<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 1, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
----------------
ECHELON CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 3670 77-0203595
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
----------------
4015 MIRANDA AVENUE
PALO ALTO, CALIFORNIA 94304
(650) 855-7400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
M. KENNETH OSHMAN
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
ECHELON CORPORATION
4015 MIRANDA AVENUE
PALO ALTO, CALIFORNIA 94304
(650) 855-7400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
COPIES TO:
LARRY W. SONSINI, ESQ. THOMAS A. BEVILACQUA, ESQ.
JOHN V. ROOS, ESQ. CURTIS L. MO, ESQ.
KATHLEEN B. BLOCH, ESQ. PETER S. BUCKLAND, ESQ.
WILSON SONSINI GOODRICH & ROSATI, P.C. BROBECK, PHLEGER & HARRISON LLP
650 PAGE MILL ROAD TWO EMBARCADERO PLACE
PALO ALTO, CA 94304 2200 GENG ROAD
(650) 493-9300 PALO ALTO, CA 94303
(650) 424-0160
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
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, 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. [_]
----------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF MAXIMUM MAXIMUM
SECURITIES AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED BE REGISTERED(1) PER SECURITY(2) OFFERING PRICE(2) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value................. 5,750,000 shares $9.00 $51,750,000 $15,266
</TABLE>
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(1) Includes 750,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457.
----------------
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.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 1, 1998
5,000,000 SHARES
[LOGO OF ECHELON(R)]
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by Echelon
Corporation ("Echelon" or the "Company"). Prior to this offering, there has
been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price will be between $7.00 and
$9.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Company has
applied for quotation of its Common Stock on the Nasdaq National Market under
the symbol ELON.
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING
ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
-----------
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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<TABLE>
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<CAPTION>
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
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<S> <C> <C> <C>
Per Share..................................... $ $ $
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Total(3)...................................... $ $ $
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</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting offering expenses payable by the Company estimated at
$700,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 750,000 additional shares of Common Stock solely to cover over-
allotments, if any. If the Underwriters exercise this option in full, the
Price to Public will total $ , the Underwriting Discount will total $
and the Proceeds to Company will total $ . See "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any orders in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of NationsBanc Montgomery Securities LLC, on or about ,
1998.
-----------
NationsBanc Montgomery Securities LLC
BancAmerica Robertson Stephens
Volpe Brown Whelan & Company
, 1998
<PAGE>
[Photographs and brief description depicting industries that use the Company's
products]
[Schematic depicting the transition from closed systems to open, distributed
networks]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF
COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
Echelon, LonBuilder, LonMaker, LonMark, LonPoint, LonTalk, LonUsers,
LonWorks, Neuron and NodeBuilder are trademarks, registered trademarks,
service marks or registered service marks of the Company. This Prospectus also
includes product names, trade names and trademarks of other companies.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto, appearing elsewhere in this Prospectus. This Prospectus
contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions, and actual results may differ materially from
those anticipated in such forward-looking statements. Unless otherwise noted,
all information in this Prospectus assumes (i) the conversion of all
outstanding shares of the Company's Preferred Stock into Common Stock on a one-
for-one basis upon the closing of this offering and (ii) no exercise of the
Underwriters' over-allotment option. As used in this Prospectus, unless the
context otherwise requires, the "Company" and "Echelon" refer to the Company
and its subsidiaries.
THE COMPANY
Echelon develops, markets and supports a family of hardware and software
products and services that enables original equipment manufacturers ("OEMs")
and systems integrators to design and implement open, interoperable,
distributed control networks. A control network enables any group of electrical
devices, called nodes, to be linked together to implement sensing, monitoring,
control and communications capabilities for a variety of applications. Control
networks, an alternative to the traditional approach of centralized control,
offer decreased costs of installation and maintenance and the ability to
implement multi-vendor systems, thereby increasing competition while providing
expanded features, flexibility and functionality. Echelon's control networking
technology allows intelligence and communications capabilities to be embedded
into individual control devices that can be connected together through a
variety of communications media, such as a twisted pair of wires (data cable)
and the existing power lines in a facility. The intelligent, networked control
devices are then able to communicate with each other, peer-to-peer, to perform
the desired control functions. In effect, the network becomes the controller,
eliminating the need for central controllers, significantly reducing wiring
costs and enhancing system functionality and flexibility.
Control systems manage key functions in virtually every type of facility that
affects our daily lives. These functions can be as simple as turning a light on
and off and as complex as operating a chemical production line. Traditionally,
most control systems have incorporated closed, centrally-controlled
architectures, where the intelligence is in the central controller and complex
wiring and customization are required for communication. These traditional
control systems share many of the same drawbacks of centralized computing
architectures that rely upon mainframes and minicomputers to communicate to
"dumb" terminals that lack independent processing capabilities. These
disadvantages, which include high installation and life-cycle costs, limited
functionality and scalability, and a single point of failure, have limited the
market opportunity for control systems because end-users find it costly and
difficult to adapt these systems to their changing needs. To overcome these
limitations, OEMs, systems integrators and end-users are increasingly moving
from closed centrally-controlled systems towards open, distributed control
networks.
The Company offers a comprehensive set of products and services, including
transceivers, control modules, routers, network interfaces, development tools
and software tools and toolkits, that provide the infrastructure and support
required to build and implement multi-vendor, open, interoperable, control
network solutions. The Company's products are based on its LonWorks networking
technology, an open standard for interoperable networked control. The Company's
objective is to establish its LonWorks technology and products as the leading
solution for networked control applications. To achieve this goal, the Company
intends to extend its technological expertise, target industry-leading OEM
customers, develop a systems integrator distribution channel, integrate
LonWorks control networks with enterprise data networks and leverage
international market opportunities.
The Company markets its products and services to OEMs and systems integrators
in the building, industrial, transportation, home and other automation markets.
The Company sells primarily through a direct sales force in North America and
other countries where it has operations, and augments its direct sales efforts
with distributors in Europe, Japan and Asia Pacific. Representative customers
include Bombardier Inc. ("Bombardier"), Edwards High Vacuum International Ltd.
("Edwards"), Fuji Electric Company Limited ("Fuji Electric"), Hitachi Limited
("Hitachi"), Honeywell, Inc. ("Honeywell"), Johnson Controls, Inc. ("Johnson
Controls"), Kawasaki Limited ("Kawasaki"), Landis & Staefa, Staefa Control
System Corporation ("Landis & Staefa") and Raytheon Company ("Raytheon").
The Company was incorporated in California in 1988 and reincorporated in
Delaware in 1989. The Company's principal executive offices are located at 4015
Miranda Avenue, Palo Alto, California 94304, and its telephone number is (650)
855-7400.
3
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company.......... 5,000,000 shares
Common Stock to be outstanding after the of-
fering...................................... 32,125,612 shares(1)
Use of proceeds.............................. For general corporate purposes,
including working capital and
capital expenditures. See "Use
of Proceeds."
Proposed Nasdaq National Market symbol....... ELON
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------- ----------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- ------- -------- ------- ------- -------
CONSOLIDATED STATEMENT OF OPERATIONS DATA: (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product................ $ 10,104 $ 14,368 $20,183 $ 20,708 $24,665 $ 6,548 $ 7,188
Service................ 1,441 2,364 3,160 3,282 3,637 926 771
-------- -------- ------- -------- ------- ------- -------
Total revenues......... 11,545 16,732 23,343 23,990 28,302 7,474 7,959
Gross profit........... 6,791 8,993 12,768 12,087 14,731 3,908 4,167
Loss from operations... (11,273) (10,250) (9,854) (10,937) (8,522) (1,944) (1,757)
Net loss............... $(11,133) $ (9,483) $(8,713) $(10,716) $(8,214) $(1,907) $(1,737)
Basic net loss per
share(2).............. $ (0.85) $ (0.67) $ (0.56) $ (0.62) $ (0.44) $ (0.10) $ (0.09)
Shares used in comput-
ing basic net loss per
share(2).............. 13,038 14,060 15,695 17,354 18,603 18,511 19,029
Pro forma basic net
loss per share(2)..... $ (0.32) $ (0.08) $ (0.06)
Shares used in comput-
ing pro forma basic
net loss per
share(2).............. 25,756 24,399 26,916
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------
AS
ACTUAL ADJUSTED(3)
------- -----------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 5,165 $41,665
Working capital............................................ 7,376 43,876
Total assets............................................... 15,695 52,195
Total stockholders' equity................................. 7,482 43,982
</TABLE>
- --------
(1) Based on shares outstanding as of March 31, 1998. Includes 1,802,438 shares
of Common Stock issued under stock purchase agreements subject to
repurchase by the Company at a weighted average price of $1.26 per share.
Excludes (i) 4,082,695 shares of Common Stock issuable upon exercise of
options outstanding as of March 31, 1998 at a weighted average exercise
price of $1.33 per share, of which options to purchase 3,932,695 shares
(including 3,167,780 shares were subject to repurchase by the Company at a
weighted average exercise price of $1.31 per share) were exercisable, (ii)
3,942,700 shares of Common Stock reserved for future issuance under the
Company's stock option plans and (iii) 430,000 shares of Common Stock
issuable upon exercise of warrants outstanding as of March 31, 1998 at a
weighted average exercise price of $5.49 per share. See "Management--Stock
Option Plans and Warrants," "Description of Capital Stock" and Note 6 of
Notes to Consolidated Financial Statements.
(2) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the shares used in computing basic net loss per share and pro forma
basic net loss per share.
(3) Adjusted to reflect (i) the conversion of all outstanding shares of
Preferred Stock into Common Stock on a one-for-one basis upon the closing
of this offering and (ii) the sale of the 5,000,000 shares of Common Stock
offered hereby (at an assumed initial public offering price of $8.00 per
share and after deducting the underwriting discount and estimated offering
expenses payable by the Company). See "Capitalization."
4
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. In addition to the other
information set forth in this Prospectus, the following risk factors should be
considered carefully in evaluating the Company and its business before
purchasing any shares of the Company's Common Stock. This Prospectus contains
certain forward-looking statements that involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations and intentions.
The cautionary statements made in this Prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this Prospectus. The Company's actual results could differ materially from
those discussed in this Prospectus. Factors that could cause or contribute to
such differences include those discussed below, as well as those discussed
elsewhere in this Prospectus.
HISTORY OF LOSSES; ACCUMULATED DEFICIT; ANTICIPATED CONTINUING LOSSES;
UNCERTAINTY OF FUTURE OPERATING RESULTS
The Company has incurred net losses each year since its inception, including
losses of $8.7 million, $10.7 million and $8.2 million for the fiscal years
ended December 31, 1995, 1996 and 1997, respectively. At March 31, 1998, the
Company had an accumulated deficit of $86.4 million. The Company continues to
invest significant financial resources in product development, marketing and
sales, and to the extent such expenditures do not result in significant
increases in revenues, the Company's business, operating results and financial
condition will be materially and adversely affected. Due to the limited
history and undetermined market acceptance of many of the Company's products
and technologies, the rapidly evolving nature of the Company's business and
markets, potential changes in voluntary product standards that significantly
influence many of the markets for the Company's products, the high level of
competition in the industries in which the Company operates and the other
factors described elsewhere in "Risk Factors," there can be no assurance that
the Company's investment in these areas will result in increases in revenues
or that any revenue growth that is achieved can be sustained. Any revenue
growth that the Company has achieved or may achieve may not be indicative of
future operating results. In addition, the Company's history of losses,
together with the factors described under "--Fluctuations in Operating
Results," make future operating results difficult to predict. The Company and
its prospects must be considered in light of the risks, costs and difficulties
frequently encountered by emerging companies. As a result, there can be no
assurance that the Company will be profitable in any future period. Future
operating results will depend on many factors, including the growth of the
markets for the Company's products, the acceptance of the Company's products,
the level of competition, the ability of the Company to develop and market new
products, and general economic conditions. In view of the uncertainties
identified herein, the Company believes that period-to-period comparisons of
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance. As of December 31, 1997, the Company
had net operating loss carryforwards for Federal and state income tax
reporting purposes of approximately $76.0 million and $5.0 million,
respectively, which expire at various dates through 2012. In addition, as of
December 31, 1997, the Company had tax credit carryforwards of approximately
$3.5 million, which expire at various dates through 2012. The Internal Revenue
Code of 1986, as amended, contains provisions that may limit the use in any
future period of net operating loss and credit carryforwards upon the
occurrence of certain events, including a significant change in ownership
interests. The Company had deferred tax assets, including its net operating
loss carryforwards and tax credits, totaling approximately $33.6 million as of
December 31, 1997. A valuation allowance has been recorded for the entire
deferred tax asset as a result of uncertainties regarding the realization of
the asset balance, the history of losses and the variability of operating
results. See "--Fluctuations in Operating Results," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 7 of
Notes to Consolidated Financial Statements.
FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced, and expects to continue to experience,
significant variability in its quarterly and annual results, as a result of a
number of factors, many of which are outside of the Company's control. The
Company believes that such variability is primarily due to the fluctuations in
the rates at which OEMs purchase
5
<PAGE>
the Company's products and services, the OEMs' own business cycles, the timely
introduction of new products, any downturns in any customer's or potential
customer's business, the Company's ability to anticipate and effectively adapt
to developing markets and rapidly changing or new technologies and
distribution channels, increased competition, market acceptance of the
Company's products, product life cycles, order delays or cancellations,
changes in the mix of products and services sold by the Company, shipment and
payment schedules, changes in pricing policy by the Company or its
competitors, changes in product distribution, product ratings by industry
analysts and endorsement of competing products by industry groups. Declines in
general economic conditions could also precipitate significant reductions in
capital spending, which could, in turn, affect orders for the Company's
products. The Company's expense levels are based, in significant part, on
expectations of future revenues. Consequently, if revenue levels are below
expectations, expense levels could be disproportionately high as a percentage
of total revenues, and operating results would be immediately and adversely
affected. The Company has failed to meet its expectations of future revenues
in the past. As a result of these and other factors, the Company believes that
its revenues and operating results are difficult to predict and are subject to
fluctuations from period to period, and that period-to-period comparisons of
its results of operations are not meaningful and should not be relied upon as
indications of future performance. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
DEPENDENCE ON OEMS AND DISTRIBUTION CHANNELS
The rate at which the Company's products are used in control networks is
primarily subject to product and marketing decisions made by OEMs. The Company
believes that since OEMs in certain industries receive a large portion of
their revenues from sales of products and services to their installed base,
such OEMs have tended to moderate the rate at which they incorporate LonWorks
technology into their products. The Company has attempted to motivate OEMs, as
well as systems integrators and owners of control systems, to effect a more
rapid transition to LonWorks technology. Furthermore, OEMs that manufacture
and promote products and technologies that compete or may compete with the
Company may be particularly reluctant to employ the Company's products and
technologies to any significant extent, if at all. There can be no assurance
that the Company will be able to improve the current rate of acceptance or
usage of its products by OEMs and others, or that such usage will not decrease
over time. The failure to increase acceptance or usage of the Company's
products, or any decrease in usage of its products, would have a material
adverse effect on the business, operating results and financial condition of
the Company. See "Business--Competition."
Currently, a significant portion of the Company's revenues are derived from
sales by EBV Elektronik GmbH ("EBV"), the sole independent distributor of the
Company's products to OEMs in Europe since December 1997. EBV accounted for
12.0%, 10.9% and 20.6% of the Company's total revenues in fiscal 1995, 1997
and the three months ended March 31, 1998, respectively. The Company's
agreement with EBV expires in November 1998. In addition, as part of its
distribution strategy, the Company intends to develop distribution
arrangements with systems integrators. In particular, the Company expects that
a significant portion of its future revenues will be derived from sales by
such systems integrators. Any failure by EBV or any other existing or future
distributor to dedicate sufficient resources and efforts to the marketing and
selling of the Company's products, or to generate significant revenues for the
Company, could have a material adverse effect on the Company's business,
operating results and financial condition. Also, the failure of the Company to
develop new distribution channels, to maintain the EBV arrangement or any
other distribution channels, or to renew the EBV arrangement on a timely
basis, would result in reduced or delayed revenues, increased operating
expenses and loss of customer goodwill, any of which could have a material
adverse effect on the business, operating results and financial condition of
the Company. See "Business--Sales and Marketing."
DEPENDENCE ON KEY MANUFACTURERS
The Neuron Chip is an important component used by the Company's customers in
control network nodes. In addition, the Neuron Chip is an important device
used in many of the Company's products. Neuron Chips are manufactured and
distributed by both Motorola, Inc. ("Motorola") and Toshiba Corporation
("Toshiba"). The Company has entered into licensing agreements with each of
Motorola and Toshiba. The agreements, among other things, grant Motorola and
Toshiba the worldwide right to manufacture and distribute Neuron Chips using
6
<PAGE>
technology licensed from the Company and require the Company to provide
support and unspecified updates to the licensed technology over the terms of
the agreements. While the Company developed the first version of the Neuron
Chip, Motorola and Toshiba subsequently developed improved, lower-cost
versions of the Neuron Chip that are presently utilized in products developed
and sold by the Company and its customers. The Company has neither the
resources nor the skills to replace either Motorola or Toshiba as a designer,
manufacturer or distributor of Neuron Chips. Motorola and Toshiba have played,
and are expected to continue to play, a key role in the development and
marketing of LonWorks technology. The loss of either Motorola or Toshiba as a
supplier of the Neuron Chip would have a material adverse effect on the
business, operating results and financial condition of the Company, and in
such event there can be no assurance that the Company would be able to locate
an alternate source for the design, manufacture or distribution of Neuron
Chips. See "Business--Products and Services," "--Strategic Alliances," "--
Manufacturing" and "Certain Transactions."
The Company's future success will also depend, in significant part, on its
ability to successfully manufacture its products cost-effectively and in
sufficient volumes. For certain key products, the Company utilizes outsourced
manufacturers including GET Manufacturing, Inc. ("GET"), Hi-Tech
Manufacturing, Inc. ("Hi-Tech"), muRata Electronics North America, Inc.
("muRata") and Quadrus Manufacturing Division of Bell Microproducts, Inc.
("Quadrus"). These outsourced manufacturers procure material and assemble,
test and inspect the final products to the Company's specifications. Such a
strategy involves certain risks, including the potential absence of adequate
capacity and reduced control over delivery schedules, product availability,
manufacturing yields, quality and costs. In addition, several key components
are currently purchased only from sole or limited sources. Any interruption in
the supply of these products or components, or the inability of the Company to
procure these products or components from alternate sources at acceptable
prices and within a reasonable time, could have a material adverse effect upon
the Company's business, operating results and financial condition. See
"Business--Manufacturing."
COMPETITION
Competition in the Company's markets is intense and involves rapidly
changing technologies, evolving industry standards, frequent new product
introductions and rapid changes in customer requirements. To maintain and
improve its competitive position, the Company must continue to develop and
introduce, on a timely and cost-effective basis, new products, features and
services that keep pace with the evolving needs of its customers. The
principal competitive factors affecting the markets for the Company's control
network products are customer service and support, product reputation,
quality, performance, price and product features such as adaptability,
scalability, ability to integrate with other products, functionality and ease
of use. The Company believes it has in the past generally competed favorably
with offerings of its competitors on the basis of these factors. However,
there can be no assurance that the Company will continue to be able to compete
effectively based on these or any other competitive factors in the future.
In each of its markets, the Company competes with a wide array of
manufacturers, vendors, strategic alliances, systems developers and other
businesses. The Company's competitors include some of the largest companies in
the electronics industry, such as Siemens AG ("Siemens") in the building and
industrial automation industries and Allen-Bradley, a subsidiary of Rockwell
International ("Allen-Bradley"), and Groupe Schneider ("Schneider") in the
industrial automation industry. Many of the Company's competitors, alone or
together with their trade associations and partners, have longer operating
histories, significantly greater financial, technical, marketing, service and
other resources, significantly greater name recognition and broader product
offerings. As a result, such competitors may be able to devote greater
resources to the development, marketing and sale of their products, and may be
able to respond more quickly to changes in customer requirements or product
technology. In addition, those competitors that manufacture and promote
closed, proprietary control systems may enjoy a captive customer base
dependent on such competitors for service, maintenance, upgrades and
enhancements. Accordingly, there can be no assurance that the Company will be
able to compete successfully with existing or new competitors, or that
competition will not have a material adverse effect on the business, operating
results or financial condition of the Company.
7
<PAGE>
Many of the Company's current and prospective competitors are dedicated to
promoting closed or proprietary systems, technologies, software and network
protocols or product standards that differ from, or are incompatible with,
those of the Company. In some cases, companies have established associations
or cooperative relationships to enhance the competitiveness and popularity of
their products, or to promote such different or incompatible technologies,
protocols and standards. For example, in the building automation market, the
Company faces widespread reluctance by vendors of traditional closed or
proprietary control systems (who enjoy a captive market for servicing and
replacing equipment) to utilize the Company's interoperable technologies, as
well as strong competition by large trade associations that promote
alternative technologies and standards in their native countries, such as the
BatiBus Club International in France and the European Installation Bus
Association in Germany (each of which has over 100 members and licensees).
Other examples include the CEBus Industry Council, which is the proponent of
an alternative protocol to the Company's LonTalk protocol for use in the home
automation industry, and a group comprised of Asea Brown Boveri, ADtranz AB,
Siemens, GEC Alstrom and other manufacturers that support an alternative rail
transportation protocol to the Company's LonTalk protocol. There can be no
assurance that the Company's technologies, protocols or standards will be
successful in any of its markets, or that the Company will be able to compete
with new or enhanced products or standards introduced by existing or future
competitors. Any increase in competition or failure by the Company to
effectively compete with new or enhanced products or standards could result in
fewer customer orders, price reductions, reduced order size, reduced operating
margins and loss of market share, any of which could have a material adverse
effect on the business, operating results or financial condition of the
Company. See "Business--Competition."
LonWorks technology is open, meaning that many of the Company's key
technology patents are broadly licensed without royalties or license fees. As
a result, the Company's customers are capable of developing products that
compete with some of the Company's products. Because some of the Company's
customers are OEMs that develop and market their own control systems, these
customers in particular could develop competing products based on the
Company's open technology. This could decrease the market for the Company's
products, increase competition, and have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
Products and Services."
DEPENDENCE ON KEY PERSONNEL
The Company's performance is substantially dependent on the performance of
its executive officers and key employees. The loss of the services of any of
the Company's executive officers or key employees could have a material
adverse effect on the business, operating results and financial condition of
the Company. The Company is particularly dependent upon its Chief Executive
Officer, as well as its technical personnel, due to the specialized technical
nature of the Company's business. The Company's future success will depend on
its ability to attract, integrate, motivate and retain qualified technical,
sales, operations and managerial personnel. There is intense competition for
qualified personnel in the areas of the Company's activities, and there can be
no assurance that the Company will be able to continue to attract and retain
qualified executive officers and key personnel necessary for the development
and success of its business. Currently, only Frederik Bruggink, the Company's
Vice President, Europe, Middle East and Africa, is bound by an employment
agreement. If the Company is unable to hire personnel on a timely basis in the
future, the Company's business, operating results and financial condition will
be materially and adversely affected. In addition, the departure or
replacement of key personnel could be disruptive, lead to additional
departures and therefore have a material adverse effect on the Company's
business, operating results and financial condition. The Company maintains and
is the beneficiary of life insurance policies in the amount of $2.5 million
covering each of M. Kenneth Oshman, its Chief Executive Officer, Beatrice
Yormark, its Vice President of Sales and Marketing, and Oliver R. Stanfield,
its Chief Financial Officer. There can be no assurance that such proceeds
would be sufficient to compensate the Company in the event of the death of Mr.
Oshman, Ms. Yormark or Mr. Stanfield. See "Management."
NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE
Customer requirements for control network products can change as a result of
innovations or changes within the building, industrial, transportation, home
and other industries. For example, the adoption of new or different
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standards within industry segments may give rise to new customer requirements,
which may or may not be compatible with the Company's current or future
product offerings. The Company's future success depends in large part on its
ability to continue to enhance existing products, lower product cost and
develop new products that maintain technological competitiveness. There can be
no assurance that the Company will be successful in modifying its products and
services to address these requirements and standards. For example, certain of
the Company's competitors may develop competing technologies based on Internet
protocols that may have advantages over the Company's products in remote
connection. If the Company is unable, for technological or other reasons, to
develop new products or enhancements of existing products in a timely manner
to respond to changing market conditions, competitive factors and customer
requirements, the Company's business, operating results and financial
condition would be materially adversely affected. See "Business--Competition."
From time to time, the introduction of new products by the Company has been
delayed beyond the Company's projected shipping date for such products. In
each instance, such delays have resulted in increased costs and delayed
revenues. Because future revenues are dependent on the timely introduction of
new product offerings, any such future delays could have a material adverse
effect on the Company's business, operating results and financial condition.
MARKET ACCEPTANCE OF INTEROPERABILITY
The future operating success of the Company will depend, in significant
part, on the successful development of interoperable products by the Company
and OEMs, and the acceptance of interoperable products by systems integrators
and end-users. When products or subsystems from multiple vendors can be
integrated into a control system without the need to develop custom hardware
or software, they are "interoperable." The Company has expended considerable
resources to develop, market and sell interoperable products, and has made
such products a cornerstone of its sales and marketing strategy. The Company
has widely promoted interoperable products as offering benefits such as lower
life-cycle costs and improved flexibility to owners and users of control
networks. However, there can be no assurance that OEMs who manufacture and
market closed systems will accept, promote or employ interoperable products,
since doing so may expose such OEMs' businesses to increased competition. In
addition, there can be no assurance that OEMs will, in fact, successfully
develop interoperable products, or that OEMs' interoperable products will be
accepted by their customers. The failure of OEMs to develop interoperable
products, or the failure of interoperable products to achieve market
acceptance, would have a material adverse effect on the business, operating
results and financial condition of the Company. See "--Competition" and
"Business--Industry Background."
INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS
The Company's sales and marketing operations are located in 10 countries.
Revenues from international sales, which include both export sales and sales
by international subsidiaries, accounted for approximately 52.0%, 53.6%, 57.5%
and 57.0% of the Company's total revenues during 1995, 1996, 1997 and the
three months ended March 31, 1998, respectively. The Company's operations and
the market price of its products may be directly affected by economic and
political conditions in the countries where the Company does business. In
addition, there can be no assurance that the Company will be able to maintain
or increase the international demand for its products. Additional risks
inherent in the Company's international business activities generally include
currency fluctuations, unexpected changes in regulatory requirements, tariffs
and other trade barriers, costs of localizing products for foreign countries,
lack of acceptance of non-local products in foreign countries, longer accounts
receivable payment cycles, difficulties in managing international operations,
potentially adverse tax consequences, including restrictions on repatriation
of earnings, and the burdens of complying with a wide variety of foreign laws.
Differing vacation and holiday patterns in other countries, particularly in
Europe, may also affect the amount of business transacted by the Company in
other countries in any given quarter, the timing of the Company's revenues and
its ability to forecast its projected operating results for such quarter. In
1997, approximately 10.7% of the Company's revenues were conducted in
currencies other than the U.S. dollar, principally the Japanese Yen.
Fluctuations in the value of currencies in which the Company conducts its
business
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relative to the U.S. dollar could cause currency translation adjustments. The
Company has recently experienced and in the future may experience an increase
in currency translation adjustments relative to currencies of Asia Pacific
countries, as well as order delays, cancellations and pricing pressure in
those countries as a result of general economic conditions in that region. The
forthcoming introduction of the "Euro" as the standard currency in
participating European countries may also impact the ability of the Company to
denominate sales transactions in U.S. dollars. To the extent that fewer of the
Company's sales in Europe are denominated in U.S. dollars, the Company may
experience an increase in currency translation adjustments, particularly as a
result of general economic conditions in Europe as a whole. The Company does
not currently engage in currency hedging transactions or otherwise cover its
foreign currency exposure. There can be no assurance that such factors will
not have a material adverse effect on international revenues and,
consequently, the Company's business, operating results and financial
condition. See "Business--Sales and Marketing."
LENGTHY SALES CYCLE
The sales cycle between initial customer contact and execution of a contract
or license agreement with a customer can vary widely. OEMs typically conduct
extensive and lengthy product evaluations before making initial purchases of
the Company's products. Subsequent purchases of the Company's products may be
delayed by prolonged product development and introduction periods for OEMs.
Attendant delays in the Company's sales cycle can result from, among other
things, changes in customers' budgets or in the priority assigned to control
network development and to educating customers as to the potential
applications of and cost savings associated with the Company's products. The
Company generally has little or no control over these factors, which may cause
a potential customer to favor a competitor's products, or to delay or forgo
purchases altogether. As a result of the foregoing, the Company's ability to
forecast the timing and amount of specific sales is limited, and the delay or
failure to complete transactions could have a material adverse effect on the
Company's business, operating results and financial condition and cause the
Company's operating results to vary significantly from period to period.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
The Company's success depends significantly upon its intellectual property
rights. The Company relies on a combination of patent, copyright, trademark
and trade secret laws, non-disclosure agreements and other contractual
provisions to establish, maintain and protect its intellectual property
rights, all of which afford only limited protection. The Company has 65 issued
U.S. patents, 21 pending U.S. patent applications, and various foreign
counterparts. There can be no assurance that patents will issue from these
pending applications or from any future applications or that, if issued, any
claims allowed will be sufficiently broad to protect the Company's technology.
Failure of any patents to protect the Company's technology, may make it easier
for the Company's competitors to offer equivalent or superior technology. The
Company has registered or applied for registration for certain trademarks, and
will continue to evaluate the registration of additional trademarks as
appropriate. Any failure by the Company to properly register or maintain its
trademarks or to otherwise take all necessary steps to protect its trademarks
may diminish the value associated with the Company's trademarks. In addition,
any failure by the Company to take all necessary steps to protect its trade
secrets or other intellectual property rights may have a material adverse
effect on the Company's ability to compete in its markets. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or services or to obtain and
use information that the Company regards as proprietary. There can be no
assurance that any patents, trademarks, copyrights or intellectual property
rights that have been or may be issued or granted will not be challenged,
invalidated or circumvented, or that any rights granted thereunder would
provide protection for the Company's proprietary rights. In addition, there
can be no assurance that the Company has taken or will take all necessary
steps to protect its intellectual property rights. Third parties may also
independently develop similar technology without breach of the Company's trade
secrets or other proprietary rights. The Company has licensed in the past and
may license in the future its key technologies to third parties. In addition,
the laws of some foreign countries, including several in which the Company
operates or sells its products, do not protect proprietary rights to as great
an extent as do the laws of the United States. Certain of the Company's
products are licensed under shrink wrap license agreements that are not signed
by licensees and therefore may not be binding under the laws of certain
jurisdictions.
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From time to time, litigation may be necessary to defend and enforce the
Company's proprietary rights. Such litigation could result in substantial
costs and diversion of management resources and could have a material adverse
effect on the Company's business, operating results and financial condition,
regardless of the final outcome. Despite the Company's efforts to safeguard
and maintain its proprietary rights both in the United States and abroad,
there can be no assurance that the Company will be successful in doing so or
that the steps taken by the Company in this regard will be adequate to deter
infringement, misuse, misappropriation or independent third-party development
of the Company's technology or intellectual property rights or to prevent an
unauthorized third party from copying or otherwise obtaining and using the
Company's products or technology. Any of such events could have a material
adverse effect on the Company's business, operating results and financial
condition.
RISKS OF PRODUCT DEFECTS OR MISUSE
Products developed, licensed and sold by the Company may contain errors or
failures or may be improperly installed or implemented. There can be no
assurance that errors or failures will not be found in the Company's products
or that, if discovered, the Company will be able to successfully correct such
errors or failures in a timely manner or at all. In addition, there can be no
assurance that the Company's products will be properly installed or
implemented by third parties. The occurrence of errors or failures in the
Company's products and applications, or improper installation or
implementation of the Company's products, could result in loss of or delay in
market acceptance, increased service and warranty costs or payment of
compensatory or other damages. In addition, such errors or failures may result
in delays of revenue recognition by the Company and diversion of the Company's
engineering resources to correct such defects. The Company maintains errors
and omissions insurance to cover liability associated with its operations but
there can be no assurance that any such insurance will be available or will be
sufficient in amount to cover any particular claim. Although the Company's
agreements with its customers typically contain provisions intended to limit
the Company's exposure to potential claims as well as any liabilities arising
from such claims, and may in very limited instances require that the Company
be named as an additional insured under the insurance policies carried by some
of its customers, such contracts and insurance may not effectively protect the
Company against the liabilities and expenses associated with product errors or
failures. Accordingly, errors or failures in the Company's products or
applications or improper installation or implementation of the Company's
products by third parties could have a material adverse effect on the
Company's business, operating results and financial condition. In addition,
because of the low cost and interoperable nature of the Company's products,
LonWorks technology could be used in a manner for which it was not intended,
which could lead to loss of goodwill or material financial losses for the
Company, or otherwise have a material adverse effect on the Company's
business, operating results and financial condition.
REGULATORY ACTIONS
Many of the Company's products and the industries in which they are used are
subject to U.S. and foreign regulation. Government regulatory action could
greatly reduce the market for the Company's products. For example, the power
line medium (the communications medium used by some of the Company's products)
is subject to special regulations in North America, Europe and Japan. These
regulations limit the ability of companies in general to use power lines as a
communication medium. In addition, some of the Company's competitors have
attempted to use regulatory actions to reduce the market opportunity for the
Company's products or to increase the market opportunity for the competitors'
products. For example, the Consumer Electronics Manufacturers Association
("CEMA"), a trade association that developed the CEBus protocol, an
alternative to the Company's LonTalk protocol for use in home automation
applications, has proposed that the Federal Communications Commission ("FCC")
adopt a standard for television-cable compatibility that encompasses CEBus.
CEMA has also proposed the use of such standard with respect to an FCC
rulemaking relating to the commercial availability of navigation devices, such
as set-top boxes. The Company has resisted these efforts and will continue to
oppose competitors' efforts to use regulation to impede competition in the
markets for the Company's products. There can be no assurance that existing or
future regulations or regulatory actions would not adversely affect the market
for the Company's products or require significant expenditures of management,
technical or financial resources, any of which could have a material adverse
effect on the Company's business, operating results and a financial condition.
See "Business--Government Regulation."
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VOLUNTARY STANDARDS
Standards bodies, which are formal and informal associations that attempt to
set voluntary, non-governmental product standards, are influential in many of
the Company's target markets. Some of the Company's competitors have attempted
to use voluntary standards to reduce the market opportunity for the Company's
products, or to increase the market opportunity for the competitors' products,
by lobbying for the adoption of voluntary standards that would exclude or
limit the use of the Company's products. The Company participates in many
voluntary standards processes both to avoid adoption of exclusionary standards
and to promote voluntary standards for the Company's products. However, the
Company does not have the resources to participate in all voluntary standards
processes that may affect its markets. The adoption of voluntary standards
that are incompatible with the Company's products or technology could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Competition."
YEAR 2000 COMPLIANCE
Computer programs that are written using two digits rather than four to
define the applicable year, may have date-sensitive software and, for
instance, may recognize a date using 00 as the year 1900 rather than the year
2000 ("Date Code Dependency"). This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in normal business activities. The Company's enterprise resource
planning ("ERP") system does have Date Code Dependencies. The Company is in
the process of replacing its current ERP system, and believes that this
replacement will be completed by June 1999, before any Date Code Dependencies
within the Company's current ERP system have a material adverse impact upon
the Company's operations. The Company has not yet estimated the cost of such
replacement. The Company is currently evaluating the dependency of its
products on date codes and intends to announce a program for addressing the
impact of the year 2000 on any such products in the near future. Failure of
the Company's ERP system or its products to operate properly with regard to
the Year 2000 and thereafter could require the Company to incur unanticipated
expenses to remedy any problems, which could have a material adverse effect on
the Company's business, operating results and financial condition. Date Code
Dependency issues may also arise with respect to any modifications made to the
Company's products by a party other than the Company or from the combination
or use of the Company's products with any other software programs or hardware
devices not provided by the Company, and therefore may result in unforeseen
Year 2000 compliance problems for some of the Company's customers, which could
result in reduced customer orders or liability to the Company, and which could
have a material adverse effect on the Company's business, operating results
and financial condition. The Company faces risks to the extent that suppliers
of products, services and systems purchased by the Company have business
systems or products that have a Date Code Dependency. In the event any such
third parties cannot provide the Company with products, services or systems
that meet year 2000 requirements in a timely manner, the Company's business
operating results and financial condition could be materially adversely
affected. In addition, some of the Company's customers or vendors could
experience Date Code Dependency problems that could result in disruptions of
their internal operations, could delay their purchases of the Company's
products, and, in turn, could result in a material adverse effect on the
Company's business, operating results and financial condition.
CONTROL BY EXISTING STOCKHOLDERS
Immediately after the closing of this offering, the directors and executive
officers of the Company, together with certain entities affiliated with them,
assuming no exercise of outstanding stock options, will beneficially own 46.9%
of the Company's outstanding Common Stock and Motorola, a principal
stockholder of the Company, will own 12.2% of the Company's outstanding Common
Stock. Further, pursuant to the terms of the stock purchase agreement under
which Motorola initially acquired its shares, Motorola and two other
stockholders which together own approximately 6.1% of the Company's
outstanding Common Stock have agreed to vote (i) all of their shares in favor
of the slate of director nominees recommended by the Board of Directors, and
(ii) a number of shares equal to at least that percentage of shares voted by
all other stockholders for or against any given matter, as recommended by the
Board of Directors, (except certain matters relating to certain changes
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to the Company's charter, liquidations, a sale of the Company or a merger of
the Company into another entity), as recommended by a majority of the Board of
Directors. As a result, these stockholders would be able to control
substantially all matters requiring approval by the stockholders of their
Company, including the election of all directors and approval of significant
corporate transactions. See "Management--Executive Officers and Directors,"
"Certain Transactions" and "Principal Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, based on the outstanding shares of Common
Stock at March 31, 1998, the Company will have outstanding 32,125,612 shares
of Common Stock outstanding (32,875,612 if the Underwriters' over-allotment
option is exercised in full). On the date of this Prospectus, in addition to
the 5,000,000 shares offered hereby, 815,251 shares of Common Stock held by
current stockholders will be immediately eligible for sale in the public
market without restriction. The Company, its officers, directors and certain
security holders of the Company have agreed not to offer, sell, contract to
sell, grant any option or other right for the sale of, or otherwise dispose of
any shares of Common Stock or any securities, indebtedness or other rights
exercisable for or convertible or exchangeable into Common Stock owned or
acquired in the future in any manner prior to the expiration of 180 days after
the date of this Prospectus without the prior written consent of NationsBanc
Montgomery Securities LLC on behalf of the Underwriters. Subject to volume
limitations on sales by affiliates pursuant to Rule 144 under the Securities
Act of 1933, as amended (the "Securities Act"), and taking into account the
effect of lock-up provisions applicable to the officers, directors and certain
stockholders of the Company, 26,310,361 additional shares of Common Stock will
be eligible for sale beginning 180 days after the date of this Prospectus.
This includes 247,375 shares held by existing stockholders pursuant to an
effective Regulation A offering statement covering the Company's 1997 Stock
Plan. No prediction can be made of the effect, if any, that sales of shares
under Rule 144 or the availability of shares for sale will have on the market
price of the Common Stock prevailing from time to time after this offering.
The Company is unable to estimate the number of shares that may be sold in the
public market under Rule 144, because such amount will depend on the trading
volume in, and market price for, the Common Stock and other factors.
Nevertheless, sales of substantial amounts of shares in the public market, or
the perception that such sales could occur, could adversely affect the market
price of the Common Stock. Following this offering, the Company intends to
file a registration statement under the Securities Act to register
approximately 8,025,395 shares (including 4,082,695 shares subject to
outstanding options at March 31, 1998) reserved for issuance under the
Company's stock plans. Shares of Common Stock issued under the Company's stock
plans after the effective date of such registration will be freely tradeable
in the public market, subject to the 180 day lock-up referred to above and
subject in the case of sales by affiliates to the volume limitation, manner of
sale, notice and public information requirements of Rule 144. In addition,
after the consummation of this offering, the holders of approximately
18,665,548 shares of Common Stock are entitled to certain rights with respect
to the registration of such shares under the Securities Act. Such registration
rights terminate for each holder when all of such holder's shares may be sold
within a given three month period under Rule 144 or other applicable
exemption; other than 10,927,498 shares held by affiliates of the Company who
will be subject to the volume limitations of Rule 144 following this offering,
all of such shares will be eligible for sale 180 days following this offering.
See "Description of Capital Stock--Registration Rights," "Shares Eligible for
Future Sale" and "Underwriting."
ANTI-TAKEOVER PROVISIONS
Immediately after the closing of this offering, the Board of Directors will
have the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock may
delay, defer or prevent a change in control of the Company as the terms of the
Preferred Stock that might be issued could potentially prohibit the Company's
consummation of any merger, reorganization, sale of substantially all of its
assets, liquidation or other extraordinary corporate transaction without the
approval of the holders of the outstanding shares of the Preferred Stock.
Additionally, the issuance of Preferred Stock could have a dilutive effect on
shareholders of the Company. The Company has no present plans to issue shares
of Preferred Stock. In addition,
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Section 203 of the Delaware General Corporation Law, to which the Company is
subject, restricts certain business combinations with any "interested
stockholder" as defined by such statute. The statute may delay, defer or
prevent a change in control of the Company. In addition, certain provisions of
the Company's Amended and Restated Certificate of Incorporation may have the
effect of delaying or preventing a change of control of the Company, which
could adversely affect the market price of the Company's Common Stock. These
provisions provide, among other things, that the Board of Directors is divided
into three classes with staggered three-year terms, that stockholders may not
take action by written consent, that the ability of stockholders to call
special meetings of stockholders and to raise matters at meetings of
stockholders is restricted and that certain amendments of the Company's
Amended and Restated Certificate of Incorporation, and certain amendments by
the stockholders of the Company's Bylaws, require the approval of holders of
at least 66 2/3% of the voting power of all outstanding shares. In addition,
the Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which will prohibit the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. The application of Section 203 also could have the
effect of delaying or preventing a change of control of the Company. See
"Description of Capital Stock--Preferred Stock" and "--Delaware Law and
Certain Charter and Bylaw Provisions" and "Description of Capital Stock."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for
the Common Stock will develop or be sustained after this offering. The initial
public offering price will be determined by negotiation between the Company
and the Underwriters based on several factors, and may bear no relationship to
the price at which the Common Stock will trade upon completion of this
offering. See "Underwriting" for a discussion of the factors to be considered
in determining the initial public offering price. The market price of the
Company's Common Stock is likely to be highly volatile and could be subject to
wide fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products by the Company or
its competitors, changes in financial estimates by securities analysts, or
other events or factors. In addition, there has been significant volatility in
the market price of securities of technology companies (especially those in
new or emerging industries, such as the Company), which volatility is often
unrelated to the operating performance of particular companies. In the future,
the Company's operating results could fall below analysts' expectations, which
would adversely affect the market price of the Company's Common Stock. In the
past, following a period of volatility in the market price of a company's
securities, securities class action lawsuits have often been instituted
against companies. If brought against the Company, regardless of outcome, the
costs and diversion of management resources of defending such litigation could
have a material adverse effect on its business, operating results and
financial condition.
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price will be substantially higher than the book
value per share of the currently outstanding Common Stock. Investors
purchasing shares in this offering will therefore suffer immediate and
substantial dilution of $6.63 per share in the pro forma net tangible book
value of their Common Stock from the assumed initial public offering price of
$8.00 per share. In addition, the exercise of any of the currently outstanding
warrants or stock options would likely result in a dilution of the value of
the Common Stock. Moreover, the Company may at any time in the future sell
additional securities and/or rights to purchase such securities, grant
additional warrants, stock options or other forms of equity-based incentive
compensation to the Company's management and/or employees to attract and
retain such personnel or in connection with the obtaining of financing, such
as debt or leasing arrangements accompanied by warrants to purchase equity
securities of the Company. Any of these actions would have a dilutive effect
upon the holders of the Common Stock. See "Dilution."
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BROAD MANAGEMENT DISCRETION AS TO USE OF PROCEEDS
The net proceeds to be received by the Company in connection with this
offering will be used for working capital and general corporate purposes.
Accordingly, management will have broad discretion with respect to the
expenditure of such proceeds. Purchasers of shares of Common Stock offered
hereby will be entrusting their funds to the Company's management, upon whose
judgment they must depend, with limited information concerning the specific
working capital requirements and general corporate purposes to which the funds
will ultimately be applied. See "Use of Proceeds."
ABSENCE OF DIVIDENDS
The Company has not paid cash dividends and does not anticipate paying cash
dividends on the Common Stock in the foreseeable future. The Company intends
to retain future earnings, if any, for use in its business. In addition, the
Company's revolving line of credit agreement prohibits the payment of
dividends other than stock dividends. See "Dividend Policy."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 5,000,000 shares of
Common Stock being offered hereby, based on an assumed initial public offering
price of $8.00 per share and after deducting the underwriting discount and
estimated offering expenses payable by the Company, are estimated to be
approximately $36.5 million (approximately $42.1 million if the Underwriters'
over-allotment option is exercised in full).
The principal purposes of this offering are to increase the Company's equity
capital, to create a public market for the Company's Common Stock, to
facilitate future access by the Company to public equity markets and to
provide increased visibility of the Company in a marketplace where many
competitors are publicly-held companies. The Company currently has no specific
plans for the net proceeds of this offering, but the Company expects to use
such proceeds for general corporate purposes, including working capital and
capital expenditures. The Company may also use a portion of such proceeds for
possible acquisitions of businesses, products and technologies that are
complementary to those of the Company. The Company has not identified any
specific businesses, products or technologies that it may acquire and does not
have any current agreements or negotiations with respect to any such
transactions. Pending use of the net proceeds of this offering for the above
purposes, the Company intends to invest such funds in short-term, interest-
bearing, investment-grade securities.
DIVIDEND POLICY
The Company has not paid any dividends on its capital stock and does not
expect to pay any dividends in the foreseeable future. The Company currently
intends to retain future earnings, if any, to finance the growth and
development of its business and therefore does not anticipate paying any cash
dividends in the foreseeable future. The payment of cash dividends in the
future will be at the discretion of the Board of Directors and subject to
certain limitations under the Delaware General Corporation Law, and will
depend on such factors as the Company's earnings levels, capital requirements,
financial condition and other factors deemed relevant by the Board of
Directors. In addition, the Company's revolving line of credit agreement
prohibits the payment of dividends other than stock dividends. There can be no
assurance that the Company will pay any dividends in the future.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998 (i) on an actual basis and (ii) as adjusted to reflect the receipt by
the Company of the net proceeds from the sale and issuance of 5,000,000 shares
of Common Stock by the Company at an assumed initial public offering price of
$8.00 per share after deducting the underwriting discount and estimated
offering expenses payable by the Company and the automatic conversion of all
outstanding shares of Preferred Stock into Common Stock upon the closing of
this offering. See "Certain Transactions" and "Description of Capital Stock."
This information should be read in conjunction with the Company's Financial
Statements and the Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity(1):
Preferred Stock, $.01 par value, 11,000,000 shares
authorized, 7,887,381 shares issued and outstanding,
actual; 5,000,000 shares authorized, no shares issued
or outstanding, as adjusted........................... $ 79 $ --
Common Stock, $.01 par value, 50,000,000 shares
authorized, 19,238,231 shares issued and outstanding,
actual; 100,000,000 shares authorized,
32,125,612 shares issued and outstanding, as
adjusted.............................................. 192 321
Additional paid-in capital............................. 94,530 130,980
Deferred compensation.................................. (519) (519)
Cumulative translation adjustment...................... (415) (415)
Accumulated deficit.................................... (86,385) (86,385)
-------- --------
Total stockholders' equity........................... $ 7,482 $ 43,982
======== ========
</TABLE>
- --------
(1) Includes 1,802,438 shares of Common Stock issued under stock purchase
agreements subject to repurchase by the Company at a weighted average
price of $1.26 per share. Excludes (i) 4,082,695 shares of Common Stock
issuable upon exercise of options outstanding as of March 31, 1998 at a
weighted average exercise price of $1.33 per share, of which options to
purchase 3,932,695 shares (including 3,167,780 shares subject to
repurchase by the Company at a weighted average exercise price of $1.31
per share) were exercisable, (ii) 3,942,700 shares of Common Stock
reserved for future issuance under the Company's stock option plans and
(iii) 430,000 shares of Common Stock issuable upon exercise of warrants
outstanding as of March 31, 1998 at a weighted average exercise price of
$5.49 per share. See "Management--Stock Option Plans and Warrants,"
"Description of Capital Stock" and Note 6 of Notes to Consolidated
Financial Statements.
17
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1998
assuming the conversion of all outstanding shares of Preferred Stock into
Common Stock on a one-for-one basis upon the closing of this offering, was
approximately $7.5 million, or $0.28 per share of Common Stock. Net tangible
book value per share is determined by dividing the net tangible book value of
the Company (total tangible assets less total liabilities) by the number of
shares of Common Stock deemed outstanding at that date. After giving effect to
the sale by the Company of the 5,000,000 shares of Common Stock offered hereby
at an assumed initial public offering price of $8.00 per share and after
deducting the underwriting discount and estimated offering expenses payable by
the Company, the Company's pro forma net tangible book value at March 31, 1998
would have been $44.0 million, or $1.37 per share. This represents an
immediate increase in net tangible book value to existing shareholders of
$1.09 per share and an immediate dilution of $6.63 per share to new investors
purchasing shares at the initial public offering price. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $8.00
Pro forma net tangible book value per share as of March 31,
1998............................................................ $0.28
Increase per share attributable to new investors................. 1.09
-----
Pro forma net tangible book value per share after this offering.... 1.37
-----
Dilution per share to new investors................................ $6.63
=====
</TABLE>
The following table sets forth on a pro forma basis as of March 31, 1998 the
number of shares of Common Stock purchased from the Company, the total
consideration paid, and the average price per share paid by existing
shareholders and by the new investors at an assumed initial public offering
price of $8.00 per share (before deducting the underwriting discount and
estimated offering expenses payable by the Company).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ -------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 27,125,612 84.4% $ 94,406,000 70.2% $3.48
New investors................. 5,000,000 15.6 40,000,000 29.8 8.00
---------- ----- ------------ -----
Total....................... 32,125,612 100.0% $134,406,000 100.0%
========== ===== ============ =====
</TABLE>
- --------
The foregoing tables assume no exercise of the Underwriters' over-allotment
option and no exercise of stock options or warrants outstanding at March 31,
1998. As of March 31, 1998, there were options outstanding to purchase a total
of 4,082,695 shares of Common Stock at a weighted average exercise price of
$1.33 per share, of which options to purchase 3,932,695 shares (including
3,167,780 shares subject to repurchase by the Company at a weighted average
exercise price of $1.31 per share) were exercisable and 3,942,700 shares were
reserved for future issuance under the Company's stock option plans. In
addition, as of March 31, 1998, there were warrants outstanding to purchase
430,000 shares of Common Stock at a weighted average exercise price of $5.49
per share and 1,802,438 shares of Common Stock issued under stock purchase
agreements which were subject to repurchase by the Company at a weighted
average price of $1.26 per share. To the extent that the over-allotment option
or any of these options or warrants are exercised, there will be further
dilution to new investors. See "Capitalization," "Management--Stock Option
Plans and Warrants," "Description of Capital Stock" and Note 6 of Notes to
Consolidated Financial Statements.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein. The consolidated statement
of operations data for the years ended December 31, 1995, 1996 and 1997, and
the consolidated balance sheet data at December 31, 1996 and 1997 are derived
from, and are qualified by reference to, the Consolidated Financial Statements
audited by Arthur Andersen LLP, independent public accountants, included
elsewhere in this Prospectus. The consolidated statement of operations data
for the years ended December 31, 1993 and 1994 and the consolidated balance
sheet data at December 31, 1993, 1994 and 1995 are derived from the Company's
consolidated financial statements audited by Arthur Andersen LLP that do not
appear herein. The consolidated statement of operations data for the three
months ended March 31, 1997 and 1998 and the consolidated balance sheet data
at March 31, 1998 are derived from the unaudited consolidated financial
statements appearing elsewhere herein and which, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results of the unaudited interim
periods. The financial results for the three months ended March 31, 1998 are
not necessarily indicative of the results to be expected for any other interim
period or the fiscal year. The historical results are not necessarily
indicative of the results of operations to be expected in the future.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------ ----------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- ------- -------
CONSOLIDATED STATEMENT OF
OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product................ $ 10,104 $ 14,368 $ 20,183 $ 20,708 $ 24,665 $ 6,548 $ 7,188
Service................ 1,441 2,364 3,160 3,282 3,637 926 771
-------- -------- -------- -------- -------- ------- -------
Total revenues......... 11,545 16,732 23,343 23,990 28,302 7,474 7,959
Cost of revenues:
Cost of product........ 3,764 6,733 9,434 10,761 11,761 3,111 3,249
Cost of service........ 990 1,006 1,141 1,142 1,810 455 543
-------- -------- -------- -------- -------- ------- -------
Total cost of reve-
nues.................. 4,754 7,739 10,575 11,903 13,571 3,566 3,792
-------- -------- -------- -------- -------- ------- -------
Gross profit........... 6,791 8,993 12,768 12,087 14,731 3,908 4,167
-------- -------- -------- -------- -------- ------- -------
Operating expenses:
Product development.... 6,861 6,658 7,355 7,526 7,121 1,740 1,958
Sales and marketing.... 8,628 9,317 10,881 11,577 12,128 3,014 3,031
General and administra-
tive.................. 2,575 3,268 4,386 3,921 4,004 1,098 935
-------- -------- -------- -------- -------- ------- -------
Total operating ex-
penses................ 18,064 19.243 22,622 23,024 23,253 5,852 5,924
-------- -------- -------- -------- -------- ------- -------
Loss from operations... (11,273) (10,250) (9,854) (10,937) (8,522) (1,944) (1,757)
Other income (expense):
Interest income, net... 180 809 1,109 536 429 71 67
Other income (expense),
net................... 9 44 175 (163) 68 21 8
-------- -------- -------- -------- -------- ------- -------
Total other income (ex-
pense)................ 189 853 1,284 373 497 92 75
-------- -------- -------- -------- -------- ------- -------
Loss before provision
for income taxes...... (11,084) (9,397) (8,570) (10,564) (8,025) (1,852) (1,682)
Provision for income
taxes.................. 49 86 143 152 189 55 55
-------- -------- -------- -------- -------- ------- -------
Net loss............... $(11,133) $ (9,483) $ (8,713) $(10,716) $ (8,214) $(1,907) $(1,737)
======== ======== ======== ======== ======== ======= =======
Basic net loss per
share(1).............. $ (0.85) $ (0.67) $ (0.56) $ (0.62) $ (0.44) $ (0.10) $ (0.09)
======== ======== ======== ======== ======== ======= =======
Shares used in comput-
ing basic net loss per
share(1).............. 13,038 14,060 15,695 17,354 18,603 18,511 19,029
======== ======== ======== ======== ======== ======= =======
Pro forma basic net
loss per share(1)..... $ (0.32) $ (0.08) $ (0.06)
======== ======= =======
Shares used in comput-
ing pro forma basic
net loss per
share(1).. 25,756 24,399 26,916
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
------ ------- ------- ------- ------- -----------
CONSOLIDATED BALANCE SHEET
DATA: (IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments.... $4,443 $24,210 $16,044 $ 8,051 $ 7,853 $ 5,165
Working capital............ 4,164 25,120 17,653 7,905 8,883 7,376
Total assets............... 9,913 31,124 24,547 15,855 16,816 15,695
Total stockholders' equi-
ty........................ 1,529 22,799 15,978 7,138 8,800 7,482
</TABLE>
- --------
(1) See Note 2 of Notes to Consolidated Financial Statements for an
explanation of shares used in computing basic net loss per share and pro
forma basic net loss per share.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and related Notes thereto included elsewhere in this
Prospectus. This Prospectus contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that may
cause such a difference include, but are not limited to, those discussed in
"Risk Factors."
OVERVIEW
The Company was founded and began operations in 1988. The Company develops,
markets and supports a family of hardware and software products and services
that enables OEMs and systems integrators to design and implement open,
interoperable, distributed control networks. The Company offers its products
and services to OEMs and systems integrators in the building, industrial,
transportation, home and other automation markets. The Company provides a
variety of technical training related to its products and underlying
technology as well as customer support to its customers on a per incident or
annual contract basis.
The Company markets its products and services in North America, Europe,
Japan and selected Asia-Pacific countries through a direct sales organization
augmented with the use of third-party distributors. International sales, which
include both export sales and sales by the Company's international
subsidiaries, accounted for 57.0% and 54.7% of total revenues for the three
months ended March 31, 1998 and 1997, respectively, and 57.5%, 53.6% and 52.0%
for fiscal 1997, 1996 and 1995, respectively. In 1997, 10.7% of the Company's
revenues were denominated in currencies other than the U.S. dollar,
principally the Japanese Yen. However, this percentage may increase over time
as the Company responds to market requirements to sell its products and
services in local currencies, such as the forthcoming Euro. As a result, the
Company's operations and the market price of its products may be directly
affected by economic and political conditions in the countries where the
Company does business. Additional risks inherent in the Company's
international business activities include currency fluctuations, unexpected
changes in regulatory requirements, tariffs and other trade barriers. The
Company expects that international sales will continue to constitute a
significant portion of total revenues. See "Risk Factors--International
Operations; Currency Fluctuations."
The Company derives its revenues primarily from the sale and licensing of
its products and, to a lesser extent, from fees associated with training and
technical support offered to its customers. Product revenues consist of
revenues from sales of transceivers, control modules, routers, network
interface devices and development tools and from licenses for network services
software products. Service revenues consist of product support (including
software post-contract support services) and training. The Company recognizes
revenue from product sales at the time of shipment to the customer. Estimated
reserves for warranty costs as well as for sales returns and allowances
related to anticipated return of products sold to distributors with limited
rights of return, which have not been material to the Company's financial
results, are recorded at the time of sale. Revenue from software sales is
recognized upon shipment of the software if there are no significant post-
delivery obligations and if collection is probable. Service revenues are
generally recognized as the services are performed. See Note 2 of Notes to
Consolidated Financial Statements.
In connection with the issuance of stock options to employees during the
three months ended March 31, 1998, the Company has recorded deferred
compensation in the aggregate amount of approximately $530,000, representing
the difference between the deemed fair value of the Company's Common Stock and
the exercise price of the stock options at the date of grant. The Company is
amortizing the deferred compensation expense over the shorter of the period in
which the employee, director or consultant provides services or the applicable
vesting period, which is typically 48 months. For the three-month period ended
March 31, 1998, amortization expense was approximately $11,000. Deferred
compensation is decreased in the period of forfeiture arising from the early
termination of an option holder's services. No compensation expense related to
any other periods presented has been recorded.
20
<PAGE>
At March 31, 1998, the Company had an accumulated deficit of $86.4 million.
As of December 31, 1997, the Company had net operating loss carryforwards for
Federal and state income tax reporting purposes of approximately $76.0 million
and $5.0 million, respectively, which expire at various dates through 2012. In
addition, as of December 31, 1997, the Company had tax credit carryforwards of
approximately $3.5 million, which expire at various dates through 2012. The
Internal Revenue Code of 1986, as amended, contains provisions that may limit
the net operating loss and credit carryforwards available for use in any given
period upon the occurrence of certain events, including a significant change
in ownership interests. The Company had deferred tax assets, including its net
operating loss carryforwards and tax credits, totaling approximately $33.6
million as of December 31, 1997. A valuation allowance has been recorded for
the entire deferred tax asset as a result of uncertainties regarding the
realization of the asset balance due to the history of losses and the
variability of operating results. See Note 7 of Notes to Consolidated
Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
total revenues represented by each item in the Company's Consolidated
Statement of Operations:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
--------------------- ------------------
1995 1996 1997 1997 1998
----- ----- ----- -------- -------
Revenues: (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Product......................... 86.5% 86.3% 87.1% 87.6% 90.3%
Service......................... 13.5 13.7 12.9 12.4 9.7
----- ----- ----- -------- -------
Total revenues................. 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Cost of product................. 40.4 44.8 41.6 41.6 40.8
Cost of service................. 4.9 4.8 6.4 6.1 6.8
----- ----- ----- -------- -------
Total cost of revenues......... 45.3 49.6 48.0 47.7 47.6
----- ----- ----- -------- -------
Gross profit................... 54.7 50.4 52.0 52.3 52.4
----- ----- ----- -------- -------
Operating expenses:
Product development............. 31.5 31.4 25.1 23.3 24.6
Sales and marketing............. 46.6 48.3 42.9 40.3 38.1
General and administrative...... 18.8 16.3 14.1 14.7 11.7
----- ----- ----- -------- -------
Total operating expenses....... 96.9 96.0 82.1 78.3 74.4
----- ----- ----- -------- -------
Loss from operations........... (42.2) (45.6) (30.1) ( 26.0) (22.0)
----- ----- ----- -------- -------
Other income (expense):
Interest income, net............ 4.8 2.2 1.5 0.9 0.8
Other income (expense), net..... 0.7 (0.6) 0.2 0.3 0.1
----- ----- ----- -------- -------
Total other income (expense)... 5.5 1.6 1.7 1.2 0.9
----- ----- ----- -------- -------
Loss before provision for in-
come taxes.................... (36.7) (44.0) (28.4) (24.8) (21.1)
Provision for income taxes........ 0.6 0.7 0.6 0.7 0.7
----- ----- ----- -------- -------
Net loss........................ (37.3)% (44.7)% (29.0)% (25.5)% (21.8)%
===== ===== ===== ======== =======
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31,
1997
Revenues
Total revenues for the three months ended March 31, 1998 increased to $8.0
million from $7.5 million in the same period of 1997, an increase of 6.5%. For
the three months ended March 31, 1998, one customer, EBV,
21
<PAGE>
the sole distributor of the Company's products in Europe since December 1997,
accounted for 20.6% of total revenues. For the three months ended March 31,
1997, no customer accounted for greater than 10% of total revenues.
Product. Product revenues for the three months ended March 31, 1998
increased to $7.2 million from $6.5 million in the same period of 1997, an
increase of 9.8%. For the three months ended March 31, 1998, product revenues
as a percentage of total revenues increased to 90.3% from 87.6% in the same
period of 1997. This increase was due to the market's growing acceptance of
the Company's products and underlying technology, and an expansion of the
Company's product offerings.
Service. Service revenues for the three months ended March 31, 1998
decreased to $771,000 from $926,000 in the same period of 1997, a decrease of
16.7%. For the three months ended March 31, 1998, service revenues as a
percentage of total revenues decreased to 9.7% from 12.4% in the same period
of 1997. This decrease was due primarily to the timing and the number of
technical training courses offered by the Company.
Cost of Revenues
Cost of product. Cost of product revenues consist of costs associated with
the purchase of components and subassemblies, as well as allocated labor,
overhead and manufacturing variances associated with the packaging,
preparation and shipment of products. Cost of product revenues for the three
months ended March 31, 1998 increased to $3.2 million from $3.1 million in the
same period of 1997, an increase of 4.4%, representing product gross margins
of 54.8% and 52.5%, respectively. The increase in product gross margins was
primarily due to a change in product mix as a result of the expansion of new
product offerings as well as a general increase in volumes of products shipped
by the Company.
Cost of service. Cost of service revenues consist of employee-related costs
as well as direct costs incurred in providing training and customer support
services. Cost of service revenues for the three months ended March 31, 1998
increased to $543,000 from $455,000 in the same period of 1997, an increase of
19.3%, representing service gross margins of 29.6% and 50.9%, respectively.
The decrease in service gross margins was due primarily to the decline in
service revenues.
Operating Expenses
Product development. Product development expenses consist primarily of
payroll and related expenses, expensed material and facility costs associated
with the development of new technologies and products. Product development
expenses for the three months ended March 31, 1998 increased to $2.0 million
from $1.7 million in the same period of 1997, representing 24.6% and 23.3%,
respectively, of total revenues. The dollar amount and percentage increases
were primarily the result of increased salaries and other costs related to the
hiring of additional engineering personnel.
Sales and marketing. Sales and marketing expenses consist primarily of
payroll and related expenses including commissions to sales personnel, travel
and entertainment, advertising and product promotion and facilities costs
associated with the Company's sales and support offices. Sales and marketing
expenses for the three months ended March 31, 1998 remained flat at $3.0
million from the same period of 1997, representing 38.1% and 40.3%,
respectively, of total revenues. The decrease in sales and marketing expense
as a percentage of total revenues was due primarily to the larger revenue base
in 1998.
General and administrative. General and administrative expenses consist
primarily of payroll and related expenses for executive, accounting and
administrative personnel, insurance, professional fees and other general
corporate expenses. General and administrative expenses for the three months
ended March 31, 1998 decreased to $935,000 from $1.1 million in the same
period in 1997, representing 11.7% and 14.7%, respectively, of total revenues.
The dollar amount and percentage decreases were attributable to a decrease in
administrative personnel and outside services.
22
<PAGE>
Interest income, net. Interest income, net reflects interest earned by the
Company on its cash and short-term investment balances. Interest income, net
for the three months ended March 31, 1998 decreased to $67,000 from $71,000 in
the same period of 1997.
Other income (expense), net. Other income (expense), net consists primarily
of purchase discounts and foreign transaction gains and losses. Other income
(expense), net for the three months ended March 31, 1998 decreased to $8,000
from $21,000 in the same period of 1997.
Provision for income taxes. Income taxes consist of income taxes related to
certain of the Company's foreign subsidiaries. Income taxes were $55,000 for
each of the three months ended March 31, 1998 and 1997.
FISCAL YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Revenues
Total revenues for fiscal 1997, 1996 and 1995 were $28.3 million, $24.0
million and $23.3 million, respectively, representing increases of 18.0% and
2.8%, respectively. EBV accounted for 10.9% and 12.0% of total revenues in
fiscal 1997 and 1995, respectively. In 1996, no single customer accounted for
10% or more of total revenues.
Product. Product revenues for fiscal 1997, 1996 and 1995 were $24.7 million,
$20.7 million and $20.2 million, respectively, representing increases of 19.1%
and 2.6%, respectively. Product revenues as a percentage of total revenues
were 87.1%, 86.3% and 86.5%, for fiscal 1997, 1996 and 1995, respectively. The
increase in 1997 as compared to 1996 was due to the market's growing
acceptance of the Company's products and underlying technology and an
expansion of the Company's product offerings. For both dollar amounts and as a
percentage of total revenues, product revenues were relatively flat between
1996 and 1995.
Service. Service revenues for fiscal 1997, 1996 and 1995 were $3.6 million,
$3.3 million and $3.2 million, respectively, representing increases of 10.8%
and 3.9% respectively. Service revenues as a percentage of total revenues were
12.9%, 13.7% and 13.5% for fiscal 1997, 1996 and 1995, respectively. The
increase in 1997 service revenues as compared to 1996 reflects increased
customer support revenues as a result of the increased installed base of the
Company's products.
Cost of Revenues
Cost of product. Cost of product revenues for fiscal 1997, 1996 and 1995
were $11.8 million, $10.8 million and $9.4 million, respectively, representing
product gross margins of 52.3%, 48.0% and 53.3%, respectively. The increases
in dollar amounts were due primarily to the additional product costs
associated with increased volumes. The increase in product gross margin in
1997 as compared to 1996 was due primarily to decreased operations spending as
a percentage of revenue and lower manufacturing variances. The decrease in
product gross margin in 1996 as compared to 1995 was due to flat revenue
growth and increased cost of products related primarily to a change in product
mix towards lower margin volume products.
Cost of service. Cost of service revenues for fiscal 1997, 1996 and 1995
were $1.8 million, $1.1 million and $1.1 million, respectively, representing
service gross margins of 50.2%, 65.2% and 63.9%, respectively. The increase in
dollar amount in fiscal 1997 as compared to 1996 was primarily the result of
an increase in the number of customer support and training personnel. The
decrease in service gross margin in 1997 as compared to 1996 was due primarily
to higher cost of service growth compared to service revenue growth. The
increase in service gross margin in 1996 as compared to 1995 was due to
slightly higher revenue growth in 1996 as the spending levels over the same
period remained unchanged.
Operating Expenses
Product development. Product development expenses for fiscal 1997, 1996 and
1995 were $7.1 million, $7.5 million and $7.4 million, respectively,
representing 25.1%, 31.4% and 31.5% of total revenues, respectively. The
decrease in product development expenses in 1997 as compared to 1996 was due
primarily to the transition of Company personnel from product development to
the direct support of the Company's existing customers.
23
<PAGE>
The increase in product development expenses in 1996 as compared to 1995 was
due primarily to investments made by the Company in technology development.
Sales and marketing. Sales and marketing expenses for fiscal 1997, 1996 and
1995 were $12.1 million, $11.6 million and $10.9 million, respectively,
representing 42.9%, 48.3% and 46.6% of total revenues, respectively. The
dollar amount increases, in each succeeding year, were primarily due to
personnel related expenses. The Company's expenses in international sales
offices in 1997 were lower than 1996 primarily due to an overall strengthening
of the U.S. dollar against most of the functional currencies used in the
international sales office operations. The increase in percentage of total
revenues in 1996 as compared to 1995 reflected an increase in fixed selling
expenses to support anticipated revenue growth in 1996.
General and administrative. General and administrative expenses for fiscal
1997, 1996 and 1995 were $4.0 million, $3.9 million and $4.4 million,
respectively, representing 14.1%, 16.3% and 18.8% of total revenues,
respectively. The decrease in percentage of total revenues in 1997 compared to
1996 was due to relatively similar spending levels spread over a larger
revenue base. The decreases in dollar amounts and percentage of total revenues
in 1996 compared to 1995 were due primarily to reduced spending related to
regulatory measures.
Interest Income, net. Interest income, net for fiscal 1997, 1996 and 1995
was $429,000, $536,000 and $1.1 million, respectively, representing 1.5%, 2.2%
and 4.8% of total revenues, respectively. The decreases in interest income
were due to lower cash and short-term investment balances.
Other income (expense), net. Other income (expense), net for fiscal 1997,
1996 and 1995 was $68,000, ($163,000) and $175,000, respectively. The amount
in other income (expense), net in 1997 was primarily due to income from
purchase discounts taken in 1997. The amount in other income (expense), net in
1996 as compared to 1995 was due primarily to foreign transaction losses
incurred in 1996 and foreign transaction gains incurred in 1995 both primarily
related to the fluctuations of the U.S. dollar against the Japanese Yen.
Provision for income taxes. Income taxes for 1997, 1996 and 1995, which
consists of income taxes related to certain of the Company's foreign
subsidiaries, were $189,000, $152,000 and $143,000, respectively.
24
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations
data for each of the five quarters in the period ended March 31, 1998, as well
as the percentage of total revenues for the periods indicated. This
information has been derived from the Company's unaudited consolidated
financial statements. The unaudited consolidated financial statements have
been prepared on the same basis as the audited consolidated financial
statements contained herein and include all adjustments, consisting only of
normal recurring adjustments, which the Company considers necessary for a fair
presentation of this information when read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Prospectus. The results of operations for any quarter and any quarter-to-
quarter trends are not necessarily indicative of the results to be expected
for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
MARCH JUNE SEPT. DEC. MARCH
1997 1997 1997 1997 1998
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Product.................. $ 6,548 $ 5,944 $ 5,487 $ 6,686 $ 7,188
Service.................. 926 1,036 862 813 771
------- ------- ------- ------- -------
Total revenues........... 7,474 6,980 6,349 7,499 7,959
Cost of revenues:
Cost of product.......... 3,111 2,840 2,724 3,086 3,249
Cost of service.......... 455 445 408 502 543
------- ------- ------- ------- -------
Total cost of revenues... 3,566 3,285 3,132 3,588 3,792
------- ------- ------- ------- -------
Gross profit............. 3,908 3,695 3,217 3,911 4,167
------- ------- ------- ------- -------
Operating expenses:
Product development...... 1,740 1,724 1,751 1,906 1,958
Sales and marketing...... 3,014 3,140 2,890 3,084 3,031
General and administra-
tive.................... 1,098 981 983 942 935
------- ------- ------- ------- -------
Total operating ex-
penses.................. 5,852 5,845 5,624 5,932 5,924
------- ------- ------- ------- -------
Loss from operations..... (1,944) (2,150) (2,407) (2,021) (1,757)
------- ------- ------- ------- -------
Other income (expense):
Interest income, net...... 71 109 143 106 67
Other income (expense),
net...................... 21 13 18 16 8
------- ------- ------- ------- -------
Total other income (ex-
pense).................. 92 122 161 122 75
------- ------- ------- ------- -------
Loss before provision for
income taxes............ (1,852) (2,028) (2,246) (1,899) (1,682)
Provision for income tax-
es....................... 55 35 34 65 55
------- ------- ------- ------- -------
Net loss................. $(1,907) $(2,063) $(2,280) $(1,964) $(1,737)
======= ======= ======= ======= =======
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues:
Product.................. 87.6% 85.2% 86.4% 89.2% 90.3%
Service.................. 12.4 14.8 13.6 10.8 9.7
------- ------- ------- ------- -------
Total revenues........... 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Cost of product.......... 41.6 40.7 42.9 41.1 40.8
Cost of service 6.1 6.4 6.4 6.7 6.8
------- ------- ------- ------- -------
Total cost of revenues... 47.7 47.1 49.3 47.8 47.6
------- ------- ------- ------- -------
Gross profit............. 52.3 52.9 50.7 52.2 52.4
------- ------- ------- ------- -------
Operating expenses:
Product development...... 23.3 24.7 27.6 25.5 24.6
Sales and marketing...... 40.3 45.0 45.6 41.1 38.1
General and administra-
tive.................... 14.7 14.0 15.4 12.6 11.7
------- ------- ------- ------- -------
Total operating ex-
penses.................. 78.3 83.7 88.6 79.2 74.4
------- ------- ------- ------- -------
Loss from operations..... (26.0) (30.8) (37.9) (27.0) (22.0)
------- ------- ------- ------- -------
Other income (expense):
Interest income, net..... 0.9 1.6 2.3 1.4 0.8
Other income (expense),
net..................... 0.3 0.1 0.2 0.3 0.1
------- ------- ------- ------- -------
Total other income (ex-
pense).................. 1.2 1.7 2.5 1.7 0.9
------- ------- ------- ------- -------
Loss before provision for
income taxes............ (24.8) (29.1) (35.4) (25.3) (21.1)
Provision for income tax-
es....................... 0.7 0.5 0.5 0.9 0.7
------- ------- ------- ------- -------
Net loss................. (25.5)% (29.6)% (35.9)% (26.2)% (21.8)%
======= ======= ======= ======= =======
</TABLE>
25
<PAGE>
The Company's revenues, expenses and results of operations have been subject
to quarterly fluctuations due to a variety of factors. These factors make the
estimation and forecast of revenues difficult on a quarterly basis. The
Company plans to continue to increase its product development and sales and
marketing expenses on a quarterly basis in an effort to increase its market
share. These increases will be based in significant part on expectations of
future revenues. As a result of these and other factors, the Company believes
that its revenues and operating results are difficult to predict and are
subject to fluctuations from period to period, and that period-to-period
comparisons of its results of operations are not meaningful and should not be
relied upon as indications of future performance. See "Risk Factors--
Fluctuations in Operating Results."
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations and met its
capital expenditure requirements primarily from the private sale of Preferred
Stock and Common Stock. From inception through March 31, 1998, the Company had
raised $94.4 million from the sale of Preferred Stock and Common Stock.
Net cash used in operating activities was $2.9 million for the three months
ended March 31, 1998 and 1997. For fiscal 1997, 1996 and 1995, net cash used
in operating activities was $9.5 million, $9.0 million and $9.2 million,
respectively. Net cash used in operations is attributable primarily to the
losses from operations in each of the periods.
Net cash used in investing activities was $3.6 million in fiscal 1997 and
$70,000 for the three months ended March 31, 1997. The net cash used in
investing activities reflected the shortfall of cash proceeds from the
maturities of short-term investments offset by the purchases of short-term
investments and capital expenditures. Net cash provided by investing
activities was $2.8 million for the three months ended March 31, 1998, and
$11.2 million and $6.5 million in fiscal 1996 and 1995, respectively. The net
cash provided by investing activities reflected the excess of cash proceeds
from the maturities of short-term investments offset by the purchases of
short-term investments and capital expenditures.
Net cash provided by financing activities was $472,000 and $16,000 for the
three months ended March 31, 1998 and 1997, respectively, and was $10.2
million, $1.9 million and $2.0 million in fiscal 1997, 1996 and 1995,
respectively. Net cash provided by financing activities consisted primarily of
proceeds from private sales of Preferred Stock and Common Stock and the
exercise of employee stock options.
At March 31, 1998, the Company's principal sources of liquidity included
cash and cash equivalents of $5.2 million. In May 1998, the Company entered
into a revolving line of credit agreement with a bank, whereby the Company may
borrow up to 85% of eligible accounts receivable, not to exceed $5.0 million.
If the credit agreement had been in effect as of April 30, 1998, the amount
available to be borrowed thereunder would have been $2.6 million. Advances
under the credit agreement bear interest at the bank's reference rate or, at
the option of the Company, at a fixed rate of interest equal to the London
interbank offered rate plus 150 basis points. As of May 31, 1998, there was
approximately $65,000 outstanding under this line of credit in the form of a
letter of credit. The credit agreement, which expires in May 1999, contains
certain negative covenants restricting the Company's ability to pay dividends
or enter into certain financial transactions. The credit agreement also
contains a minimum tangible net worth requirement, determined on a quarterly
basis.
The Company believes that the proceeds from this offering, together with its
existing sources of liquidity, will satisfy the Company's projected working
capital and other cash requirements for at least the next 24 months. However,
there can be no assurance that the Company will not require additional
financing within this period or that any such financing will be available to
the Company in the amounts or at the times required by the Company, or on
acceptable terms, if at all. The failure of the Company to obtain additional
financing could have a material adverse effect on the Company's business,
operating results and financial condition.
26
<PAGE>
NEW PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting
and presentation of comprehensive income. SFAS No. 130, which was adopted by
the Company in the first quarter of 1998, requires companies to report a new
measurement of income. "Comprehensive Income (loss)" is required to include
foreign currency translation gains and losses and other unrealized gains and
losses that have historically been excluded from net income and reflected
instead in equity. The following table reconciles comprehensive net loss under
the provisions of SFAS No. 130 for the years ended December 31, 1995, 1996 and
1997 and for the three months ended March 31, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------- ----------------
1995 1996 1997 1997 1998
------- -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss..................... $(8,713) $(10,716) $(8,214) $(1,907) $(1,737)
Foreign currency translation
adjustments................. (62) (35) (320) (201) (64)
------- -------- ------- ------- -------
Comprehensive net loss....... $(8,775) $(10,751) $(8,534) $(2,108) $(1,801)
======= ======== ======= ======= =======
</TABLE>
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
establishes standards for disclosure of segment information and which will be
adopted by the Company in the fourth quarter of 1998. The Company anticipates
that SFAS No. 131 will not have a material impact on its financial statements.
27
<PAGE>
BUSINESS
OVERVIEW
Echelon develops, markets and supports a family of hardware and software
products and services that enables OEMs and systems integrators to design and
implement open, interoperable, distributed control networks. A control network
enables any group of electrical devices, called nodes, to be linked together
to implement sensing, monitoring, control and communications capabilities for
a variety of applications. Control networks, an alternative to the traditional
approach of centralized control, offer decreased costs of installation and
maintenance and the ability to implement multi-vendor systems, thereby
increasing competition while providing expanded features, flexibility and
functionality. Echelon's control networking technology allows intelligence and
communications capabilities to be embedded into individual control devices
that can be connected together through a variety of communications media, such
as a twisted pair of wires (data cable) and the existing power lines in a
facility. The intelligent, networked control devices are then able to
communicate with each other, peer-to-peer, to perform the desired control
functions. In effect, the network becomes the controller, eliminating the need
for central controllers, significantly reducing wiring costs and enhancing
system functionality and flexibility.
The Company markets its products and services to OEMs and systems
integrators in the building, industrial, transportation, home and other
automation markets. The Company sells primarily through a direct sales force
in North America and other countries where it has operations, and augments its
direct sales efforts with distributors in Europe, Japan and Asia Pacific.
Representative customers include Bombardier, Edwards, Fuji Electric, Hitachi,
Honeywell, Johnson Controls, Kawasaki, Landis & Staefa and Raytheon.
INDUSTRY BACKGROUND
Control systems manage key functions in virtually every type of facility
that affects our daily lives, such as buildings, factories, transportation
systems and homes. These functions can be as simple as turning a light on and
off and as complex as operating a chemical production line. For example, a
common application of a control system is to enable a thermostat to
communicate with other equipment in a building to automatically adjust
temperature and airflow. In addition to interconnecting and monitoring
heating, ventilation and air conditioning ("HVAC"), control systems are used
within buildings to manage such functions as elevators, lighting, security and
access control. In industrial facilities, these systems are used to automate
semiconductor manufacturing equipment, oil pumping stations, textile dyeing
machinery and hundreds of other applications. In transportation systems,
control systems are used to regulate such features as propulsion, braking and
heating systems.
Control systems consist of an array of hardware devices and software used to
collect data from the physical world and convert that data to electrical
signals. These signals, in turn, provide information that can be used to
effect responses based upon pre-programmed rules and logic. Traditionally,
most control systems have incorporated closed, centrally-controlled
architectures. These systems share many of the same drawbacks of centralized
computing architectures that rely upon mainframes and minicomputers to
communicate to "dumb" terminals that lack independent processing capabilities.
Products for control systems are typically designed and manufactured by OEMs
that focus on one or more vertical markets, such as HVAC systems for
buildings, or braking control systems for trains. Control systems are
typically installed and maintained by specialty contractors, or "systems
integrators," and in some instances by the in-house installation and
maintenance divisions of OEMs. Closed, centralized control systems have a
number of inherent disadvantages for OEMs, systems integrators and end-users.
OEMs, as the designers of control systems and, in some instances, developers
of their own protocols, incur significant development and ongoing support
expense to implement and maintain their closed infrastructures. In addition,
supporting such a closed infrastructure takes valuable resources away from
developing competitive applications and limits the OEM's ability to leverage
the product development efforts of third party companies who use open
platforms. Finally, centralized systems also risk complete shutdown if the
central controller fails.
28
<PAGE>
For systems integrators, the installation of closed, centralized control
systems is typically characterized by the time-consuming and costly physical
task of installing large amounts of wire and conduit to connect each component
to one or more central controllers. Once the physical infrastructure is
installed, specially-trained and highly-skilled personnel must program,
install and "debug" detailed control logic software into the controllers in
order to manage the disparate components. To the extent that a facility
incorporates control systems from more than one OEM, systems integrators also
spend considerable time connecting systems that were not designed to
interoperate, such as HVAC and fire/life/safety systems. This complex process
also makes modifications to the system expensive and time consuming. Because
of the excessive costs of installing and modifying closed, centrally-
controlled systems, end-users, who ultimately must pay for these products and
services, often cannot acquire new applications at an affordable cost. The
Company believes that these factors have reduced the market opportunity for
both OEMs and systems integrators to sell new products, functions and
applications to end-users.
OEMs, systems integrators and end-users are increasingly seeking to overcome
the limitations of closed, centralized systems. As with the computer
industry's move away from centralized computing architectures, the Company
believes that across a broad range of control applications, the control
industry is moving away from custom, wiring-intensive and closed
interconnection schemes among various system components, towards open,
interoperable, distributed architectures in which the control intelligence
resides among the sensors and actuators in an intelligent network, rather than
in central controllers.
THE ECHELON SOLUTION
Echelon develops, markets and supports a family of hardware and software
products and services that enables OEMs and systems integrators to design and
implement open, interoperable, distributed control networks. Echelon's
networking technology allows intelligence and communications capabilities to
be embedded into individual control devices that can be connected together
through a variety of communications media such as a twisted pair of wires
(data cable) and the existing power lines in a facility. The intelligent,
networked control devices are then able to communicate with each other, peer-
to-peer, to perform the desired control functions. For example, a temperature
sensor might detect a change in temperature and send a message over the
network that is received and acted upon by other devices that have been
configured to accept the message. In effect, the network becomes the
controller, eliminating the need for central controllers, significantly
reducing wiring costs and enhancing system functionality and flexibility.
The Company offers a comprehensive set of products and services that
provides the infrastructure and support required to build and implement open,
multi-vendor, interoperable, control network solutions for building,
industrial, transportation, home and other automation markets. The Company's
products are based on its LonWorks networking technology, an open standard for
interoperable networked control. In a LonWorks control network, intelligent
control devices, called nodes, communicate using the Company's LonTalk
protocol. Each node in the network contains embedded intelligence that
implements the protocol and performs local sense and control functions. At the
core of this embedded intelligence is the Neuron Chip, an integrated circuit
that was initially designed by Echelon and is currently manufactured and sold
by Motorola and Toshiba. In addition, the Company offers transceivers that
couple the Neuron Chip to the communications medium; control modules that
significantly reduce OEM development cost; intelligent LonWorks routers that
allow users to build large systems containing different networking media;
network interfaces that connect computers to the network; development tools
that allow OEMs to design LonWorks technology into their products; and
software tools and toolkits that allow users to install, monitor, maintain and
control their systems.
29
<PAGE>
The diagrams below compare a control application implemented in a closed,
centralized control system architecture with the same application implemented
using Echelon's LonWorks distributed control network solution.
TRADITIONAL CLOSED, CENTRALLY-CONTROLLED SYSTEM ARCHITECTURE
[SCHEMATIC DEPICTING THE TRANSITION FROM CLOSED SYSTEMS TO OPEN, DISTRIBUTED
NETWORKS]
ECHELON'S OPEN, DISTRIBUTED CONTROL NETWORK ARCHITECTURE
Echelon's family of products and services provides the following benefits to
its customers:
. Installation Cost Savings. LonWorks based open control networks are less
expensive to install than closed, centrally-controlled systems. By
replacing individual hard-wired connections with shared network channels,
wiring and conduit material and labor costs are substantially reduced. By
eliminating the need to program and debug complex control logic software,
systems can be designed and commissioned more quickly by personnel with
less specialized training. In addition, LonWorks based networks do not
require expensive, performance-limiting gateways (which are used to enable
communication between disparate systems) to connect control systems from
multiple vendors.
. Life-Cycle Cost Savings. LonWorks networks eliminate many of the sources of
high life-cycle costs found in traditional control systems. By providing an
open, interoperable platform, LonWorks networks allow end-users to select
the most cost-effective products and services for their applications from a
broad range of OEMs. In addition, the inherent flexibility of the LonWorks
network architecture permits modifications to the control system, including
adding new products, features and functions, to be made at significantly
lower cost. LonWorks technology also enables devices to be logically
"rewired" across the network without the need to run new physical wire or
to replace or reprogram devices.
. Improved Quality and Functionality. With LonWorks networks, end-users are
able to customize their control networks to their specific needs by
incorporating products and applications from an array of applications
providers. In open LonWorks networks, any piece of information from any
device can easily be shared with any other device in the same control
system, in a different control system, or in a computer system, without the
need for custom programming or additional hardware. For example, a
measurement
30
<PAGE>
system can analyze information from a manufacturing system and send back
improvements within seconds if the two systems communicate directly, rather
than through a process where information is gathered and communicated
manually over days or even weeks.
. Improved Reliability. In a fully-distributed LonWorks control network,
there is no single point of failure. Typically, the failure of a device on
the network only affects a small subset of devices with which it interacts.
Unlike devices in a centrally controlled system, devices in a LonWorks
network are "self-aware" and can take appropriate actions, such as
returning to default set-points, to adapt to the error condition. In
addition, by utilizing its built-in processing power, each device can keep
track of its own status and can report problems before they occur.
. Increased Market Demand. The Company believes that by eliminating high-cost
centralized controllers and fostering interoperability between devices,
LonWorks technology enables both OEMs and systems integrators to create
low-cost, customized solutions to satisfy market demands that have not been
met by traditional control systems.
STRATEGY
Echelon's objective is to be the leading supplier of products and services
used in the growing market for open, interoperable control networks. Key
elements of the Company's strategy to accomplish this objective include:
. Extend Technological Leadership. Echelon's LonWorks networking technology
is the foundation for a low-cost, flexible, interoperable and reliable
platform for implementing networked control applications. The Company
intends to leverage its position as the developer of the LonWorks platform,
along with its expertise in networking software, distributed control
systems and digital and analog circuit design, to deliver a full range of
highly-functional and cost-effective products and systems that meet its
customers' needs.
. Target Industry-Leading OEM Customers. The Company seeks to develop broad
industry support for its LonWorks platform. To help accomplish this
objective, the Company works closely with industry-leading OEMs, such as
Bombardier, Edwards and Honeywell, in the product design process and
invests in programs that enable these customers to develop, market and
support their products. The Company believes that close collaborative
relationships with OEM customers will continue to accelerate the transition
of its targeted industries toward open, multi-vendor architectures for
control networks.
. Develop Systems Integrator Distribution Channel. The Company believes that
end-users increasingly prefer multi-vendor control networks in order to
decrease life-cycle costs and improve the functionality of their control
systems. In order to capitalize on this opportunity, the Company
complements its OEM distribution channel by aggressively targeting
independent systems integrators as an additional channel to install,
configure and maintain highly-functional control networks for end-users. To
more effectively meet the needs of systems integrators, the Company
recently released its LonPoint System, which provides the infrastructure
needed to implement open, interoperable, distributed control networks. The
Company intends to continue promoting the benefits of the LonWorks
technology and products to systems integrators and end-users as a means to
create stronger demand for its control network solutions.
. Increase Penetration of Existing Vertical Markets. While the Company's
control network products are applicable across a broad range of industries,
the Company intends to continue to focus its marketing efforts on those
vertical markets in which it has established a large customer base, namely
the building, industrial, transportation and home automation industries.
The Company works closely with OEMs and systems integrators in these
vertical markets to identify market needs, and targets its product
development efforts to meet those needs. For instance, in 1997, the Company
began shipping its network operating system, LonWorks Network Services, in
response to the needs of OEMs for a multi-user platform to install,
maintain, monitor and interface with control networks. In addition, the
Company established the LonMark Interoperability Association in May 1994 to
facilitate the development and implementation of interoperable LonWorks
based control systems within various industries. Several industry leaders
in the Company's targeted markets have announced and currently promote
products that conform to these standards.
31
<PAGE>
. Integrate LonWorks Control Networks with Enterprise Data Networks. The
Company believes that the seamless integration between LonWorks control
networks and enterprise data networks is important to enable end-users to
remotely monitor and manage their control networks, as well as to collect
and analyze data generated by their control networks. To meet this market
demand, the Company is developing systems and technology that combine
standard data networking and communications protocols with the Company's
products and technology. In support of this effort, the Company recently
entered into a strategic agreement with Toshiba and a non-binding
memorandum of understanding with Cisco to develop products that integrate
LonWorks control networks with enterprise data networks.
. Leverage International Market Opportunities. With sales and marketing
operations in 10 countries and 57.5% of the Company's total revenues in
1997 attributable to international sales, the Company has established a
significant international presence. The Company plans to continue to devote
significant resources to international sales, marketing and product
development efforts to capitalize on markets for control networks outside
of the United States. For example, the Company's most popular power line
transceiver was designed to meet the requirements imposed by regulators in
both North America and Europe, enabling OEMs to leverage their product
development programs across these markets.
MARKETS, APPLICATIONS AND CUSTOMERS
The Company markets its products and services primarily in North America,
Europe, Japan and selected Asia Pacific countries. The Company's target
markets include:
Building Automation. Companies worldwide are using LonWorks control networks
in most facets of the building automation industry, including access control,
automatic doors, elevators, energy management, fire/life/safety, HVAC,
lighting, metering, security and window blinds. The Company believes that
LonWorks networks are widely accepted because they lower installed system
cost, reduce ongoing life-cycle costs and increase functionality. For example,
a major automation project is currently being completed for British Airways'
new combined business center, BA Waterside, near Heathrow Airport. The project
uses LonWorks control networks throughout the six building campus to connect
the building management, lighting and access control systems together in a
unified system. Key customers in the building automation market include
Honeywell, Johnson Controls, Landis & Staefa, Philips Lighting B.V., Schindler
Elevator Corp. and Siebe.
Industrial Automation. LonWorks control networks are found in semiconductor
fabrication plants, gas compressor stations, gasoline tank farms, oil pumping
stations, water pumping stations, textile dyeing machinery, pulp and paper
processing equipment, automated conveyor systems and many other industrial
environments. In such industrial installations, LonWorks networks replace
complex wiring harnesses, reduce installation costs, eliminate expensive
programmable logic controllers and distribute control among sensors, actuators
and other devices, thereby reducing system costs, improving control and
eliminating the problem of a single point of failure, among other things. For
example, Edwards, a leading supplier of vacuum pumping systems to the
semiconductor industry, is using LonWorks control networks within each pumping
station to replace complex wiring used to connect various motors, sensors,
actuators and displays. The same control network is extended to connect up to
400 pumping stations together in a semiconductor fabrication plant to form a
complete pumping system. Echelon's key customers in the industrial automation
market include Brooks Instrument, Edwards, Fuji Electric, Hitachi, Lam
Research Corporation and Marley Pump.
Transportation. Echelon's technology is used in important transportation
applications, including railcars, light rail, buses, motor coaches, fire
trucks, naval vessels and aircraft. LonWorks networks are used in these
transportation systems to improve efficiency, reduce maintenance costs and
increase safety and comfort. LonWorks technology has been specified as the
standard for electro-pneumatic braking for freight transportation trains by
the American Association of Railroads, and as one of the standards by the New
York City Transit Authority for the replacement of its subway cars. Key OEMs
in the transportation market include Bombardier, Cummins Engine, Kawasaki and
Raytheon.
32
<PAGE>
Home Automation and Other. While the home automation market is still in its
infancy, numerous companies are now selling LonWorks based products for HVAC,
lighting, security, utility meters and whole house automation. A number of
utility companies located throughout the world, including CSW Communications
(the holding company for Central and Southwest Utilities), Detroit Edison and
Enron Energy Services in the United States, and Sydkraft and Scottish Hydro
Electric in Europe, currently are pursuing residential projects involving
LonWorks networks. Other industries in which LonWorks control networks have
been utilized or are being developed for use include telecommunications
(including alarm systems for switching equipment), agriculture (including
feeding and watering systems) and medical instrumentation (including the use
of CAT scans to create holographic images).
PRODUCTS AND SERVICES
The Company offers a comprehensive set of over 80 products and services
marketed under the LonWorks brand name that provide the infrastructure and
support required to implement and deploy open, interoperable, control network
solutions.
LonWorks Control and Connectivity Products. This suite of hardware products,
some with embedded firmware, serves as the physical interface between the
control software resident on the managed devices and the cabling and wiring
infrastructure. These products include a variety of transceivers, control
modules, routers and network interface devices. Standard, off-the-shelf
LonWorks transceivers and control modules simplify the development of LonWorks
nodes, provide the foundation for interoperability and reduce the development
cost and time for an OEM's product development. LonWorks routers provide
transparent support for multiple media, which makes it possible to signal
between different types of media, such as twisted pair, power line, radio
frequency, optical fiber and infrared. Routers can also be used to control
network traffic and partition sections of the network from traffic in another
area, increasing the total throughput and speed of the network. Network
interfaces can be used to connect computers to a LonWorks network.
LonWorks Network Services ("LNS"). Echelon's network operating system, LNS,
serves as the platform for installing, maintaining, monitoring and interfacing
with control networks. The LNS family of products adds the power of client-
server architecture and component-based software design into control systems
and allows tools from multiple vendors to work together.
The LonMaker for Windows tool, built on the LNS network operating system and
the Visio technical drawing package, gives users a familiar, CAD-like
environment in which to design their network's control system. The graphical
nature of the LonMaker tool provides an intuitive interface for designing,
installing and maintaining multi-vendor, open, interoperable LonWorks control
networks. LNS also allows multiple users, each running their own copy of
LonMaker for Windows or other LNS-based tools, to utilize the system in
parallel, thereby streamlining the design and commissioning process, and
facilitating future adds, moves and changes.
LonPoint System Products. In the second quarter of 1998, the Company began
shipment of the LonPoint System, which provides the infrastructure to
implement open, interoperable, distributed control networks. In contrast to
traditional closed, centrally-controlled systems, the LonPoint System offers a
flat network architecture in which every device performs control processing.
Distributing the processing throughout the network lowers installation and
overall life-cycle costs, increases reliability by eliminating central points
of failure, and provides the flexibility to adapt the system to a wide variety
of applications.
The LonPoint System includes a family of hardware and software products.
Hardware products include interface modules (which convert a variety of legacy
digital and analog sensors and actuators into intelligent and interoperable
network devices), routers (which provide transparent connectivity and
intelligent message passing between various combinations of standard LonWorks
media), and scheduler modules (which provide system timekeeping and state
coordination). The LonPoint System is installed using the LonMaker for Windows
tool
33
<PAGE>
and includes LNS software plug-ins that provide end-users with a customized
configuration view of each LonPoint module, thereby reducing the time and
training required to configure LonPoint interface modules.
Development Tools. Echelon provides development tools that are used by an
OEM to design LonWorks technology into the OEM's products. The LonBuilder
Developer's Workbench integrates a complete set of tools for developing
LonWorks based control networks. These tools include an environment for
developing and debugging applications at multiple nodes, a network manager to
install and configure these nodes, and a protocol analyzer to examine network
traffic to ensure adequate capacity and to debug errors.
The NodeBuilder development tool is designed to make it easy for OEMs to
develop and test individual LonWorks nodes. It uses a familiar Windows based
development environment with easy-to-use on-line help. The NodeBuilder tool
can complement the development capabilities of the LonBuilder Developer's
Workbench, since the NodeBuilder tool can be used to develop individual nodes
that are then integrated and tested as a system using the LonBuilder tool.
Training and Support. The Company conducts a variety of technical training
courses covering its LonWorks network technology and products. These courses
are designed to provide hands-on, in-depth and practical experience that can
be used immediately by OEMs and systems integrators of LonWorks systems. The
Company also offers technical support to its customers on a per incident and
annual contract basis. These support services are intended to ensure proper
use of the Company's products and to shorten development time for the
customer's products that use Echelon's technology through timely resolution of
the customer's technical problems. As of May 31, 1998, the Company had 14
employees in the United States, Japan and the United Kingdom engaged in
training and support.
SALES AND MARKETING
The Company markets and sells its products and services to OEMs and
increasingly to systems integrators to promote the widespread use of its
LonWorks technology. In addition, the Company believes that awareness of the
benefits of LonWorks networks among end-users will increase demand "pull" for
the Company's products. In North America, the Company sells its products
through a direct sales organization. Outside the United States, direct sales,
applications engineering and customer support are conducted through the
Company's operations in China, France, Germany, Hong Kong, Italy, Japan, the
Netherlands, South Korea and the United Kingdom. Each of these offices is
staffed primarily with local employees. The Company supplements its worldwide
sales personnel with application engineers and technical and industry experts
working in the Company's headquarters. The Company also leverages its selling
efforts through the use of an in-house telephone sales staff. Internationally,
the Company augments its direct sales with the use of distributors. These
distributors tend to specialize in certain geographical markets. The Company
sells its products in Europe principally through EBV, its sole independent
European distributor, and through its direct sales force. The Company relies
solely on distributors in certain countries in the Asia Pacific region,
including Australia and Taiwan, and in Latin America, through its distributor
in Argentina. See "Risk Factors--Dependence on OEMs and Distribution
Channels."
The Company has recently implemented an authorized network integrator
program to increase the distribution of its products through systems
integrators worldwide. These systems integrators design, install and service
control systems using the Company's LonPoint System with legacy devices and
other manufacturers' products that meet the certification guidelines of the
LonMark Interoperability Association, thereby reducing dependence on single-
vendor products, eliminating the risks of centralized, closed controllers and
supporting less complex, peer-to-peer system architectures. The Company
provides these systems integrators with access to the training, tools and
products required to cost-effectively install, commission and maintain open,
multi-vendor distributed control systems based on LonWorks control networks.
The Company's marketing efforts are augmented by the LonMark
Interoperability Association and the LonUsers International group. The LonMark
Interoperability Association was formed by Echelon in May 1994 and has over
200 members. This Association defines the technical standards for
interoperability for LonWorks
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technology and promotes the use of open control networks based on the LonMark
standard. The purpose of LonUsers International, established by Echelon in
1991, is to provide a forum in which parties can share recent information
concerning LonWorks technology and applications, build alliances and support
the LonWorks standard for control networking. In 1997, LonUsers International
meetings in North America, Europe and Asia drew nearly 4,000 participants.
STRATEGIC ALLIANCES
Neuron Chips, which are important components in control network nodes, are
manufactured and sold by both Motorola and Toshiba. The Company has entered
into licensing agreements with each of Motorola and Toshiba. Among other
things, the agreements grant Motorola and Toshiba the worldwide right to
manufacture and distribute Neuron Chips using technology licensed from the
Company and require the Company to provide support and unspecified updates to
the licensed technology over the terms of the agreements. While the Company
developed the first version of the Neuron Chip, Motorola and Toshiba
subsequently developed improved, lower-cost versions of the Neuron Chip that
are presently utilized in products developed and sold by the Company and its
customers. The Company has neither the resources nor the skills to replace
either Motorola or Toshiba as a designer, manufacturer or distributor of
Neuron Chips. Motorola and Toshiba have played, and are expected to continue
to play, a key role in the development and marketing of LonWorks technology.
The loss of either Motorola or Toshiba as a supplier of the Neuron Chip would
have a material adverse effect on the business, operating results and
financial condition of the Company, and in such event there can be no
assurance that the Company would be able to locate an alternate source for the
design, manufacture or distribution of Neuron Chips. See "Risk Factors--
Dependence on Key Manufacturers" and "Certain Transactions."
The Company has an agreement with Toshiba and a non-binding memorandum of
understanding with Cisco to develop products that integrate LonWorks control
networks into enterprise data networks. Echelon's joint development agreement
with Toshiba is intended to enable products and technologies to be developed
using the Java programming language to program LonWorks control devices. The
Company expects that its relationship with Cisco will result in jointly-
developed products that simplify enterprise-wide integration of LonWorks
control and Internet protocol data networks.
PRODUCT DEVELOPMENT
The Company's future success depends in large part on its ability to enhance
existing products, lower product cost and develop new products that maintain
technological competitiveness. The Company has made and intends to continue to
make substantial investments in product development. The Company recently has
made significant engineering investments in bringing its LNS network operating
system and LonPoint System products to market. Extensive product development
input is obtained from customers and by monitoring end-user needs and changes
in the marketplace.
The Company's total expenses for product development for the three months
ended March 31, 1998 and for fiscal 1997 and 1996 were $2.0 million, $7.1
million and $7.5 million, respectively. The Company anticipates that it will
continue to commit substantial resources to product development in the future
and that product development expenses may increase in the future. To date, the
Company's development efforts have not resulted in any capitalized software
development costs. As of May 31, 1998, the Company's product development
organization consisted of 44 personnel.
COMPETITION
Competition in the Company's markets is intense and involves rapidly
changing technologies, evolving industry standards, frequent new product
introductions and rapid changes in customer requirements. To maintain and
improve its competitive position, the Company must continue to develop and
introduce, on a timely and cost-effective basis, new products, features and
services that keep pace with the evolving needs of its customers. The
principal competitive factors affecting the markets for the Company's control
network products are customer
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service and support, product reputation, quality, performance and price, and
product features such as adaptability, scalability, ability to integrate with
other products, functionality and ease of use. The Company believes it has in
the past generally competed favorably with offerings of its competitors on the
basis of these factors. However, there can be no assurance that the Company
will continue to be able to compete effectively based on these or any other
competitive factors in the future.
In each of its markets, the Company competes with a wide array of
manufacturers, vendors, strategic alliances, systems developers and other
businesses. The Company's competitors include some of the largest companies in
the electronics industry, such as Siemens in the building and industrial
automation industries and Allen-Bradley and Schneider in the industrial
automation industry. Many of the Company's competitors, alone or together with
their trade associations and partners, have longer operating histories,
significantly greater financial, technical, marketing, service and other
resources, significantly greater name recognition and broader product
offerings. As a result, such competitors may be able to devote greater
resources to the development, marketing and sale of their products, and may be
able to respond more quickly to changes in customer requirements or product
technology. In addition, those competitors that manufacture and promote
closed, centralized proprietary systems may enjoy a captive customer base
dependent on such competitors for service, maintenance, upgrades and
enhancements. Accordingly, there can be no assurance that the Company will be
able to compete successfully with existing or new competitors, or that
competition will not have a material adverse effect on the business, operating
results or financial condition of the Company.
Many of the Company's current and prospective competitors are dedicated to
promoting closed or proprietary systems, technologies, software and network
protocols or product standards that differ from, or are incompatible with,
those of the Company. In some cases, companies have established associations
or cooperative relationships to enhance the competitiveness and popularity of
their products, or to promote such different or incompatible technologies,
protocols and standards. For example, in the building automation market, the
Company faces widespread reluctance by vendors of traditional closed or
proprietary control systems (who enjoy a captive market for servicing and
replacing equipment) to utilize the Company's interoperable technologies, as
well as strong competition by large trade associations that promote
alternative technologies and standards in their native countries, such as the
BatiBus Club International in France and the European Installation Bus
Association in Germany (each of which has over 100 members and licensees).
Other examples include the CEBus Industry Council, which is the proponent of
an alternative protocol to the Company's LonTalk protocol for use in the home
automation industry, and a group comprised of Asea Brown Boveri, ADtranz AB,
Siemens, GEC Alstrom and other manufacturers that support an alternative rail
transportation protocol to LonWorks networks. The Company works with
standards-setting organizations to establish open markets for LonWorks
products in the Company's targeted markets. There can be no assurance that the
Company's technologies, protocols or standards will be successful in any of
its markets, or that the Company will be able to compete with new or enhanced
products or standards introduced by existing or future competitors. Any
increase in competition or failure by the Company to effectively compete with
new or enhanced products or standards could result in fewer customer orders,
price reductions, reduced order size, reduced operating margins and loss of
market share, any of which could have a material adverse effect on the
business, operating results or financial condition of the Company. See "Risk
Factors--Competition."
LonWorks technology is open, meaning that many of the Company's key
technology patents are broadly licensed without royalties or license fees. As
a result, the Company's customers are capable of developing products that
compete with some of the Company's products. Because some of the Company's
customers are OEMs that develop and market their own control systems, these
customers in particular could develop competing products based on the
Company's open technology. This could decrease the market for the Company's
products, increase competition, and have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
Products and Services."
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MANUFACTURING
The Company's manufacturing strategy is to outsource production to third
parties where it is more cost- effective and to limit its internal
manufacturing to such tasks as quality inspection, system integration, testing
and order fulfillment. Echelon maintains manufacturing agreements with
Motorola and Toshiba related to the Neuron Chip, an important component in
many of the Company's products. Additionally, for certain key products, the
Company utilizes outsourced manufacturers including GET, Hi-Tech, muRata and
Quadrus. These outsourced manufacturers procure material and assemble, test
and inspect the final products to the Company's specifications.
The Company's future success will depend, in significant part, on its
ability to successfully manufacture its products cost-effectively and in
sufficient volumes. To date, the Company has not experienced any significant
delays or material unanticipated costs resulting from the use of third party
manufacturing; however, such a strategy involves certain risks, including the
potential absence of adequate capacity and reduced control over delivery
schedules, manufacturing yields, quality and costs. The loss of either
Motorola or Toshiba as a supplier of the Neuron Chip would have a material
adverse effect on the business, operating results and financial condition of
the Company, and in such event there can be no assurance that the Company
would be able to locate an alternate source for the design, manufacture or
distribution of Neuron Chips. Further, several key components are currently
purchased only from sole or limited sources. Any interruption in the supply of
these components, or the inability of the Company to procure these components
from alternate sources at acceptable prices and within a reasonable time,
could have a material adverse effect upon the Company's business, operating
results and financial condition. See "Risk Factors--Dependence on Key
Manufacturers."
GOVERNMENT REGULATION
Many of the Company's products and the industries in which they are used are
subject to U.S. and foreign regulation. Government regulatory action could
greatly reduce the market for the Company's products. For example, the power
line medium (the communications medium used by some of the Company's products)
is subject to special regulations in North America, Europe and Japan. These
regulations limit the ability of companies in general to use power lines as a
communication medium. In addition, some of the Company's competitors have
attempted to use regulatory actions to reduce the market opportunity for the
Company's products or to increase the market opportunity for the competitors'
products. For example, CEMA, a trade association that developed the CEBus
protocol for use in home automation applications, has proposed that the FCC
adopt a standard for television-cable compatibility that encompasses CEBus.
CEMA has also proposed the use of such standard with respect to an FCC rule
making relating to the commercial availability of navigation devices, such as
set-top boxes. The Company has resisted these efforts and will continue to
oppose competitors' efforts to use regulation to impede competition in the
markets for the Company's products. There can be no assurance that existing or
future regulations or regulatory actions would not adversely affect the market
for the Company's products or require significant expenditures of management
or financial resources, any of which could have a material adverse effect on
the Company's business, operating results and a financial condition. See "Risk
Factors--Regulatory Actions."
PROPRIETARY RIGHTS
The Company is the owner of numerous patents, trademarks and logos. As of
May 31, 1998, the Company had received 65 United States patents, and has 21
patent applications pending. Some of these patents have also been granted in
selected foreign countries. Many of the specific patents that are fundamental
to LonWorks technology have been licensed to the Company's customers with no
license fee or royalties. The principal value of the remaining patents relates
to the Company's specific implementation of its products. See "Risk Factors--
Competition" and "--Limited Protection of Intellectual Property Rights."
The Company holds several registered trademarks in the United States,
including Echelon, LonBuilder, LonMark, LonTalk, LonUsers, LonWorks, Neuron
and NodeBuilder. The Company has also registered some of its trademarks and
logos in foreign countries.
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EMPLOYEES
As of May 31, 1998, the Company had 152 employees worldwide, of which 44
were in product development, 23 were in operations, 52 were in sales and
marketing, 14 were in customer support and training and 19 were in general and
administrative. Approximately 115 employees are located at the Company's
headquarters in Palo Alto, California. The Company has employees in 10
countries worldwide, with the largest concentrations outside the United States
in Japan, the Netherlands and the United Kingdom. None of the Company's
employees is represented by a labor union. The Company has not experienced any
work stoppages and considers its relations with its employees to be good.
FACILITIES
The Company leases approximately 55,000 square feet of office, manufacturing
and distribution facilities in Palo Alto, California under two leases that
expire on June 30, 2000. The Company has an option to extend the lease of a
portion of the facilities for a five year period. The aggregate rental expense
under these leases will be approximately $1.4 million during 1998. The Company
also leases office space for its employees in China, France, Germany, Hong
Kong, Italy, Japan, the Netherlands and the United Kingdom. The aggregate
rental expense for such office space will be approximately $348,000 during
1998. The Company believes that additional office space will be available as
required on acceptable terms.
LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company is a party or
to which any of its properties are subject, nor are there any material legal
proceedings known to the Company to be contemplated by any governmental
authority against the Company or any of its properties.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
M. Kenneth Oshman........... 57 Chairman of the Board, President & Chief
Executive Officer, Director
Gibson Anderson............. 56 Vice President of Human Resources
Frederik Bruggink........... 43 Vice President, Europe, Middle East and
Africa
Lawrence Y.H. Chan.......... 47 Vice President, Asia Pacific and Japan
Robert A. Dolin............. 43 Vice President and Chief Technology Officer
James M. Kasson............. 55 Vice President, Chief Information Officer
Kenneth E. Lavezzo.......... 56 Vice President of Operations
Peter Mehring............... 36 Vice President, Engineering
Oliver R. Stanfield......... 49 Vice President of Finance & Chief Financial
Officer
Ed Sterbenc................. 52 Vice President, Americas
Beatrice Yormark............ 53 Vice President of Marketing and Sales
Armas Clifford Markkula,
Jr.(1)..................... 56 Vice Chairman of the Board, Director
Bertrand Cambou............. 42 Director
Robert R. Maxfield(2)....... 56 Director
Richard M. Moley(2)......... 59 Director
Arthur Rock(1).............. 71 Director
Larry W. Sonsini............ 57 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
The Board of Directors is divided into three classes, designated as Class A,
Class B and Class C. The term of the Class A directors expires at the
Company's annual meeting of stockholders in 1999 and each third annual meeting
thereafter. M. Kenneth Oshman and Larry W. Sonsini have been designated as
Class A directors. The term of the Class B directors expires at the Company's
annual meeting of stockholders in 2000 and each third annual meeting
thereafter. Bertrand Cambou, Clifford Markkula, Jr. and Robert R. Maxfield
have been designated as Class B directors. The term of the Class C directors
expires at the Company's annual meeting of stockholders in 2001 and each third
annual meeting thereafter. Richard M. Moley and Arthur Rock have been
designated as Class C directors. Officers are appointed by the Board of
Directors and serve at the discretion of the Board. There are no family
relationships among the officers and directors of the Company.
M. Kenneth Oshman has been President and Chief Executive Officer of the
Company since December 1988. Mr. Oshman, with three associates, founded ROLM
Corporation ("ROLM") in 1969. He was Chief Executive Officer, President, and a
director at ROLM from its founding until its merger with IBM in 1984.
Following the merger, he became a Vice President of IBM and a member of the
Corporate Management Board. He remained in that position until he left IBM in
1986. Prior to founding ROLM, Mr. Oshman was a member of the technical staff
at Sylvania Electric Products from 1963 to 1969. In addition to his
responsibilities at Echelon, Mr. Oshman serves as a director of Sun
Microsystems, Knight-Ridder, Inc. and CMC Industries, Inc. Mr. Oshman earned
B.A. and B.S.E.E. degrees from Rice University and M.S. and Ph.D. degrees in
Electrical Engineering at Stanford University.
Gibson Anderson has been Vice President, Human Resources of the Company
since February 1997 and was the Director of Human Resources of the Company
from 1990 to 1997. Mr. Anderson was employed by ROLM from 1971 to 1986, where
he held positions in engineering, marketing, manufacturing and human
resources. Before joining ROLM, he spent three years at Hewlett-Packard
developing data acquisition systems and three years at IBM performing analog
and digital circuit design and research in computerized speech recognition.
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<PAGE>
Mr. Anderson holds B.A. and B.S.E.E. degrees from Rice University and a M.S.
degree in Electrical Engineering from Stanford University.
Frederik Bruggink has been Vice President, Europe, Middle East and Africa,
since April 1996. Mr. Bruggink joined the Company from Banyan Systems, where
he was Vice President, Europe. From 1985 to 1993, Mr. Bruggink held several
positions at Stratus Computer, including General Manager positions for
Holland, Benelux, and Northern Europe. His last position at Stratus was Vice
President, Northern Europe (including Germany). Prior to joining Stratus, he
held sales positions at Burroughs Computers. Mr. Bruggink attended the
University of Leiden.
Lawrence Y.H. Chan joined the Company in April 1997 as Vice President of
Asia Pacific and Japan and is based in Hong Kong. Prior to joining the
Company, Mr. Chan was Vice President of Asia Pacific and Japan for Banyan
Systems. Prior to that, he held management positions at Stratus Computer, both
in the U.S. and Hong Kong. Prior to joining Stratus, he held positions with
ComputerVision, Oriental Data Systems, Ltd., Hong Kong Terminals, John Swire
and Sons, Ltd., Kowloon Container Terminals Ltd. and NCR Hong Kong Ltd. Mr.
Chan received a General Certificate of Education from the University of
London, a degree in Electrical Engineering from Hong Kong Technical College
and a degree in Computer Programming from Hong Kong University.
Robert A. Dolin has been Vice President and Chief Technology Officer of the
Company since May 1995. From 1989 until 1995, Mr. Dolin was the Director of
Systems Engineering of the Company. Before joining the Company, Mr. Dolin was
Manager of Architecture at ROLM where he worked for 12 years. He has a B.S.
degree in Electrical Engineering and Computer Science from the University of
California at Berkeley.
James M. Kasson has been Vice President, Chief Information Officer of the
Company since November 1997. He served as Vice President of Engineering of the
Company from May 1995 to November 1997. From 1986 until 1995, he was an IBM
Fellow, first as Director of IBM's Advanced Telecommunications Research
Laboratory and later at the Almaden Research Center in San Jose where he
worked in research on a wide variety of electronic imaging systems. Mr. Kasson
joined ROLM in 1973, which was purchased by IBM in 1984. Mr. Kasson received a
B.S. degree in Electrical Engineering from Stanford University and an M.S.
degree in Electrical Engineering from the University of Illinois.
Kenneth E. Lavezzo has been Vice President of Operations of the Company
since September 1990 and has been employed by the Company since 1989. Mr.
Lavezzo joined the Company from ROLM, where he was the Director responsible
for Phonemail and Voice Applications. He also served as General Manager of the
Phones Division. Mr. Lavezzo joined ROLM in 1973 and held a variety of other
positions ranging from product design and program management to production and
manufacturing management. Prior to joining ROLM, he spent seven years at
Hewlett-Packard as a member of the technical staff developing medical products
and high-speed data acquisition products. Mr. Lavezzo received a B.S. degree
in Electrical Engineering from the University of California at Berkeley.
Peter Mehring has been Vice President, Engineering of the Company since
March 1998. Mr. Mehring joined the Company from Umax Computer Corporation
("Umax") where he was a Founder, General Manager, and Vice President of
research and development. Prior to joining Umax, Mr. Mehring held engineering
management positions at Radius, Inc., Power Computing Corporation, Sun
Microsystems, Inc., and Wang Laboratories, Inc. Mr. Mehring received a B.S.
degree in Electrical Engineering from Tufts University, Massachusetts.
Oliver R. Stanfield has been Vice President of Finance & Chief Financial
Officer of the Company since March 1989. Mr. Stanfield joined the Company from
ROLM, where he served in several positions since 1980, including Director of
Pricing; Vice President, Plans and Controls; Vice President, Business
Planning; Vice President, Financial Planning and Analysis; Treasurer; and
Controller, Mil Spec Division. Prior to joining ROLM, Mr. Stanfield worked for
ITEL Corporation, Computer Automation and Rockwell International. Mr.
Stanfield began his business career with Ford Motor Company in 1969 in various
accounting positions while completing B.S. and M.B.A. degrees at the
University of Southern California.
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Ed Sterbenc joined the Company in April, 1997 as Vice President, Americas.
Prior to joining the Company, Mr. Sterbenc was with Tandem Computers, Inc.
from 1987 to 1997. At Tandem, he held positions in sales, international sales
and marketing. Prior to joining Tandem Computers, Inc., Mr. Sterbenc was Vice
President of Sales at Syntelligence. He was a Sales Manager for Cullinet
Software from 1984 to 1986, and held positions in sales, marketing and sales
management at IBM from 1973 to 1984. Mr. Sterbenc worked at Inland Steel prior
to joining IBM. Mr. Sterbenc holds a B.S. degree in Industrial Management and
an A.A.S. degree in Computer Science from Purdue University.
Beatrice Yormark has been Vice President of Marketing and Sales of the
Company since January 1990. Ms. Yormark joined the Company from Connect, Inc.,
an on-line information services company, where she was the company's Chief
Operating Officer. Before joining Connect, Ms. Yormark held a variety of
positions, including Executive Director of Systems Engineering for Telaction
Corporation, Director in the role of Partner at Coopers & Lybrand, Vice
President of Sales at INTERACTIVE Systems Corporation, and various staff
positions at the Rand Corporation. Ms. Yormark received a B.S. degree in
Mathematics from City College of New York and an M.S. degree in Computer
Science from Purdue University.
Armas Clifford Markkula, Jr. is the founder of the Company and has served as
a director since 1988. He has been Vice Chairman of the Company's Board since
1989. Mr. Markkula was Chairman of the Board of Directors of Apple Computer,
Inc. from October 1993 to February 1996 and was a director from 1977 to 1997.
A founder of Apple, he held a variety of positions there, including
President/Chief Executive Officer and Vice President of Marketing. Prior to
founding Apple, Mr. Markkula was with Intel Corporation as Marketing Manager,
Fairchild Camera and Instrument Corporation as Marketing Manager in the
Semiconductor Division, and Hughes Aircraft as a member of the technical staff
in the company's research and development laboratory. Mr. Markkula received
B.S. and M.S. degrees in Electrical Engineering from the University of
Southern California.
Bertrand F. Cambou has been a director of the Company since 1998. He has
been Senior Vice President and General Manager of the Networking and Computing
System Group of Motorola since 1997. Between 1984 and 1997 he held various
management positions within Motorola in Operations and Research and
Development. From 1980 to 1984, he participated in the founding of Matra
Harris Semiconductor. Dr. Cambou received a B.S. degree in Electrical
Engineering from L'Ecole Superieure d'Electricite in Paris, France, a Masters
degree in Physics from Toulouse University and a Doctorate degree in
Electronics from Paris University.
Robert R. Maxfield has been a director of the Company since 1989. He was a
co-founder of ROLM in 1969, and served as Executive Vice President and a
director until ROLM's merger with IBM in 1984. Following the merger, he
continued to serve as Vice President of ROLM until 1988. Since 1988, he has
been a consulting professor in the Electrical Engineering and Engineering-
Economic Systems Departments at Stanford University, and was a venture partner
with Kleiner, Perkins, Caufield & Byers from 1989 to 1992. He serves as a
director of Cedro Group Inc. Dr. Maxfield received B.A. and B.S.E.E. degrees
from Rice University, and M.S. and Ph.D. degrees in Electrical Engineering
from Stanford University.
Richard M. Moley has been a director of the Company since February 1997. Mr.
Moley was Senior Vice President, Wide Area Business Unit, of Cisco Systems,
Inc. from July 1996 to July 1997. He served as President and Chief Executive
Officer of StrataCom, Inc. from June 1986 to July 1996, when StrataCom was
acquired by Cisco. Mr. Moley serves on the Board of Directors of Linear
Technology, Inc., CMC Industries, Inc. and Cidco, Inc. Mr. Moley received a
B.S. degree in Electrical Engineering from Manchester University, an M.S.
degree in Electrical Engineering from Stanford University and an M.B.A. from
the University of Santa Clara.
Arthur Rock has been a director of the Company since December 1988. Mr. Rock
has been Principal of Arthur Rock & Co., a venture capital firm, since 1969.
He has been a director of Intel since its founding in 1968, and is presently
Chairman of the Executive Committee and Lead Director of the Board of
Directors of Intel. He is also a director of Argonaut Group, Inc. and AirTouch
Communications, Inc., and a trustee of California Institute of Technology. Mr.
Rock received a B.S. degree in Political Science and Finance from Syracuse
University and an M.B.A. from Harvard University.
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Larry W. Sonsini has been a director of the Company since August 1993. Mr.
Sonsini serves as Chairman of the Executive Committee of the law firm of
Wilson Sonsini Goodrich & Rosati, where he has practiced since 1966. Mr.
Sonsini serves as a director of Novell, Inc., Lattice Semiconductor
Corporation and PIXAR Inc. Mr. Sonsini received an A.B. degree in Political
Science and Economics and an L.L.B. degree from the University of California
at Berkeley.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a company will not be personally liable for monetary damages for
breach of their fiduciary duties as directors, except for liability (i) for
any breach of their duty of loyalty to the company or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for unlawful payments of
dividends or unlawful stock repurchases or redemptions as provided in Section
174 of the Delaware General Corporation Law, or (iv) for any transaction from
which the director derived an improper personal benefit.
The Company's Bylaws provide that the Company shall indemnify its officers
and directors and may indemnify its employees and other agents to the fullest
extent permitted by law. The Company believes that indemnification under its
Bylaws covers at least negligence and gross negligence on the part of
indemnified parties. The Company's Bylaws also permit it to secure insurance
on behalf of any officer, director, employee or other agent for any liability
arising out of his or her actions in such capacity, regardless of whether the
Bylaws would permit indemnification.
The Company has entered into agreements to indemnify its directors and
officers, in addition to the indemnification provided for in the Company's
Bylaws. These agreements, among other things, indemnify the Company's
directors and officers for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in the right of the Company,
arising out of such person's services as a director or officer of the Company,
any subsidiary of the Company or any other company or enterprise to which the
person provides services at the request of the Company. The Company believes
that these provisions and agreements are necessary to attract and retain
qualified persons as directors and officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company, where indemnification
will be required or permitted. The Company is not aware of any threatened
litigation or proceeding which may result in a claim for such indemnification.
42
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain summary information regarding
compensation earned in the fiscal year ended December 31, 1997 by the
Company's Chief Executive Officer and each of the Company's four other most
highly paid executive officers (collectively, the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------- -------------
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITION SALARY BONUS COMPENSATION OPTIONS(#)(1) COMPENSATION(2)
- ------------------ -------- ------ ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
M. Kenneth Oshman
Chairman of the Board,
President and CEO...... $270,000 $ -- $ -- -- $1,636
Oliver R. Stanfield
Vice President of Fi-
nance and CFO.......... 260,000 -- -- 150,000 1,438
Beatrice Yormark
Vice President of Mar-
keting and Sales....... 260,000 -- -- 150,000 1,584
James M. Kasson
Vice President, Chief
Information Officer.... 230,000 -- -- 100,000 1,122
Kenneth E. Lavezzo
Vice President of Oper-
ations................. 220,000 -- -- 75,000 998
</TABLE>
- --------
(1) The options were granted under the Company's 1997 Stock Plan. See "--Stock
Option Plans and Warrants" for a description of the 1997 Stock Plan.
(2) Consists of premiums paid by the Company for life insurance coverage.
OPTION GRANTS DURING THE FISCAL YEAR ENDED DECEMBER 31, 1997
The following table sets forth certain information regarding the stock
options granted during the fiscal year ended December 31, 1997 to each of the
Named Executive Officers. No stock appreciation rights were granted to those
individuals during the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
-----------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS EXERCISE OPTION TERM (4)
OPTIONS GRANTED TO PRICE EXPIRATION --------------------
NAMED EXECUTIVE OFFICER GRANTED EMPLOYEES(2) PER SHARE(3) DATE 5% 10%
- ----------------------- ---------- ------------ ------------ ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
M. Kenneth Oshman....... -- -- -- -- -- --
Oliver R. Stanfield..... 150,000 6.9% $1.40 6/10/02 $58,019 $128,207
Beatrice Yormark........ 150,000 6.9 1.40 6/10/02 58,019 128,207
James M. Kasson......... 100,000 4.6 1.40 6/10/02 38,679 85,471
Kenneth E. Lavezzo...... 75,000 3.4 1.40 6/10/02 29,010 64,104
</TABLE>
- --------
(1) All options granted during the fiscal year were granted under the 1997
Stock Plan. Each option is immediately exercisable and vests according to
a vesting schedule, subject to the employee's continued employment with
the Company. See "--Stock Option Plans and Warrants."
(2) Based on a total of 2,185,700 options granted to all employees during the
fiscal year ended December 31, 1997.
(3) The exercise price per share of options granted represented the fair
market value as determined by the Board of Directors on June 10, 1997, the
date the options were granted.
43
<PAGE>
(4) Potential gains are net of the exercise price but before taxes associated
with the exercise. The 5% and 10% assumed annual rates of compounded stock
appreciation based upon the deemed fair market value as mandated by the
rules of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of the future common stock price. Actual
gains, if any, on stock option exercises are dependent on the future
financial performance of the Company, overall market conditions and the
option holders' continued employment through the vesting period. This
table does not take into account any appreciation in the deemed fair
market value of the Common Stock from the date of grant to the date of
this Prospectus, other than the columns reflecting assumed rates of
appreciation of 5% and 10%.
AGGREGATE OPTION EXERCISES IN 1997 AND 1997 FISCAL YEAR-END OPTION VALUES
There were no option exercises by the Named Executive Officers in the fiscal
year ended December 31, 1997. The following table sets forth for each Named
Executive Officer the number of shares covered by exercisable stock options as
of December 31, 1997. Also reported are values for "in-the-money" options that
represent the positive spread between the respective exercise prices of
outstanding options and the fair market value of the Company's Common Stock as
of December 31, 1997, as determined by the Board of Directors of the Company.
No stock appreciation rights to those individuals were outstanding during the
fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS AT
END FISCAL YEAR-END(1)(2)
------------------------- -------------------------
EXERCISABLE UNEXERCISABLE
NAME EXERCISABLE UNEXERCISABLE ($) ($)
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
M. Kenneth Oshman........... -- -- $ -- $ --
Oliver R. Stanfield......... 300,000(3) -- -- --
Beatrice Yormark............ 300,000(3) -- -- --
James M. Kasson............. 175,000(4) -- -- --
Kenneth E. Lavezzo.......... 75,000(5) -- -- --
</TABLE>
- --------
(1) Options granted under the 1988 Stock Option Plan and 1997 Stock Plan may
be exercised immediately upon grant and prior to full vesting, subject to
the optionee's entering into a restricted stock purchase agreement with
the Company with respect to any unvested shares.
(2) Calculated by determining the difference between fair market value of the
securities underlying the option at December 31, 1997 ($1.40 per share, as
determined by the Board of Directors) and the exercise price ($1.40 per
share) of the options.
(3) Includes 37,500 vested shares and 262,500 unvested shares as of December
31, 1997.
(4) Includes 18,750 vested shares and 156,250 unvested shares as of December
31, 1997.
(5) Includes no vested shares and 75,000 unvested shares as of December 31,
1997.
STOCK OPTION PLANS AND WARRANTS
1988 Stock Option Plan. A total of 8,900,000 shares of Common Stock were
reserved for issuance under the Company's 1988 Stock Option Plan (the "1988
Plan"), the reservation of which shares was approved by the Company's
stockholders. The 1988 Plan was terminated as to new option grants, effective
as of April 23, 1997. Outstanding options granted and unvested stock issued
under the 1988 Plan remain subject to the terms and conditions of the
agreements evidencing those grants or issuances. The Board currently
administers the 1988 Plan with respect to the outstanding options and stock
issuances and has full authority to interpret and construe the provisions of
those options and issuances. As of March 31, 1998, 4,996,813 shares of Common
Stock had been issued upon the exercise of stock options granted under the
1988 Plan, 2,072,770 shares were outstanding (the "Outstanding 1988 Plan
Options"), no shares had been issued upon the exercise of stock purchase
rights, and as a result of the termination of the 1988 Plan, all shares that
had been available for future grant were returned to the status of authorized
and unissued shares. Of the Outstanding 1988 Plan Options, the per share
44
<PAGE>
exercise prices range from $0.15 to $1.40 and the expiration dates range from
May 19, 1998 to November 12, 2001.
The 1988 Plan provides that options and stock purchase rights may be granted
to employees (including officers and employee directors) and consultants
(including non-employee directors) of the Company and its majority-owned
subsidiaries. Options intended to qualify as incentive stock options ("ISOs")
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, may only be granted to employees, while options not intended to
qualify as ISOs, also known as nonstatutory stock options ("NSOs"), may be
granted to both employees and consultants.
The exercise price of any ISOs granted under the 1988 Plan were at least
equal to the fair market value of the shares of Common Stock on the date of
grant; provided, however, that the exercise price of ISOs granted to an
employee holding stock representing more than 10% of the voting power of the
Company (a "10% Stockholder") had to be 110% of the fair market value of the
shares of Common Stock on the date of grant. The exercise price of NSOs and
stock purchase rights granted under the 1988 Plan had to be at least equal to
85% of the fair market value of the shares of Common Stock on the date of
grant; provided, however, that the exercise price of NSOs to a 10% Stockholder
had to be 110% of the fair market value of the shares of Common Stock on the
date of grant. The Board has the authority to reprice options outstanding
under the 1988 Plan at a lower exercise price than the original exercise price
in the event the fair market value of the Common Stock declines after the date
the option was granted. The maximum term of each option must not exceed 10
years; however, the term of an ISO granted to a 10% Stockholder must not
exceed five years. Options granted under the 1988 Plan generally have a term
of five years.
Options granted under the 1988 Plan are subject to vesting, which generally
occurs at the rate of one-fourth of the shares each year following the date of
hire or grant. Generally, shares which have not yet vested may be exercised
pursuant to a restricted stock purchase agreement subject to a repurchase
option in favor of the Company which lapses at the same rate as the vesting
schedule set forth in the option agreement. In the event of termination of an
optionee's employment or consulting relationship, ISOs may be exercised, to
the extent vested, within 30 days following such termination, and any
outstanding NSOs may be exercised, to the extent vested, during such period of
time, as determined by the Board not to exceed six months following
termination; provided, however, that in the event of termination due to
disability or death, both ISOs and NSOs may be exercised, to the extent
vested, within 12 months following termination due to disability or death.
Options granted under the 1988 Plan may not be transferred other than by will
or by the laws of descent or distribution. In the event of the dissolution or
liquidation of the Company, unexercised options shall terminate immediately
prior to the consummation of such proposed action. In the event of a merger of
the Company with or into another corporation, the 1988 Plan provides that each
outstanding option shall be assumed or an equivalent option shall be
substituted by the successor corporation; provided, however, that if such
successor corporation refuses to assume or substitute the then outstanding
options, (i) any options granted prior to October 19, 1993 shall become fully
exercisable, and (ii) any options granted on or after October 19, 1993 will
terminate as of the closing of the merger.
1997 Stock Plan. The Company's 1997 Stock Plan, as amended and restated (the
"1997 Plan"), provides for the granting to employees of incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and for the granting to employees and
consultants of nonstatutory stock options and stock purchase rights ("SPRs").
The 1997 Plan was approved by the Board of Directors in February 1997 and by
the stockholders in April 1997. Unless terminated sooner, the 1997 Plan will
terminate automatically in 2007. A total of 6,200,000 shares of Common Stock
are currently reserved for issuance pursuant to the 1997 Plan, plus annual
increases on the first day of the Company's fiscal year (beginning in 1999)
not to exceed the lesser of (i) 5,000,000 shares or (ii) 5% of the outstanding
shares on such date. As of March 31, 1998, 247,375 shares of Common Stock had
been issued upon the exercise of stock options granted under the 1997 Plan,
and 2,009,925 options were outstanding.
The 1997 Plan may be administered by the Board of Directors or a committee
of the Board (as applicable, the "Administrator"), which committee shall, in
the case of options intended to qualify as "performance-based
45
<PAGE>
compensation" within the meaning of Section 162(m) of the Code, consist of two
or more "outside directors" within the meaning of Section 162(m) of the Code.
The Administrator has the power to determine the terms of the options or SPRs
granted, including the exercise price, the number of shares subject to each
option or SPR, the exercisability thereof, and the form of consideration
payable upon such exercise. In addition, the Administrator has the discretion
to reprice outstanding options or to cancel and regrant options with the
exercise price lower than the original exercise price. The Administrator has
the authority to amend, suspend or terminate the 1997 Plan, provided that no
such action may affect any share of Common Stock previously issued and sold or
any option previously granted under the 1997 Plan.
Options and SPRs granted under the 1997 Plan are not generally transferable
by the optionee, and each option and SPR is exercisable during the lifetime of
the optionee only by such optionee. Options granted under the 1997 Plan must
generally be exercised within three months of the end of optionee's status as
an employee or consultant of the Company, or within 12 months after such
optionee's termination by death or disability, but in no event later than the
expiration of the option's term. In the case of SPRs, unless the Administrator
determines otherwise, the Restricted Stock Purchase Agreement shall grant the
Company a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's employment with the Company for any reason
(including death or disability). The purchase price for shares repurchased
pursuant to the Restricted Stock Purchase Agreement shall be the original
price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to the Company. The repurchase option shall
lapse at a rate determined by the Administrator. The exercise price of all
incentive stock options granted under the 1997 Plan must be at least equal to
the fair market value of the Common Stock on the date of grant. The exercise
price of nonstatutory stock options and SPRs granted under the 1997 Plan is
determined by the Administrator, but will also be at least equal to 100% of
the fair market value per share of Common Stock on the grant or issue date,
except that up to 10% of the aggregate number of shares reserved for issuance
under the 1997 Plan (including shares that have been issued or are issuable in
connection with options exercised or granted under the 1997 Plan) may have
exercise prices that are from 0% to 100% of the fair market value of the
Common Stock on the date of grant. With respect to any participant who owns
stock possessing more than 10% of the voting power of all classes of the
Company's outstanding capital stock, the exercise price of any incentive stock
option granted must equal at least 110% of the fair market value on the grant
date and the term of such incentive stock option must not exceed five years.
The term of all other options granted under the 1997 Plan may not exceed 10
years.
The 1997 Plan provides that in the event of a merger of the Company with or
into another corporation, a sale of substantially all of the Company's assets
or a like transaction involving the Company, each option or right shall be
assumed or an equivalent option or right substituted by the successor
corporation. If the outstanding options or rights are not assumed or
substituted as described in the preceding sentence, the Administrator shall
provide for the Optionee to have the right to exercise the option or SPR as to
all of the optioned stock, including shares as to which it would not otherwise
be exercisable for a period of 15 days from the date of such notice, and the
option or SPR will terminate upon the expiration of such period.
1998 Director Option Plan. Non-employee directors are entitled to
participate in the 1998 Director Option Plan (the "Director Plan"). The
Director Plan was adopted by the Board of Directors in May 1998, and is
subject to stockholder approval, but it will in no event become effective
until the date of this offering. The Director Plan has a term of 10 years,
unless terminated sooner by the Board. A total of 300,000 shares of Common
Stock have been reserved for issuance under the Director Plan. The share
reserve under the Director Plan will increase each year on the first day of
the Company's fiscal year, beginning in 1999, by an amount equal to 100,000
shares or a lesser amount determined by the Board.
The Director Plan provides for the automatic grant of an option to purchase
25,000 shares of Common Stock (the "First Option") to each non-employee
director who first becomes a non-employee director after May 29, 1998, whether
by appointment by the Board or election by the stockholders, provided such
non-employee director has not previously been in the employ of the Company.
Each non-employee director shall also automatically be granted an option to
purchase 10,000 shares (a "Subsequent Option") on both the effective
46
<PAGE>
date of this offering and on the date of the Company's Annual Stockholder
Meeting provided that he or she is re-elected to the Board or otherwise
remains on the Board, if on such date he or she shall have served on the Board
for at least the preceding six months. Each First Option and each Subsequent
Option shall have a term of five years and the shares subject to the option
will become exercisable in four equal annual installments subject to the
optionee's completion of each year of Board service over the four year period
measured from the grant date. The exercise price of any option granted under
the Director Plan will be equal to the fair market value per share of Common
Stock on the grant date. The fair market value per share will be equal to the
closing sales price per share of Common Stock on the Nasdaq National Market on
the last market trading day prior to the grant date. However, for automatic
options granted on the effective date of this offering, the fair market value
will be equal to the initial price per share offered to the public in this
offering. On the effective date of this offering options to purchase an
aggregate of 60,000 shares will be granted under the Director Plan.
Options granted under the Director Plan must be exercised within three
months of the end of the optionee's tenure as a director of the Company, or
within 12 months after such director's termination by death or disability, but
in no event later than the expiration of the option's five year term. Options
outstanding at the end of an optionee's tenure as a director may only be
exercised to the extent exercisable at the time of such cessation of service
as a director. However, if the optionee has served as a director for at least
five years at the time of such cessation of service as a director, then the
option will accelerate and become immediately exercisable for all of the
option shares at the time subject to the option as fully-vested shares and
will remain exercisable for those shares until the end of the five year term.
No option granted under the Director Plan is transferable by the optionee
other than by will or the laws of descent and distribution, and each option is
exercisable, during the lifetime of the optionee, only by such optionee. In
the event of a merger of the Company or the sale of substantially all of the
assets of the Company, each outstanding option will become fully-vested and
exercisable for all of the option shares, unless such outstanding options are
assumed or substituted by the successor corporation. In the event outstanding
options are either assumed or substituted by the successor corporation, each
outstanding option will continue to become exercisable in accordance with its
original exercise schedule. If an outstanding option is assumed or substituted
and the optionee's status as a director or as a director of the successor
corporation terminates other than upon a voluntary resignation by the
optionee, then the option will become immediately exercisable for all of the
option shares at the time of such termination as fully-vested shares.
Warrants. Warrants to purchase an aggregate of 30,000 shares of Common Stock
at a per share exercise price of $12.00 are outstanding and unexercised (the
"Common Stock Warrants"). The Common Stock Warrants are exercisable at any
time until their expiration on the earlier of February 2, 1999 or the
consummation of a merger of the Company with another entity or the sale of
substantially all of the Company's assets, whereby the holders of the
Company's voting securities prior to such transaction do not hold more than
50% of the voting securities of the surviving entity following such
transaction (a "Change in Control").
In addition, warrants to purchase an aggregate of 400,000 shares of Series E
Preferred Stock (or Common Stock, if all Series E Preferred Stock has then
been converted into Common Stock) at a per share exercise price of $5.00 are
outstanding and unexercised (the "Series E Warrants"; and together with the
Common Stock Warrants, the "Warrants"). The Series E Warrants are exercisable
at any time until their expiration on the earlier of May 15, 2002 or a Change
in Control. Each Warrant contains a cashless conversion right that allows the
holder to receive a number of shares of the Company's Common Stock or Series E
Preferred Stock, as applicable, equal to the quotient obtained by dividing (x)
the value of the Warrant on the date of exercise, which value is determined by
subtracting (a) the aggregate exercise price of the Warrant from (b) the
aggregate fair market value of the Warrant shares on the date of exercise, by
(y) the fair market value of one share of the Company's Common Stock or Series
E Preferred Stock, as applicable, on the date of exercise, as determined by
the Company's Board of Directors. The issuance of the Warrants did not require
stockholder approval. Upon the closing of this offering, the Series E
Preferred Stock will be converted into Common Stock and the Series E Warrants
will be exercisable for Common Stock.
47
<PAGE>
CERTAIN TRANSACTIONS
In June and July 1995, the Company sold shares of Common Stock to the
following officers of the Company at a per share purchase price of $1.10, the
then fair market value of the Company's Common Stock as determined by the
Company's Board of Directors: James M. Kasson--150,000 shares; Kenneth E.
Lavezzo--75,000 shares; M. Kenneth Oshman--250,000 shares, Oliver R.
Stanfield--175,000 shares; Beatrice Yormark--200,000 shares. These shares are
subject to a repurchase option by the Company, which repurchase option lapses
at the rate of one-fourth of the shares on May 23, 1996 and each one year
anniversary thereafter, subject to the continued employment with the Company
of each such officer.
In December 1995, the Company sold 100,000 shares of Common Stock to James
M. Kasson at a per share purchase price of $1.29, the then fair market value
of the Company's Common Stock as determined by the Company's Board of
Directors. These shares are subject to a repurchase option by the Company,
which repurchase option lapses at the rate of one-fourth of the shares on
November 17, 1996 and each one year anniversary thereafter, subject to Mr.
Kasson's continued employment with the Company.
In November 1996, the Company sold 1,000,000 shares of Common Stock to M.
Kenneth Oshman at a per share purchase price of $1.40, the then fair market
value of the Company's Common Stock as determined by the Company's Board of
Directors. These shares are subject to a repurchase option by the Company,
which repurchase option lapses at the rate of one-fourth of the shares on
September 17, 1997 and each one year anniversary thereafter, subject to Mr.
Oshman's continued employment with the Company.
In May 1997, the Company sold an aggregate of 2,000,000 shares of Series E
Preferred Stock, at a per share purchase price of $5.00, and issued warrants
to purchase an aggregate of 400,000 shares of Series E Preferred Stock at a
per share exercise price of $5.00 each in a private placement financing with
existing stockholders of the Company, including (i) an aggregate of 1,022,428
shares purchased by M. Kenneth Oshman and Barbara S. Oshman, Trustees of the
Oshman Trust dated July 10, 1979 (the "Oshman Trust"), and O-S Ventures, of
which Dr. Oshman is general partner ("O-S Ventures"), and a warrant to
purchase 249,713 shares issued to the Oshman Trust, (ii) an aggregate of
186,011 shares purchased by Armas Clifford Markkula, Jr. and Linda Kathryn
Markkula, Trustees of the Restated Arlin Trust Dated December 12, 1990 (the
"Arlin Trust"), and Markkula Family Limited Partnership (the "Markkula
Partnership"), and a warrant to purchase 40,183 shares issued to the Arlin
Trust, (iii) 121,029 shares purchased by Arthur Rock and a warrant to purchase
29,187 shares issued to Mr. Rock, (iv) 66,230 shares purchased by a trust for
the benefit of Robert R. Maxfield (the "Maxfield Trust") and a warrant to
purchase 15,736 shares issued to the Maxfield Trust, and (v) 37,803 shares
purchased by Richard M. Moley and a warrant to purchase 10,000 shares issued
to Mr. Moley.
In March 1998, Peter Mehring was granted an option to purchase 200,000
shares of Common Stock pursuant to the Company's 1997 Stock Plan at a per
share exercise price of $2.00. The option vests at the rate of one-fourth of
the shares on March 9, 1999 and each one-year anniversary thereafter, subject
to Mr. Mehring's continued employment with the Company. Mr. Mehring's stock
option agreement provides that at any time in 1998, following the date of
grant of the option, Mr. Mehring may exercise the option for 50,000 shares
which vest on March 9, 1999; at any time in 1999 Mr. Mehring may exercise the
option for 50,000 shares which vest on March 9, 2000; at any time in 2000 Mr.
Mehring may exercise the option for 50,000 shares which vest on March 9, 2001;
and at any time in 2001 Mr. Mehring may exercise the option for 50,000 shares
which vest on March 9, 2002. In April 1998, Mr. Mehring exercised 50,000
unvested option shares and executed a promissory note in the principal amount
of $100,000 payable to the Company. The note is a full recourse note and is
secured by the shares, bears interest at the annual rate of 5.7% and is due in
April 2003.
The Company has entered into licensing agreements with Motorola, which is a
principal stockholder of the Company and Motorola has had a representative on
the Company's Board of Directors from time to time since 1991. Pursuant to
this agreement, Motorola has the right to use certain intellectual property
owned by the Company in the manufacture of Neuron Chips. Further, pursuant to
the terms of the stock purchase agreement
48
<PAGE>
under which Motorola initially acquired its shares, Motorola has agreed to
vote (i) all of its shares in favor of the slate of director nominees
recommended by the Board of Directors, and (ii) a number of shares equal to at
least that percentage of shares voted by all other stockholders for or against
any given matter, as recommended by the Board of Directors (except certain
matters relating to certain changes to the Company's charter, liquidations, a
sale of the Company or a merger of the Company into another entity), as
recommended by a majority of the Board of Directors. See "Risk Factors--
Dependence on Key Manufacturers" and "-- Control by Existing Stockholders" and
"Business--Strategic Alliances."
From time to time beginning April 1998, Dr. Oshman uses private air travel
services for business trips for himself and for any employees accompanying
him. These private air travel services are provided by certain entities
controlled by Dr. Oshman or Mr. Markkula. The net cash outlay to the Company
with respect to such private air travel services is no greater than comparable
first class commercial air travel services. Such net outlays to date have not
been material.
49
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of the Company's
Common Stock as of March 31, 1998, by all persons known to the Company to be
the beneficial owners of more than 5% of the Company's Common Stock, by each
director, by each of the Named Executive Officers, and by all directors and
executive officers as a group. Except as otherwise indicated in the footnotes
to the table, the persons and entities named in the table have sole voting and
investment power with respect to all shares beneficially owned, subject to
community property laws, where applicable.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)
------------------------
NUMBER OF SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OFFERING OFFERING
- ------------------------ --------------------- ---------- ----------
<S> <C> <C> <C>
M. Kenneth Oshman(2)........ 5,080,413 18.6% 15.7%
Echelon Corporation
4015 Miranda Avenue
Palo Alto, CA 94304
Motorola, Inc.
Bertrand Cambou(3).......... 3,912,381 14.4 12.2
1303 East Algonquin Road
Schaumburg, IL 60196
Armas Clifford Markkula, 1,577,038 5.8 4.9
Jr.(4).....................
c/o ACM Investments
P.O. Box 620170
Woodside, CA 94062
Beatrice Yormark(5)......... 968,000 3.5 3.0
Oliver R. Stanfield(6)...... 925,000 3.4 2.9
Arthur Rock(7).............. 717,716 2.6 2.2
Kenneth E. Lavezzo(8)....... 475,000 1.8 1.5
Robert R. Maxfield(9)....... 436,966 1.6 1.4
James M. Kasson(10)......... 425,000 1.6 1.3
Richard M. Moley(11)........ 85,303 * *
Larry W. Sonsini(12)........ 82,500 * *
All Officers and Directors 16,027,817 54.9% 46.9%
as a Group (17 persons)
(13).......................
</TABLE>
- --------
* Represents less than 1% of the Company's Common Stock outstanding as of
March 31, 1998.
(1) The number of shares outstanding and percent of ownership is based on:
(i) 27,125,612 shares of Common Stock outstanding as of March 31, 1998;
and (ii) 32,125,612 shares of Common Stock outstanding upon the closing
of this offering. Unless otherwise indicted below, the persons and
entities named in the table have sole voting and sole investment power
with respect to all shares of Common Stock beneficially owned, subject to
community property laws where applicable. The shares of Common Stock
issuable pursuant to options and warrants that are currently exercisable
or exercisable within 60 days of March 31, 1998 are deemed to be
outstanding and to be beneficially owned by the person holding such
options for the purpose of computing the percentage ownership of such
person, but are not deemed to be outstanding and to be beneficially owned
for the purpose of computing the percentage ownership of any other
person.
(2) Includes 4,395,700 shares of Common Stock held by M. Kenneth Oshman and
Barbara S. Oshman, Trustees of the Oshman Trust dated July 10, 1979, and
435,000 shares held by O-S Ventures, of which Mr. Oshman is general
partner, and excludes an aggregate of 36,000 shares held by trusts, not
for the benefit of Mr. Oshman, of which Mr. Oshman serves as trustee.
Includes a warrant to purchase 249,713 shares of Common Stock exercisable
within 60 days of March 31, 1998. The Company has the right, but not the
obligation, to repurchase 925,000 shares owned by Mr. Oshman if he should
discontinue his employment with the Company. This repurchase right
expires on various future dates through September 17, 2000.
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<PAGE>
(3) All 3,912,381 shares are held by Motorola, Inc. Dr. Cambou, a director of
the Company, is Senior Vice President and General Manager of the
Networking and Computing Group of Motorola, Inc. and may be deemed to be
a beneficial owner of shares held by such corporation. Dr. Cambou
disclaims beneficial ownership of such shares.
(4) Includes 1,379,927 shares of Common Stock held by Armas Clifford
Markkula, Jr. and Linda Kathryn Markkula, Trustees of the Restated Arlin
Trust Dated December 12, 1990, and 151,928 shares held by Markkula Family
Limited Partnership (the "Markkula Partnership"), and excludes 141,928
shares of Common Stock held by a trust for the benefit of Kristi Kathryn
Markkula Bowers, an adult child of Mr. and Mrs. Markkula. Mr. and Mrs.
Markkula disclaim beneficial ownership of all but 30,386 of the shares
held by the Markkula Partnership. Includes a warrant to purchase 40,183
shares of Common Stock exercisable within 60 days of March 31, 1998.
Includes an option to purchase 5,000 shares of Common Stock exercisable
within 60 days of March 31, 1998, none of which shares are vested at
March 31, 1998. The Company has the right, but not the obligation, to
repurchase 3,750 shares owned by Mr. Markkula if he should cease to serve
on the Company's Board of Directors. This repurchase right expires on
various future dates through January 22, 2000.
(5) Includes 668,000 shares held by Justin C. Walker and Beatrice Yormark,
Trustees of the Walker-Yormark Family Trust Dated October 2, 1992 (the
"Walker-Yormark Trust"). Includes options to purchase 300,000 shares of
Common Stock exercisable within 60 days of March 31, 1998, of which
37,500 shares are vested at March 31, 1998. The Company has the right,
but not the obligation, to repurchase 125,000 shares owned by the Walker-
Yormark Trust if Ms. Yormark should discontinue her employment with the
Company. This repurchase right expires on various future dates through
May 23, 1999.
(6) Includes an aggregate of 170,600 shares held in individual retirement
accounts for the benefit of Mr. Stanfield and his wife. Includes options
to purchase 300,000 shares of Common Stock exercisable within 60 days of
March 31, 1998, of which 37,500 shares are vested at March 31, 1998. The
Company has the right, but not the obligation, to repurchase 112,500
shares owned by Mr. Stanfield if he should discontinue his employment
with the Company. This repurchase right expires on various future dates
through May 23, 1999.
(7) Includes an aggregate of 20,000 shares held by a trust for the benefit of
Mr. Rock's wife, of which Mr. Rock serves as trustee, and as to which Mr.
Rock disclaims beneficial ownership. Includes 2,000 shares held by a
trust, not for the benefit of Mr. Rock, of which Mr. Rock has sole voting
and dispositive power, and as to which Mr. Rock disclaims beneficial
ownership. Includes a warrant to purchase 29,187 shares of Common Stock
exercisable within 60 days of March 31, 1998. Includes an option to
purchase 5,000 shares of Common Stock exercisable within 60 days of March
31, 1998, none of which shares are vested at March 31, 1998. The Company
has the right, but not the obligation, to repurchase 3,750 shares owned
by Mr. Rock if he should cease to serve on the Company's Board of
Directors. This repurchase right expires on various future dates through
January 22, 2000.
(8) Includes options to purchase 18,750 shares of Common Stock exercisable
within 60 days of March 31, 1998, none of which shares are vested at
March 31, 1998. The Company has the right, but not the obligation, to
repurchase 162,500 shares owned by Mr. Lavezzo if he should discontinue
his employment with the Company. This repurchase right expires on various
future dates through June 10, 2001.
(9) Includes a warrant to purchase 15,736 shares of Common Stock exercisable
within 60 days of March 31, 1998. Includes an option to purchase 5,000
shares of Common Stock exercisable within 60 days of March 31, 1998, none
of which shares are vested at March 31, 1998. The Company has the right,
but not the obligation, to repurchase 3,750 shares owned by Mr. Maxfield
if he should cease to serve on the Company's Board of Directors. This
repurchase right expires on various future dates through January 22,
2000.
(10) Includes options to purchase 175,000 shares of Common Stock exercisable
within 60 days of March 31, 1998, of which 18,750 shares are vested at
March 31, 1998. The Company has the right, but not the obligation, to
repurchase 125,000 shares owned by Mr. Kasson if he should discontinue
his employment with the Company. This repurchase right expires on various
future dates through November 17, 1999.
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<PAGE>
(11) Includes a warrant to purchase 10,000 shares of Common Stock exercisable
within 60 days of March 31, 1998. Includes an option to purchase 25,000
shares of Common Stock exercisable within 60 days of March 31, 1998, none
of which shares are vested at March 31, 1998.
(12) Includes 60,000 shares held by investment accounts of Wilson Sonsini
Goodrich & Rosati, Professional Corporation ("WSGR"). Mr. Sonsini is
Chairman of the Executive Committee of WSGR and disclaims beneficial
ownership of such shares except as to those shares in which he has a
pecuniary interest. Includes options to purchase 20,000 shares of Common
Stock exercisable within 60 days of March 31, 1998, of which 11,250
shares are vested at March 31, 1998.
(13) Includes warrants to purchase an aggregate of 344,819 shares of Common
Stock exercisable within 60 days of March 31, 1998. Includes options to
purchase an aggregate of 1,698,750 shares of Common Stock exercisable
within 60 days of March 31, 1998, of which 212,500 shares are vested at
March 31, 1998. The Company has the right, but not the obligation, to
repurchase an aggregate of 1,650,000 shares owned by the Company's
officers and directors if such officers and directors should discontinue
their employment with the Company or cease to serve on the Company's
Board of Directors. This repurchase right expires on various future dates
through June 10, 2001.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this Offering, the authorized capital stock of the
Company will consist of 100,000,000 shares of Common Stock and 5,000,000
shares of Preferred Stock. The following summary of certain provisions of the
Common Stock and Preferred Stock does not purport to be complete and is
subject to, and qualified in its entirety by, the provisions of the Company's
Amended and Restated Certificate of Incorporation which is included as an
exhibit to the Registration Statement of which this Prospectus is a part and
by the provisions of applicable law.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Subject to the
preferences that may be applicable to any outstanding Preferred Stock, the
holders of Common Stock are entitled to receive ratably the dividends, if any,
that may be declared from time to time by the Board of Directors out of funds
legally available for such dividends. The Company has never declared a
dividend and does not anticipate doing so in the foreseeable future. In the
event of a liquidation, dissolution or winding up of the Company, subject to
the prior rights of any outstanding shares of Preferred Stock, the holders of
Common Stock are entitled to share ratably in any remaining assets after
payment of liabilities. The Common Stock has no preemptive rights or
redemption or sinking fund provisions applicable to shares of Common Stock.
All of the outstanding shares of Common Stock are fully paid and
nonassessable.
PREFERRED STOCK
Pursuant to the Company's Amended and Restated Certificate of Incorporation
effective after conversion of previously outstanding shares of Preferred Stock
into an aggregate of 7,887,381 shares of Common Stock, which conversion will
be effected simultaneously with the consummation of this offering, the Board
of Directors has the authority, without further action by the stockholders, to
issue up to 5,000,000 shares of Preferred Stock in one or more series and to
fix the designations, powers, preferences, privileges, and relative
participating, optional or special rights and the qualifications, limitations
or restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption and liquidation preferences, any or all of which
may be greater than the rights of the Common Stock. The Board of Directors,
without stockholder approval, can issue Preferred Stock with voting,
conversion or other rights that could adversely affect the voting power and
other rights of the holders of Common Stock. Preferred Stock could thus be
issued quickly with terms calculated to delay or prevent a change in control
of the Company or make removal of management more difficult. Additionally, the
issuance of Preferred Stock may have the effect of decreasing the market price
of the Common Stock, and may adversely affect the voting and other rights of
the holders of Common Stock. At present, there are no shares of Preferred
Stock outstanding and the Company has no plans to issue any of the Preferred
Stock. See "Risk Factors--Anti-Takeover Provisions."
COMMON STOCK WARRANTS
As of the date of this Prospectus, the Company has warrants outstanding
exercisable to purchase an aggregate of 430,000 shares of Common Stock.
In February 1994, the Company issued warrants to purchase an aggregate of
30,000 shares of Common Stock at a per share exercise price of $12.00. These
warrants are exercisable at any time until their expiration on the earlier of
February 2, 1999 or the consummation of a merger of the Company with another
entity or the sale of substantially all of the Company's assets, whereby the
holders of the Company's voting securities prior to such transaction do not
hold more than 50% of the voting securities of the surviving entity following
such transaction (a "Change in Control").
In addition, in May 1997, the Company issued warrants to purchase an
aggregate of 400,000 shares of Common Stock at a per share exercise price of
$5.00. These warrants are exercisable at any time until their expiration on
the earlier of May 15, 2002 or a Change in Control. Each warrant contains a
cashless conversion right that allows the holder to receive a number of shares
of the Company's Common Stock equal to the quotient
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<PAGE>
obtained by dividing (x) the value of the warrant on the date of exercise,
which value is determined by subtracting (a) the aggregate exercise price of
the warrant from (b) the aggregate fair market value of the warrant shares on
the date of exercise, by (y) the fair market value of one share of the
Company's Common Stock.
Registration Rights. After this offering, the holders of approximately
18,665,548 shares of Common Stock will be entitled to certain rights with
respect to the registration of such shares under the Securities Act (the
"Registrable Securities"). Under the terms of the Company's Amended and
Restated Modification Agreement (the "Modification Agreement"), subject to
certain conditions, if the Company proposes to register any of its securities
under the Securities Act, either for its own account or for the account of
other security holders, other than in connection with a registration relating
to shares of capital stock of the Company under employee benefit plans (such
as shares of Common Stock issuable upon exercise of Options granted under the
1997 Plan), the Company is required to include the Registrable Securities in
such registration. In addition, beginning one year after the date of this
Prospectus and subject to certain conditions, the holders of not less than 50%
of the Registrable Securities may also require the Company, on not more than
two occasions, to file a registration statement under the Securities Act with
respect to at least 1,500,000 of Registrable Securities. Further, if the
Company is a registrant entitled to use Form S-3, the holders of Registrable
Securities may require the Company to file a registration statement on Form S-
3 under the Securities Act with respect to such Registrable Securities,
subject to certain conditions and limitations. See "Risk Factors--Shares
Eligible for Future Sale" and "Shares Eligible for Future Sale."
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any business combination with any
"interested stockholder" for a period of three (3) years following the date
that such stockholder became an interested stockholder, unless: (i) prior to
such date, the board of directors of the corporation approved either the
business combination or the transaction that resulted in the stockholder
becoming an interested stockholder; (ii) upon consummation of the transaction
that resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding, for
purposes of determining the number of shares outstanding, those shares owned
(x) by persons who are directors and also officers and (y) by employee stock
plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer; or (iii) on or subsequent to such date, the business
combination is approved by the board of directors and authorized at an annual
or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock that is
not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested stockholder; (iii) subject to
certain exceptions, any transaction that results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation that has the
effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
The Company's Amended and Restated Certificate of Incorporation requires
that any action required or permitted to be taken by the stockholders of the
Company must be effected at a duly called annual or special meeting of the
stockholders and may not be effected by a consent in writing. In addition, as
provided by the Company's Bylaws, special meetings of the stockholders of the
Company may be called only by the Board of Directors. The Amended and Restated
Certificate of Incorporation also provides that, beginning upon the closing of
this offering, the Board of Directors will be divided into three classes, with
each class serving staggered three-
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<PAGE>
year terms, and that certain amendments of the Company's Amended and Restated
Certificate of Incorporation and certain amendments by the stockholders of the
Company's Bylaws, require the approval of holders of at least 66 2/3% of the
voting power of all outstanding stock. These provisions may have the effect of
deferring hostile takeovers or delaying changes in control or management of
the Company. See "Risk Factors--Antitakover Provisions."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is
ChaseMellon Shareholder Services, L.L.C.
LISTING
The Company has applied to list its Common Stock on the Nasdaq National
Market under the symbol ELON.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, based on the outstanding shares of Common
Stock at March 31, 1998, the Company will have outstanding 32,125,612 shares
of Common Stock (32,875,612 if the Underwriters' over-allotment option is
exercised in full). Of these shares, the 5,000,000 shares sold in this
offering (5,750,000 if the Underwriters' over-allotment option is exercised in
full) will be freely tradeable without restriction or further registration
under the Securities Act unless such shares are owned by "affiliates" of the
Company as that term is defined under Rule 144 under the Securities Act.
247,375 shares are held by existing stockholders pursuant to a Regulation A
Offering Statement and will become eligible for sale 180 days after the date
of this Prospectus upon the expiration of contractual lock-up agreements which
provide that the holders of these shares shall not sell or otherwise transfer
such shares for a period of 180 days after the date of this Prospectus. The
remaining 26,878,237 shares of Common Stock held by existing stockholders are
deemed to be "restricted" securities within the meaning of the Securities Act
and may be publicly sold only if registered under the Securities Act or sold
in accordance with an applicable exemption from registration, such as those
provided by Rule 144 promulgated under the Securities Act, as described below.
In addition to the 5,000,000 shares sold in this offering, 815,251 shares of
Common Stock held by existing stockholders will be immediately eligible for
sale in the public market without restriction pursuant to Rule 144(k). The
remaining 26,310,361 shares of Common Stock (including 247,375 shares covered
by the Regulation A Offering Statement) will be eligible for sale beginning
180 days after the date of this Prospectus upon the expiration of contractual
lock-up agreements which provide that the holders of these shares shall not
sell or otherwise transfer such shares for a period of 180 days after the date
of this Prospectus. See "Risk Factors--Shares Eligible for Future Sale."
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of restricted securities from the
Company or from an "affiliate" of the Company, as that term is defined under
the Securities Act, the acquiror or subsequent holder would be entitled to
sell within any three-month period commencing 90 days after the date of this
Prospectus a number of those shares that does not exceed the greater of one
percent of the number of shares of such class of stock then outstanding or the
average weekly trading volume of the shares of such class of stock during the
four calendar weeks preceding the filing of a Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. In addition, if two years have elapsed since
the later of the date of acquisition of restricted securities from the Company
or from any affiliate of the Company, and the acquirer or subsequent holder
thereof is deemed not to have been an affiliate of the Company of such
restricted securities at any time during the 90 days preceding a sale, such
person would be entitled to sell such restricted securities under Rule 144(k)
without regard to the requirements described above.
Following this offering, the Company intends to file a registration
statement under the Securities Act covering shares of Common Stock reserved
for issuance under the Company's stock plans (other than shares issued upon
the exercise of options prior to the effective date of such registration
statement). Based on the number of shares of Common Stock subject to
outstanding options as of March 31, 1998 and the number of shares of Common
Stock reserved for issuance, such registration statement would cover
approximately 8,025,395 shares (including 4,082,695 shares subject to
outstanding options at March 31, 1998). Such registration statement will
automatically become effective upon filing. Shares of Common Stock issued
under the Company's Stock Plans after the effective date of such registration
will be freely tradeable in the public market, subject to the 180 day lock-up
referred to above and subject in the case of sales by affiliates to the volume
limitation, manner of sale, notice and public information requirements of Rule
144.
No prediction can be made of the effect, if any, that sales of shares under
Rule 144 or the availability of shares for sale will have on the market price
of the Common Stock prevailing from time to time after this offering. The
Company is unable to estimate the number of shares that may be sold in the
public market under Rule 144, because such amount will depend on the trading
volume in, and market price for, the Common Stock
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<PAGE>
and other factors. Nevertheless, sales of substantial amounts of shares in the
public market, or the perception that such sales could occur, could adversely
affect the market price of the Common Stock. See "Underwriting."
After this offering, the holders of approximately 18,665,548 shares of
Common Stock will be entitled to certain rights with respect to registration
of such shares under the Securities Act. Registration of such shares under the
Securities Act would result in such shares becoming freely tradeable without
restriction under the Securities Act (except for shares purchased by
affiliates of the Company pursuant to any such registration) immediately upon
the effectiveness of such registration. Such registration rights terminate for
each holder to the extent such holder's shares may be sold within a given
three month period under Rule 144 or other applicable exemption. See
"Description of Capital Stock--Registration Rights."
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<PAGE>
UNDERWRITING
The Underwriters named below, represented by NationsBanc Montgomery
Securities LLC, BancAmerica Robertson Stephens and Volpe Brown Whelan &
Company, LLC (the "Representatives"), have severally agreed, subject to the
terms and conditions set forth in the Underwriting Agreement, to purchase from
the Company the number of shares of Common Stock indicated below opposite
their respective names at the initial public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters to
pay for and accept delivery of the shares of Common Stock are subject to
certain conditions precedent, and that the Underwriters are committed to
purchase all of such shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
NationsBanc Montgomery Securities LLC..............................
BancAmerica Robertson Stephens.....................................
Volpe Brown Whelan & Company, LLC..................................
---------
Total............................................................ 5,000,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters initially
propose to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow to
selected dealers a concession of not more than $ per share, and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. After this offering, the
offering price and concessions and reallowances to dealers may be changed by
the Representatives. The Common Stock is offered subject to receipt and
acceptance by the Underwriters and to certain other conditions, including the
right to reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a
maximum of 750,000 additional shares of Common Stock to cover over-allotments,
if any, at the same price per share as the initial 5,000,000 shares to be
purchased by the Underwriters. To the extent that the Underwriters exercise
this option, each of the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with this offering.
The directors, officers and certain stockholders of the Company holding in
the aggregate 20,340,587 shares of Common Stock after this offering have
agreed that, for a period of 180 days after the date of this Prospectus, they
will not, without the prior written consent of NationsBanc Montgomery
Securities LLC, directly or indirectly sell, offer to sell or otherwise
dispose of any such shares of Common Stock or any right to acquire such
shares. In addition, the Company has agreed that, for a period of 180 days
after the date of this Prospectus, it will not, without the prior written
consent of NationsBanc Montgomery Securities LLC, issue, offer, sell, grant
options to purchase or otherwise dispose of any of the Company's equity
securities or any other securities convertible into or exercisable or
exchangeable for the Common Stock or other equity security, other than the
grant of options to purchase Common Stock or the issuance of shares of Common
Stock under the Company's stock option and stock purchase plans and the
issuance of shares of Common Stock pursuant to the exercise of outstanding
options and warrants.
Under the terms of the Company's Stock Option Plans and the Modification
Agreement, the holders of 6,118,963 additional shares of the Company's Common
Stock have agreed not to sell or transfer their shares
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<PAGE>
prior to the expiration of 180 days after the date of this Prospectus. The
Company has agreed not to waive any such restriction without the prior written
consent of NationsBanc Montgomery Securities LLC.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including civil liabilities
under the Securities Act, or will contribute to payments the Underwriters may
be required to make in respect thereof.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price was determined by
negotiations between the Company and the Representatives. Among the factors
considered in such negotiations were the history of, and the prospects for,
the Company and the industry in which it competes, an assessment of the
Company's management, the Company's past and present operations, its past and
present financial performance, the prospects for future earnings of the
Company, the present state of the Company's development, the general condition
of the securities markets at the time of this offering and the market prices
of and demand for publicly traded common stock of comparable companies in
recent periods and other factors deemed relevant.
Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock
offered hereby. Such transactions may include stabilizing, the purchase of
Common Stock to cover syndicate short positions and the imposition of penalty
bids. A stabilizing bid means the placing of any bid or the effecting of any
purchase for the purpose of pegging, fixing or maintaining the price of the
Common Stock. A syndicate covering transaction means the placing of any bid on
behalf of the underwriting syndicate or the effecting of any purchase to
reduce a short position created in connection with this offering. A penalty
bid means an arrangement that permits the Underwriters to reclaim a selling
concession from a syndicate member in connection with this offering when
shares of Common Stock sold by the syndicate member are purchased in syndicate
covering transactions. Such transactions may stabilize or maintain the market
price of the Common Stock at a level above that which otherwise might prevail
in the open market and, if commenced, may be discontinued at any time.
The Underwriters have reserved for sale, at the initial public offering
price, up to 250,000 shares of the Common Stock offered hereby for certain
individuals designated by the Company who have expressed an interest in
purchasing such shares of Common Stock in the offering. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased
will be offered by the Underwriters to the general public on the same basis as
other shares offered hereby.
The Representatives have informed the Company that the Underwriters do not
expect to make sales to accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereby.
Mr. Arthur Rock, one of the Company's directors, has an ownership interest
in Volpe Brown Whelan & Company, LLC.
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LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company by
Wilson Sonsini Goodrich & Rosati, Professional Corporation ("WSGR"), Palo
Alto, California. Certain legal matters in connection with this offering will
be passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP.
Messrs. Larry W. Sonsini and John V. Roos, who are members of WSGR, own 22,500
and 5,000 shares, respectively, of Common Stock. In addition, 60,000 shares of
Common Stock are held by investment accounts of WSGR, in which Messrs. Sonsini
and Roos are participants.
EXPERTS
The Consolidated Financial Statements included in this Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, to the extent
and for the periods indicated in their report and are included herein in
reliance upon the authority of said firm as experts in giving said report.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus is a part and
which term shall encompass any amendments thereto) on Form S-1 pursuant to the
Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto, certain portions of which
are omitted as permitted by the rules and regulations of the Commission.
Statements made in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to any such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matters involved, and each such statement shall be
deemed qualified in its entirety by such reference.
Upon completion of the Offering, the Company will be subject to the
information requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, will file reports and
other information with the Commission. The Registration Statement, the
exhibits and schedules forming a part thereof and the report and other
information filed by the Company with the Commission in accordance with the
Exchange Act may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549; 7 World Trade Center, 13th Floor, New York, New
York 10048; and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material can also be
obtained at prescribed rates from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Such material may
also be accessed electronically by means of the Commission's home page on the
Internet at http://www.sec.gov.
The Company intends to furnish to its stockholders annual reports containing
audited consolidated financial statements examined by an independent
accounting firm and quarterly reports for the first three quarters of each
fiscal year containing interim unaudited consolidated financial information.
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ECHELON CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................................... F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Stockholders' Equity............................. F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Echelon Corporation:
We have audited the accompanying consolidated balance sheets of Echelon
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1996
and 1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Echelon Corporation and
subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
San Jose, California
February 17, 1998
F-2
<PAGE>
ECHELON CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
1998
DECEMBER 31, PRO FORMA
------------------ MARCH 31, STOCKHOLDERS'
1996 1997 1998 EQUITY
-------- -------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..... $ 8,051 $ 4,872 $ 5,165
Short-term investments........ -- 2,981 --
Accounts receivable, net of
allowances of $819, $562 and
$857, respectively........... 3,231 3,810 4,486
Inventories................... 1,592 2,444 3,176
Other current assets.......... 1,346 1,196 1,382
-------- -------- --------
Total current assets........ 14,220 15,303 14,209
-------- -------- --------
PROPERTY AND EQUIPMENT:
Computer and other equipment.. 6,486 6,816 6,832
Furniture and fixtures........ 1,297 1,323 1,337
Leasehold improvements........ 543 548 526
-------- -------- --------
8,326 8,687 8,695
Less: Accumulated depreciation
and amortization............. (6,691) (7,174) (7,209)
-------- -------- --------
Net property and equipment.. 1,635 1,513 1,486
-------- -------- --------
$ 15,855 $ 16,816 $ 15,695
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES:
Accounts payable.............. $ 1,800 $ 2,081 $ 2,758
Accrued payroll and related
expenses..................... 1,045 1,081 1,027
Accrued liabilities........... 617 907 793
Current portion of deferred
revenues..................... 2,853 2,351 2,255
-------- -------- --------
Total current liabilities... 6,315 6,420 6,833
-------- -------- --------
LONG-TERM LIABILITIES:
Deferred rent, net of current
portion...................... 377 246 198
Deferred revenues, net of
current portion.............. 2,025 1,350 1,182
-------- -------- --------
Total long-term
liabilities................ 2,402 1,596 1,380
-------- -------- --------
STOCKHOLDERS' EQUITY:
Convertible preferred stock,
$.01 par value; aggregate
liquidation preference of
$60,294 at December 31, 1997:
Authorized--11,000,000 shares
Outstanding--(Series B, C, D
and E)--5,887,381 shares in
1996, 7,887,381 shares in
1997 and at March 31, 1998;
5,000,000 shares authorized,
none issued and outstanding
pro forma (Note 8).......... 59 79 79 $ --
Common stock, $.01 par value:
Authorized--50,000,000 shares
Outstanding--18,494,020,
18,832,430 and 19,238,231
shares in 1996, 1997 and at
March 31, 1998,
respectively; 100,000,000
shares authorized,
27,125,612 shares
outstanding pro forma....... 185 188 192 271
Additional paid-in capital.... 83,359 93,532 94,530 94,530
Deferred compensation......... -- -- (519) (519)
Cumulative translation
adjustment................... (31) (351) (415) (415)
Accumulated deficit........... (76,434) (84,648) (86,385) (86,385)
-------- -------- -------- --------
Total stockholders' equity.. 7,138 8,800 7,482 $ 7,482
-------- -------- -------- ========
$ 15,855 $ 16,816 $ 15,695
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
ECHELON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ----------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Product................ $ 20,183 $20,708 $ 24,665 $ 6,548 $ 7,188
Service................ 3,160 3,282 3,637 926 771
---------- ----------- ---------- ---------- ----------
Total revenues........ 23,343 23,990 28,302 7,474 7,959
---------- ----------- ---------- ---------- ----------
COST OF REVENUES:
Cost of product........ 9,434 10,761 11,761 3,111 3,249
Cost of service........ 1,141 1,142 1,810 455 543
---------- ----------- ---------- ---------- ----------
Total cost of
revenues............. 10,575 11,903 13,571 3,566 3,792
---------- ----------- ---------- ---------- ----------
Gross profit.......... 12,768 12,087 14,731 3,908 4,167
---------- ----------- ---------- ---------- ----------
OPERATING EXPENSES:
Product development.... 7,355 7,526 7,121 1,740 1,958
Sales and marketing.... 10,881 11,577 12,128 3,014 3,031
General and
administrative........ 4,386 3,921 4,004 1,098 935
---------- ----------- ---------- ---------- ----------
Total operating
expenses............. 22,622 23,024 23,253 5,852 5,924
---------- ----------- ---------- ---------- ----------
Loss from operations.. (9,854) (10,937) (8,522) (1,944) (1,757)
---------- ----------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income, net... 1,109 536 429 71 67
Other income (expense),
net................... 175 (163) 68 21 8
---------- ----------- ---------- ---------- ----------
Total other income
(expense)............ 1,284 373 497 92 75
---------- ----------- ---------- ---------- ----------
Loss before provision
for income taxes..... (8,570) (10,564) (8,025) (1,852) (1,682)
PROVISION FOR INCOME
TAXES.................. 143 152 189 55 55
---------- ----------- ---------- ---------- ----------
Net loss............... $ (8,713) $ (10,716) $ (8,214) $ (1,907) $ (1,737)
========== =========== ========== ========== ==========
Basic net loss per
share................. $ (0.56) $ (0.62) $ (0.44) $ (0.10) $ (0.09)
========== =========== ========== ========== ==========
Shares used in
computing basic net
loss per share........ 15,695 17,354 18,603 18,511 19,029
========== =========== ========== ========== ==========
Pro forma basic net
loss per share........ $ (0.32) $ (0.08) $ (0.06)
========== ========== ==========
Shares used in
computing pro forma
basic
net loss per share.... 25,756 24,399 26,916
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
ECHELON CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL CUMULATIVE
----------------- -------------- PAID-IN DEFERRED TRANSLATION ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION ADJUSTMENT DEFICIT TOTAL
-------- ------- ------ ------ ---------- ------------ ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1994................... 5,858 $ 59 14,830 $148 $79,531 $ -- $ 66 $(57,005) $ 22,799
Exercise of stock op-
tions................. -- -- 1,072 11 558 -- -- -- 569
Sale of common stock... -- -- 975 10 1,082 -- -- -- 1,092
Sale of Series D pre-
ferred stock.......... 29 -- -- -- 293 -- -- -- 293
Foreign currency trans-
lation adjustment..... -- -- -- -- -- -- (62) -- (62)
Net loss............... -- -- -- -- -- -- -- (8,713) (8,713)
-------- ------ ------ ---- ------- ------ ----- -------- --------
BALANCE AT DECEMBER 31,
1995................... 5,887 59 16,877 169 81,464 -- 4 (65,718) 15,978
Exercise of stock op-
tions................. -- -- 630 6 514 -- -- -- 520
Sale of common stock,
net................... -- -- 987 10 1,381 -- -- -- 1,391
Foreign currency trans-
lation adjustment..... -- -- -- -- -- -- (35) -- (35)
Net loss............... -- -- -- -- -- -- -- (10,716) (10,716)
-------- ------ ------ ---- ------- ------ ----- -------- --------
BALANCE AT DECEMBER 31,
1996................... 5,887 59 18,494 185 83,359 -- (31) (76,434) 7,138
Exercise of stock op-
tions................. -- -- 354 3 289 -- -- -- 292
Repurchase of common
stock, net............ -- -- (16) -- (16) -- -- -- (16)
Sale of Series E pre-
ferred stock.......... 2,000 20 -- -- 9,900 -- -- -- 9,920
Foreign currency trans-
lation adjustment..... -- -- -- -- -- -- (320) -- (320)
Net loss............... -- -- -- -- -- -- -- (8,214) (8,214)
-------- ------ ------ ---- ------- ------ ----- -------- --------
BALANCE AT DECEMBER 31,
1997................... 7,887 79 18,832 188 93,532 -- (351) (84,648) 8,800
unaudited:
Exercise of stock
options.............. -- -- 405 4 467 -- -- -- 471
Sale of common stock,
net.................. -- -- 1 -- 1 -- -- -- 1
Deferred
compensation......... -- -- -- -- 530 (530) -- -- --
Amortization of
deferred
compensation......... -- -- -- -- -- 11 -- -- 11
Foreign currency
translation
adjustment........... -- -- -- -- -- -- (64) -- (64)
Net loss.............. -- -- -- -- -- -- -- (1,737) (1,737)
-------- ------ ------ ---- ------- ------ ----- -------- --------
BALANCE AT MARCH 31,
1998
(unaudited)............ 7,887 $ 79 19,238 $192 $94,530 $(519) $(415) $(86,385) $ 7,482
======== ====== ====== ==== ======= ====== ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
ECHELON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------- ----------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss................ $ (8,713) $ (10,716) $ (8,214) $(1,907) $(1,737)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization.......... 988 771 715 141 194
Deferred compensation
expense............... -- -- -- -- 11
Loss (gain) on disposal
of fixed assets....... 10 (13) -- -- --
Change in operating
assets and
liabilities:
Accounts receivable... (929) 332 (579) (216) (676)
Inventories........... (476) 319 (852) (18) (732)
Other current assets.. (300) 149 150 123 (186)
Accounts payable...... 887 (439) 281 (142) 677
Accrued liabilities... 231 104 252 (57) (186)
Deferred revenues..... (788) 552 (1,177) (853) (264)
Deferred rent......... (86) (69) (57) (14) (30)
---------- ---------- ---------- ------- -------
Net cash used in
operating
activities........... (9,176) (9,010) (9,481) (2,943) (2,929)
---------- ---------- ---------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of held-to-
maturity short-term
investments............ (31,974) (10,068) (10,740) -- --
Proceeds from maturities
of held-to-maturity
short-term
investments............ 39,313 22,117 7,759 -- 2,981
Capital expenditures.... (882) (872) (628) (84) (167)
Proceeds from sale of
fixed assets........... -- 13 35 14 --
---------- ---------- ---------- ------- -------
Net cash provided by
(used in)
investing activities.. 6,457 11,190 (3,574) (70) 2,814
---------- ---------- ---------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance
of preferred and
common stock........... 1,954 1,911 10,196 16 472
---------- ---------- ---------- ------- -------
EFFECT OF EXCHANGE RATES
ON CASH................. (62) (35) (320) (201) (64)
---------- ---------- ---------- ------- -------
NET INCREASE (DECREASE)
IN CASH AND
CASH EQUIVALENTS........ (827) 4,056 (3,179) (3,198) 293
CASH AND CASH
EQUIVALENTS:
Beginning of period..... 4,822 3,995 8,051 8,051 4,872
---------- ---------- ---------- ------- -------
End of period........... $ 3,995 $ 8,051 $ 4,872 $ 4,853 $ 5,165
========== ========== ========== ======= =======
SUPPLEMENTAL DISCLOSURES
OF CASH
FLOW INFORMATION:
Cash paid for income
taxes.................. $ 111 $ 123 $ 185 $ 14 $ 42
========== ========== ========== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ECHELON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(ALL INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS
UNAUDITED)
1. ORGANIZATION OF THE COMPANY:
Echelon Corporation (the "Company") was incorporated in Delaware in January
1989. The Company develops, markets and supports a family of hardware and
software products and services that enable OEMs and systems integrators to
design and implement open, interoperable, distributed control networks. The
Company's products are based on its LonWorks networking technology, an open
standard for interoperable networked control developed by the Company. In a
LonWorks control network, intelligent control devices, called nodes,
communicate using the Company's LonTalk protocol. The Company sells its
products and services to the building, industrial, transportation, home and
other automation markets.
The Company emerged from the development stage during 1990. However, the
Company continues to be subject to the risks and challenges associated with
other companies in a comparable stage of development including among others:
history of losses; fluctuation in operating results; dependence on OEMs and
distribution channels; dependence on key manufacturers; competition;
dependence on key personnel; new products and rapid technological change;
market acceptance of interoperability; international operations and currency
fluctuations; lengthy sales cycle; limited protection of intellectual property
rights; risks of product defects or misuse; regulatory actions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The Company's consolidated financial statements reflect operations of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
Unaudited Interim Financial Data
The unaudited financial statement data as of March 31, 1998 and for the
three months ended March 31, 1997 and 1998 has been prepared on the same basis
as the audited consolidated financial statements and, in the opinion of
management, include all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial information set forth
therein, in accordance with generally accepted accounting principles.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make 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 and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company's revenues are derived from the sale and license of its products
and to a lesser extent, from fees associated with training and technical
support offered to its customers. Product revenues consist of revenues from
hardware sales and software licensing arrangements. Revenues from software
licensing arrangements have not been significant to date. Service revenues
consist of product support (including software post-contract support services)
and training.
Revenue from hardware sales are recognized upon shipment to the customer.
Estimated reserves for warranty costs as well as reserves for sales returns
and allowances related to anticipated return of products sold to distributors
with limited rights of return, which are not material to the consolidated
financial statements, are
F-7
<PAGE>
ECHELON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
recorded at the time of sale. Revenue from software sales are recognized upon
shipment of the software if there are no significant post-delivery obligations
and if collection is probable. Service revenue is recognized as the training
services are performed, or ratably over the term of the support period.
During 1990, the Company entered into separate licensing agreements with
Motorola, Inc. ("Motorola") and one other major semiconductor company.
Motorola is a significant stockholder and is also a related party to the
Company due to its representation on the Company's Board of Directors during
1995, 1996 and part of 1997. The agreements provide, among other things, for
the worldwide right to manufacture and distribute products subject to the
licensed technology and requires the Company to provide support and
unspecified updates to the licensed technology over the terms of the
agreements. The agreements also provide for nonrefundable advance royalty
payments. As of December 31, 1997, the Company has deferred $2,025,000 (of
which $1,350,000 is classified as a long-term liability) of royalty payments
that will be recognized in future periods. These payments are being recognized
as revenue ratably over the ten-year royalty period due to the ongoing
obligation to provide support and unspecified updates to the licensed
technology. Any additional royalties that are reported by Motorola or the
other company are recognized as revenue upon receipt of such royalties by the
Company. Product revenues for the years ended December 31, 1995, 1996 and 1997
each include $675,000 related to these advance royalty payments. For the years
ended December 31, 1995, 1996 and 1997, Motorola accounted for approximately
$595,000, $845,000 and $360,000 of total revenues, respectively.
Cash and Cash Equivalents
The Company considers bank deposits, money market investments and U.S.
government securities with an original maturity of three months or less as
cash and cash equivalents.
Short-Term Investments
At December 31, 1997, short-term investments consist of U.S. government
securities with original maturities of approximately five months. These short-
term investments are classified as held-to-maturity and valued using the
amortized cost method, which approximated the fair market value.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and include material, labor and manufacturing overhead. Inventories consist of
the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1996 1997 1998
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Purchased materials................................ $1,079 $1,791 $2,286
Work-in-process.................................... 129 130 133
Finished goods..................................... 384 523 757
------ ------ ------
$1,592 $2,444 $3,176
====== ====== ======
</TABLE>
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of two to five years
for computer and other equipment and furniture and fixtures. Leasehold
improvements are amortized over the shorter of the remaining lease term or the
estimated useful life of the improvements using the straight-line method.
F-8
<PAGE>
ECHELON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Software Development Costs
The Company capitalizes eligible computer software development costs upon
the establishment of technological feasibility, which the Company has defined
as completion of a working model. For the years ended December 31, 1995, 1996
and 1997, and for the three months ended March 31, 1997 and 1998, costs that
were eligible for capitalization were insignificant and, thus, the Company has
charged all software development costs to product development expense in the
accompanying consolidated statements of operations.
Foreign Currency Translation
The functional currency of the Company's subsidiaries is the local currency.
Accordingly, all assets and liabilities are translated into U.S. dollars at
the current exchange rate as of the applicable balance sheet date. Revenues
and expenses are translated at the average exchange rate prevailing during the
period. Gains and losses resulting from the translation of the financial
statements are reported as a separate component of stockholders' equity.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments and trade receivables. The Company has cash investment policies
that limit the amount of credit exposure to any one financial institution and
restrict placement of these investments to financial institutions evaluated as
highly creditworthy. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Company's customer base and their dispersion across many different industries
and geographies. With respect to trade receivables, the Company performs
ongoing credit evaluations of its customers' financial condition.
Additionally, the Company establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends and other available information.
Computation of Basic Net Loss Per Share and Pro Forma Basic Net Loss Per
Share
Historical net loss per share has been calculated under Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No.
128 requires companies to compute earnings per share under two different
methods (basic and diluted). Basic net loss per share is calculated by
dividing net loss by the weighted average shares of common stock outstanding
during the period. No diluted loss per share information has been presented in
the accompanying consolidated statements of operations since potential common
shares from the conversion of preferred stock, stock options and warrants are
antidilutive. The Company evaluated the requirements of the Securities and
Exchange Commission Staff Accounting Bulletin No. 98 ("SAB 98"), and concluded
that there are no nominal issuances of common stock or potential common stock
which would be required to be shown as outstanding for all periods as outlined
in SAB 98.
Pro forma basic net loss per share has been calculated assuming the
conversion of the outstanding preferred stock into an equivalent number of
shares of common stock, as if the shares had been converted on the dates of
their issuance.
New Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting
and presentation of comprehensive income. SFAS No. 130, which was adopted by
the Company in the first quarter of 1998, requires companies to report a new
measurement of income. "Comprehensive Income (Loss)" is to include foreign
currency translation gains and losses and other unrealized gains and losses
that have historically been excluded from net income (loss) and reflected
instead in equity. The following table reconciles comprehensive net loss under
the provisions of SFAS No. 130 for
F-9
<PAGE>
ECHELON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the years ended December 31, 1995, 1996 and 1997 and for the three months
ended March 31, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------- ----------------
1995 1996 1997 1997 1998
------- -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss..................... $(8,713) $(10,716) $(8,214) $(1,907) $(1,737)
Foreign currency translation
adjustments................. (62) (35) (320) (201) (64)
------- -------- ------- ------- -------
Comprehensive net loss....... $(8,775) $(10,751) $(8,534) $(2,108) $(1,801)
======= ======== ======= ======= =======
</TABLE>
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
establishes standards for disclosure of segment information and which will be
adopted by the Company in the fourth quarter of 1998. The Company anticipates
that SFAS No. 131 will not have a material impact on its financial statements.
3. COMMITMENTS:
The Company leases its facilities under operating leases which expire on
various dates through 2002. As of December 31, 1997, future minimum lease
payments under such agreements were as follows (in thousands):
<TABLE>
<S> <C>
1998.................................. $1,579
1999.................................. 1,593
2000.................................. 804
2001.................................. 35
2002.................................. 35
------
$4,046
======
</TABLE>
Rent expense for the years ended December 31, 1995, 1996 and 1997 was
approximately $1,645,000, $1,768,000 and $1,818,000, respectively. Certain
lease agreements provide for escalating rent payments over the term of the
lease. Rent expense under these agreements is recognized on a straight-line
basis. As of December 31, 1996 and 1997, the Company has accrued approximately
$440,000 and $383,000, respectively, of deferred rent related to these
agreements of which $63,000 and $137,000 is included in accrued liabilities as
of December 31, 1996 and 1997, respectively, in the accompanying consolidated
balance sheets.
4. MAJOR CUSTOMER AND GEOGRAPHIC AREA:
In 1996, no single customer accounted for 10% or more of total revenues. In
1995, 1997 and the three months ended March 31, 1998, one customer, who is
also a distributor of the Company's products, accounted for 12.0%, 10.9% and
20.6% of total revenues, respectively. For the three months ended March 31,
1997, no single customer accounted for 10% or more of total revenues.
F-10
<PAGE>
ECHELON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company operates in the control network industry segment. The Company's
operations by geographic area were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------- ----------------
1995 1996 1997 1997 1998
------- -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues from customers:
United States............... $20,323 $ 21,445 $25,610 $ 6,805 $ 7,244
Japan....................... 3,020 2,545 2,692 669 715
------- -------- ------- ------- -------
Total...................... $23,343 $ 23,990 $28,302 $ 7,474 $ 7,959
======= ======== ======= ======= =======
Intercompany revenues between
geographic areas:
United States............... $ 1,405 $ 2,085 $ 2,455 $ 741 $ 693
Japan....................... -- -- -- -- --
Europe and Other............ 3,257 4,025 4,523 1,024 1,031
Eliminations................ (4,662) (6,110) (6,978) (1,765) (1,724)
------- -------- ------- ------- -------
Total...................... $ -- $ -- $ -- $ -- $ --
======= ======== ======= ======= =======
Income (loss) from
operations:
United States............... $(6,974) $ (6,414) $(3,413) $ (777) $ (642)
Japan....................... 118 (854) (1,084) (158) (174)
Europe and Other............ 250 380 350 75 83
Eliminations................ (3,248) (4,049) (4,375) (1,084) (1,024)
------- -------- ------- ------- -------
Total...................... $(9,854) $(10,937) $(8,522) $(1,944) $(1,757)
======= ======== ======= ======= =======
Identifiable assets:
United States............... $22,741 $ 13,789 $14,203 $13,044
Japan....................... 1,264 1,191 1,800 1,886
Europe and Other............ 542 875 813 765
------- -------- ------- -------
Total...................... $24,547 $ 15,855 $16,816 $15,695
======= ======== ======= =======
</TABLE>
Revenues from export sales (primarily to Europe) accounted for approximately
39.1%, 43.0%, 48.0%, 45.7% and 48.0% of total revenues for the years ended
December 31, 1995, 1996 and 1997 and for the three months ended March 31, 1997
and 1998, respectively.
The Company's operations are structured to achieve consolidated objectives.
As a result, significant interdependencies and overlaps exist among the
Company's operating units. Accordingly, the revenues from customers, income
(loss) from operations and identifiable assets shown for each geographic area
may not be indicative of the amounts that would have been reported if the
operating units were independent of one another.
Intercompany sales and transfers of manufacturing materials and finished
goods between areas are accounted for based on established intercompany sales
prices.
F-11
<PAGE>
ECHELON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. PREFERRED STOCK:
Preferred stock outstanding consists of the following (in thousands, except
share amounts):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------- MARCH 31,
1996 1997 1998
---------------- ---------------- ----------------
ADDITIONAL ADDITIONAL ADDITIONAL
PAR PAID-IN PAR PAID-IN PAR PAID-IN
VALUE CAPITAL VALUE CAPITAL VALUE CAPITAL
----- ---------- ----- ---------- ----- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Series B, 1,250,000 shares
authorized, 1,250,000
shares outstanding in 1996,
1997 and 1998, liquidation
preference of $7,500....... $13 $ 7,463 $13 $ 7,463 $13 $ 7,463
Series C, 1,608,000 shares
authorized, 1,608,000
shares outstanding in 1996,
1997 and 1998, liquidation
preference of $12,500...... 16 12,483 16 12,483 16 12,483
Series D, 3,172,000 shares
authorized, 3,029,381
shares outstanding in 1996,
1997 and 1998, liquidation
preference of $30,294...... 30 30,234 30 30,234 30 30,234
Series E, 2,400,000 shares
authorized, no shares
outstanding
in 1996, 2,000,000 shares
outstanding in 1997 and
1998, liquidation
preference of $10,000...... -- -- 20 9,900 20 9,900
--- ------- --- ------- --- -------
Total...................... $59 $50,180 $79 $60,080 $79 $60,080
=== ======= === ======= === =======
</TABLE>
In February 1992, the Company completed a stock purchase agreement with
Motorola whereby it sold 1,250,000 shares of its authorized Series B preferred
stock at $6.00 per share for total gross proceeds of $7,500,000 to the
Company. In January 1993, the Company completed a stock purchase agreement
with Motorola whereby it sold 1,608,000 shares of its authorized Series C
preferred stock at $7.77 per share for total gross proceeds of $12,500,000 to
the Company. In 1994, the Company completed a stock purchase agreement with
Motorola and two new investors whereby it sold 1,000,000 shares of its
authorized Series D preferred stock at $10.00 per share to each investor for
total gross proceeds of $30,000,000 to the Company. In May 1997, the Company
completed a stock purchase agreement with existing shareholders whereby it
sold 2,000,000 shares of its authorized Series E preferred stock at $5.00 per
share for total gross proceeds of $10,000,000 to the Company. Motorola is a
party to certain licensing agreements discussed in Note 2.
In connection with the issuance of the Series D preferred stock to Motorola
in 1994, Motorola was granted the right to purchase additional shares of
Series D preferred stock in order to maintain its ownership percentage (the
"Motorola Purchase Right"). The Motorola Purchase Right expires upon the
closing of an underwritten public offering of the common stock which results
in gross proceeds to the Company of not less than $15,000,000. The exercise
price of the stock purchase right is the last sales price per share of
preferred stock sold by the Company. During 1995, Motorola purchased 29,381
shares of Series D preferred stock at $10.00 per share under this agreement.
During 1996 and 1997, Motorola did not purchase any shares of preferred stock
under this agreement. As of December 31, 1997, Motorola had the right to
purchase approximately 49,000 additional shares of Series D preferred stock
under this agreement which expired in February 1998.
The rights and preferences of the Series B, C, D and E convertible preferred
stock are as follows:
(A) Each holder of Series B, C, D and E convertible preferred stock is
entitled to receive noncumulative dividends at a rate of $0.48, $0.622,
$0.80 and $0.40 per share, respectively, per annum, when and as declared by
the Board of Directors, prior to payment of dividends on common stock. To
date, no dividends have been declared by the Board of Directors for the
preferred stock.
(B) Each share of Series B, C, D and E preferred stock is convertible at
the option of the holder, at any time after the issuance of such share,
into such number of fully paid and nonassessable shares of common stock as
is determined by the conversion rate. The initial conversion rate shall be
one for one and is subject to adjustment upon the occurrence of specific
events. The preferred shares automatically convert into shares of common
stock upon the earlier of (1) the affirmative vote of the holders of a
majority of the
F-12
<PAGE>
ECHELON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Series B, C, D and E preferred stock to cause all outstanding shares of
Series B, C, D and E preferred stock to be converted; or (2) the closing of
an underwritten public offering of the common stock which results in gross
proceeds to the Company of not less than $15,000,000.
(C) In the event of any liquidation, dissolution or winding up of the
Company, either voluntary or involuntary, the holders of the Series B, C, D
and E preferred stock shall be entitled to receive $6.00, $7.7736, $10.00
and $5.00 per share, respectively, plus any declared but unpaid dividends,
prior to any distribution to the holders of common stock.
(D) The holder of each share of Series B, C, D and E preferred stock is
entitled to vote in an amount equivalent to the number of shares of common
stock into which the preferred stock could be converted.
(E) Without the approval of a majority of the holders of the outstanding
shares of Series B, C, D and E preferred stock, the Company cannot, among
other things, materially alter or change the powers, preferences or special
rights of the Series B, C, D and E preferred stock so as to affect them
adversely.
6. COMMON STOCK:
The Company sold 975,000, 1,005,000 and 5,000 shares of common stock during
1995, 1996 and 1997, respectively, at the fair value, as determined by the
Board of Directors, of $1.00 per share to $1.29 per share during 1995, $1.29
per share to $1.40 per share during 1996 and $1.40 per share during 1997 under
stock purchase agreements, primarily to certain officers of the Company. The
stock purchased under these agreements vests annually over four years. As of
December 31, 1997, 1,322,500 shares of common stock issued and outstanding
under these stock purchase agreements and previous stock purchase agreements
were unvested and subject to repurchase by the Company at prices ranging from
$0.77 to $1.40 per share and a weighted average price of $1.26 per share.
Warrants
In connection with the issuance of the Series D preferred stock in 1994, the
Company granted certain investment bankers warrants to purchase 30,000 shares
of the Company's common stock at $12.00 per share (the "Common Stock
Warrants"). The Common Stock Warrants expire upon the earlier of (i) February
2, 1999 or (ii) the consummation of any transaction resulting in the sale,
transfer or disposition of all or substantially all of the Company's assets or
the merger of the Company with or into, or consolidation with, any other
corporation, whereby the holders of the Company's voting securities prior to
the transaction do not hold more than 50% of the voting securities of the
surviving entity following consummation of the transaction ("Change in
Control"). At December 31, 1997, these Common Stock Warrants were exercisable
but no warrants had been exercised.
In addition, in connection with the issuance of the Series E preferred stock
in 1997, warrants to purchase an aggregate of 400,000 shares of Series E
preferred stock (or common stock, if all Series E preferred stock has then
been converted into common stock) at a per share exercise price of $5.00 were
issued (the "Series E Warrants" and together with the Common Stock Warrants,
the "Warrants"). The Series E Warrants are exercisable at any time until their
expiration on the earlier of May 15, 2002 or a Change in Control. Each
Warrant contains a cashless conversion right that allows the holder to receive
a number of shares of the Company's common stock or Series E preferred stock,
as applicable, equal to the quotient obtained by dividing the value of the
Warrant on the date of exercise, which value is determined by subtracting (i)
the aggregate exercise price of the Warrant from (ii) the aggregate fair
market value of the Warrant shares on the date of exercise, by the fair market
value of one share of the Company's Common Stock or Series E Preferred Stock,
as applicable, on the date of exercise, as determined by the Company's Board
of Directors. At December 31, 1997, these Series E Warrants are exercisable
but no warrants had been exercised.
At the date of issuance, the fair market value of these Warrants was deemed
to be immaterial.
F-13
<PAGE>
ECHELON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1988 Stock Option Plan
During 1988, the Company adopted the 1988 Stock Option Plan (the "1988
Plan") for key employees, officers and directors. The Company has reserved
8,900,000 shares under the 1988 Plan. Incentive stock options to purchase
shares of common stock may be granted at not less than 100% of the fair market
value, as determined by the Board of Directors, and generally have a term of
five years from the date of grant, not to exceed ten years. The 1988 Plan also
provides for holders of non-qualified stock options to purchase shares at not
less than 85% of the fair market value, as determined by the Board of
Directors. Options generally vest ratably over four years.
The 1988 Plan also allows for the issuance of options which are immediately
exercisable through execution of a restricted stock purchase agreement. Shares
purchased pursuant to a stock purchase agreement generally vest over four
years. Options granted under the 1988 Plan will remain outstanding in
accordance with their original terms. However, effective April 1997, the Board
of Directors determined that no further options will be granted under the 1988
Plan.
1997 Stock Plan
During 1997, the Company adopted the 1997 Stock Plan (the "1997 Plan") for
key employees, officers and directors. The Company has reserved 5,000,000
shares under the 1997 Plan. In February 1998, the Board of Directors
authorized an increase in the number of shares reserved for issuance under the
1997 Plan to 6,200,000 shares. Incentive stock options to purchase shares of
common stock may be granted at not less than 100% of the fair market value, as
determined by the Board of Directors, and generally have a term of five years
from the date of grant, not to exceed ten years. The 1997 Plan also provides
for holders of non-qualified stock options to purchase shares at not less than
85% of the fair market value, as determined by the Board of Directors. Options
generally vest ratably over four years.
The 1997 Plan also allows for the issuance of options which are immediately
exercisable through execution of a restricted stock purchase agreement. Shares
purchased pursuant to a stock purchase agreement generally vest annually over
four years. In the event of termination of employment, the Company may
repurchase unvested shares at a price equal to the original issuance price. As
of December 31, 1997, no shares of common stock were issued and outstanding
under these restricted stock purchase agreements.
F-14
<PAGE>
ECHELON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock option activity under the 1988 and 1997 Plans is summarized below:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF OPTIONS EXERCISE PRICE
---------- --------------
<S> <C> <C>
Options outstanding,
December 31, 1994....... 2,227,000 $0.57
Grants.................. 943,800 1.11
Cancellations........... (104,551) 0.80
Exercises............... (1,072,373) 0.53
---------- -----
Options outstanding,
December 31, 1995....... 1,993,876 0.84
Grants.................. 1,618,700 1.38
Cancellations........... (130,938) 1.07
Exercises............... (630,124) 0.83
---------- -----
Options outstanding,
December 31, 1996....... 2,851,514 1.14
Grants.................. 2,185,700 1.40
Cancellations........... (366,626) 1.29
Exercises............... (354,156) 0.83
---------- -----
Options outstanding,
December 31, 1997....... 4,316,432 1.28
Grants.................. 215,250 2.00
Cancellations........... (43,938) 1.24
Exercises............... (405,049) 1.16
---------- -----
Options outstanding,
March 31, 1998
(unaudited)............. 4,082,695 $1.33
========== =====
Exercisable at December
31, 1997................ 4,316,432 $1.28
========== =====
Exercisable at March 31,
1998 (unaudited)........ 3,932,695 $1.31
========== =====
</TABLE>
The following table summarizes the stock options outstanding as of December
31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
---------------------------------------------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE VESTED AVERAGE
EXERCISE DECEMBER 31, LIFE (IN EXERCISE DECEMBER 31, EXERCISE
PRICE RANGE 1997 YEARS) PRICE 1997 PRICE
----------- -------------- --------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$0.15 25,500 1.7 $0.15 25,500 $0.15
0.60-0.77 431,189 1.2 0.72 321,300 0.70
0.97-1.40 3,859,743 3.8 1.35 524,490 1.27
--------- --- ----- ------- -----
0.15-1.40 4,316,432 3.5 $1.28 871,290 $1.03
========= === ===== ======= =====
</TABLE>
Certain options issued under the 1988 and 1997 Plans may be exercised any
time prior to their expiration. In addition, the Company has the right, upon
termination of an optionholder's employment or service with the Company, at
its discretion, to repurchase any unvested shares issued under the 1988 and
1997 Plans at the original purchase price. As of December 31, 1997 and March
31, 1998, 220,938 and 479,938 shares, respectively, were subject to repurchase
by the Company at prices ranging from $0.77 to $1.40 per share and a weighted
average repurchase price of $1.12 and $1.27, respectively. Of the 4,316,432
options exercisable at December 31, 1997, 871,290 were vested, and of the
3,932,695 options exercisable at March 31, 1998, 764,915 were vested.
F-15
<PAGE>
ECHELON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with the issuance of stock options to employees during the
three months ended March 31, 1998, the Company has recorded deferred
compensation in the aggregate amount of approximately $530,000, representing
the difference between the deemed fair value of the Company's common stock and
the exercise price of the stock options at the date of grant. The Company is
amortizing the deferred compensation expense over the shorter of the period in
which the employee provides services or the applicable vesting period, which
is typically 48 months. For the three-month period ended March 31, 1998,
amortization expense was approximately $11,000. Deferred compensation is
decreased in the period of forfeiture arising from the early termination of an
option holder's services. No compensation expense related to any other periods
presented has been recorded.
The Company accounts for the Plans under APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Had compensation expense for the Plans been
determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net loss and basic net loss per share would have
been increased to the following pro forma amounts (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Net loss:
As reported.................................... $(8,713) $(10,716) $(8,214)
Pro forma...................................... (8,789) (10,992) (8,626)
Basic net loss per share:
As reported.................................... $ (0.56) $ (0.62) $ (0.44)
Pro forma...................................... (0.56) (0.63) (0.46)
</TABLE>
The weighted-average grant date fair value of options granted during 1995,
1996 and 1997 was $0.08, $0.17 and $0.19, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants
in 1995, 1996 and 1997: risk-free interest rates of 5.95%, 6.10% and 5.60%,
respectively; expected dividend yields of zero percent; expected lives of 4
years; expected volatility of effectively zero percent.
Shares Reserved
At December 31, 1997, the Company has reserved shares of its common stock as
follows:
<TABLE>
<S> <C>
Conversion of convertible preferred stock......................... 7,887,381
Exercise and future issuance of stock options..................... 7,265,382
Warrants.......................................................... 430,000
Series D purchase right-Motorola.................................. 49,000
----------
15,631,763
==========
</TABLE>
7. INCOME TAXES:
The Company accounts for income taxes using SFAS No. 109, "Accounting for
Income Taxes". SFAS No. 109 provides for an asset and liability approach under
which deferred income taxes are based upon enacted tax laws and rates
applicable to the periods in which the taxes become payable.
Income taxes for the years ended December 31, 1995, 1996 and 1997 primarily
consist of taxes related to foreign subsidiaries.
F-16
<PAGE>
ECHELON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the net deferred income tax asset as of December 31, 1996
and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Net operating loss carryforwards......................... $ 23,986 $ 26,315
Deferred revenue......................................... 1,084 940
Tax credit carryforwards................................. 3,051 3,537
Capitalized research and development costs............... 1,469 1,852
Reserves and other cumulative temporary differences...... 1,104 906
-------- --------
30,694 33,550
Valuation allowance...................................... (30,694) (33,550)
-------- --------
Net deferred income tax asset............................ $ -- $ --
======== ========
</TABLE>
As of December 31, 1997, the Company had net operating loss carryforwards
for Federal and state income tax reporting purposes of approximately $76.0
million and $5.0 million, respectively, which expire at various dates through
2012. In addition, as of December 31, 1997, the Company had tax credit
carryforwards of approximately $3.5 million, which expire at various dates
through 2012. The Internal Revenue Code of 1986, as amended, contains
provisions that may limit the net operating loss and credit carryforwards
available for use in any given period upon the occurrence of certain events,
including a significant change in ownership interests.
A valuation allowance has been recorded for the entire deferred tax asset as
a result of uncertainties regarding the realization of the asset balance due
to the history of losses and the variability of operating results.
8. SUBSEQUENT EVENTS (UNAUDITED):
Pro Forma Stockholders' Equity
In April 1998, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission permitting
the Company to sell shares of its common stock in connection with the proposed
initial public offering ("IPO"). In addition, the Board of Directors
authorized the Company to amend its articles of incorporation, whereby the
Company will be authorized to issue 100,000,000 shares of common stock and
5,000,000 shares of preferred stock. If the offering is consummated under the
terms presently anticipated, all of the currently outstanding preferred stock
will automatically convert into 7,887,381 shares of common stock upon the
closing of the IPO. The effect of the above has been reflected in the
accompanying unaudited pro forma stockholders' equity as of March 31, 1998.
1998 Directors Option Plan
Non-employee directors are entitled to participate in the 1998 Director
Option Plan (the "Director Plan"). The Director Plan was adopted by the Board
of Directors in May 1998, is subject to stockholder approval and will not
become effective until the date of this offering. The Director Plan has a term
of ten years, unless terminated sooner by the Board. A total of 300,000 shares
of Common Stock have been reserved for issuance under the Director Plan, plus
an increase each year equal to 100,000 shares or such lesser amount as the
Board may determine.
The Director Plan provides for the automatic grant of 25,000 shares of
common stock (the "First Option") to each non-employee director on the date he
or she first becomes a director (provided that such person joins the Board
after May 29, 1998). Each non-employee director shall also automatically be
granted an option to purchase 10,000 shares (a "Subsequent Option") on both
the effective date of this offering and on the date of the
F-17
<PAGE>
ECHELON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company's Annual Stockholder Meeting provided that he or she is re-elected to
the Board or otherwise remains on the Board, if on such date he or shall have
served on the Board for at least the preceding six months. Each First Option
and each Subsequent Option shall have a term of five years and the shares
subject to the option shall vest as to 25% of the shares subject to option on
each anniversary of the date of grant. The exercise price of each First Option
and Subsequent Option shall be 100% of the fair market value per share of the
common stock, generally determined with reference to the closing price of the
common stock as reported on the Nasdaq National Market on the date of grant.
On the effective date of this offering options to purchase an aggregate of
60,000 shares will be granted under the Director Plan, with an exercise price
equal to the initial public offering price per share.
In the event of a merger of the Company with or into another corporation or
the sale of substantially all of the assets of the Company, each option shall
be assumed or an equivalent option may be substituted by the successor
corporation. Following such assumption or substitution, if the optionee's
status as a director of the successor corporation terminates other than upon a
voluntary resignation by the optionee, the option shall become fully
exercisable, including as to shares as to which it would not otherwise be
exercisable. If the outstanding options are not assumed or substituted, the
options shall become fully vested and exercisable. Options granted under the
Director Plan must be exercised within three months of the end of the
optionee's tenure as a director of the Company, or within twelve months after
such director's termination by death or disability, but in no event later than
the expiration of the option's five year term; provided, however, that shares
subject to an option granted to a director who has served as a director with
the Company for at least five years shall become fully vested and exercisable
for the remainder of the option's five year term upon such director's
termination. No option granted under the Director Plan is transferable by the
optionee other than by will or the laws of descent and distribution, and each
option is exercisable, during the lifetime of the optionee, only by such
optionee.
Bank Revolving Line of Credit Agreement
In May 1998, the Company entered into a revolving line of credit agreement
with a bank, whereby the Company may borrow up to 85% of eligible accounts
receivable, not to exceed $5.0 million. If the credit agreement had been in
place as of April 30, 1998, the amount available to be borrowed would have
been $2.6 million. Advances under the credit agreement bear interest at the
bank's reference rate or, at the option of the Company, at a fixed rate of
interest equal to the London interbank offered rate plus 150 basis points. As
of May 31, 1998, there was approximately $65,000 outstanding under this line
of credit in the form of a letter of credit. The credit agreement, which
expires in May 1999, contains certain negative covenants restricting the
Company's ability to pay dividends or enter into certain financial
transactions. The credit agreement also contains a minimum tangible net worth
requirement, determined on a quarterly basis.
F-18
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, sales representative, or any other person has been authorized to
give any information or to make any representations in connection with this of-
fering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been au-
thorized by the Company or any of the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the Common Stock to which it relates or an offer to, or a solicita-
tion of, any person in any jurisdiction where such an 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 or that the
information contained herein is correct as of any time subsequent to the date
hereof.
--------------------------
TABLE OF CONTENTS
--------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Consolidated Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 28
Management............................................................... 39
Certain Transactions..................................................... 48
Principal Stockholders................................................... 50
Description of Capital Stock............................................. 53
Shares Eligible for Future Sale.......................................... 56
Underwriting............................................................. 58
Legal Matters............................................................ 60
Experts.................................................................. 60
Additional Information................................................... 60
Index to Consolidated Financial Statements............................... F-1
</TABLE>
Until , 1998 (25 days after the date of this Prospectus), all dealers ef-
fecting transactions in the Common Stock offered hereby, whether or not partic-
ipating in this distribution, may be required to deliver a Prospectus. This is
in addition to the obligation of dealers to deliver a Prospectus when acting as
Underwriters and with respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5,000,000 SHARES
[LOGO OF ECHELON(R)]
COMMON STOCK
---------------
PROSPECTUS
---------------
NationsBanc Montgomery Securities LLC
BancAmerica Robertson Stephens
Volpe Brown Whelan & Company
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale
of Common Stock being registered. All amounts are estimates except the SEC
registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE
PAID
--------
<S> <C>
SEC registration fee............................................... $ 15,266
NASD filing fee.................................................... 5,675
Printing and engraving expenses.................................... 125,000
Legal fees and expenses............................................ 300,000
Accounting fees and expenses....................................... 150,000
Blue Sky qualification fees and expenses........................... 10,000
Transfer agent and registrar fees.................................. 10,000
Miscellaneous fees................................................. 84,059
--------
Total............................................................ $700,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Certificate of Incorporation includes a provision that eliminates
the personal liability of its directors for monetary damages for breach or
alleged breach of their duty of care. In addition, as permitted by Section 145
of the Delaware General Corporation Law, the Bylaws of the Registrant provide
that: (i) the Registrant is required to indemnify its directors and executive
officers and persons serving in such capacities in other business enterprises
(including, for example, subsidiaries of the Registrant) at the Registrant's
request, to the fullest extent permitted by Delaware law, including in those
circumstances in which indemnification would otherwise be discretionary; (ii)
the Registrant may, in its discretion, indemnify employees and agents in those
circumstances where indemnification is not required by law; (iii) the
Registrant is required to advance expenses, as incurred, to its directors and
executive officers in connection with defending a proceeding (except that it
is not required to advance expenses to a person against whom the Registrant
brings a claim for breach of the duty of loyalty, failure to act in good
faith, intentional misconduct, knowing violation of law or deriving an
improper personal benefit; (iv) the rights conferred in the Bylaws are not
exclusive, and the Registrant is authorized to enter into indemnification
agreements with its directors, executive officers and employees; and (v) the
Registrant may not retroactively amend the Bylaw provisions in a way that is
adverse to such directors, executive officers and employees.
The Registrant's policy is to enter into indemnification agreements with
each of its directors and executive officers that provide the maximum
indemnity allowed to directors and executive officers by Section 145 of the
Delaware General Corporation Law and Bylaws, as well as certain additional
procedural protections. In addition, such indemnity agreements provide that
directors and executive officers will be indemnified to the fullest possible
extent not prohibited by law against all expenses (including attorney's fees)
and settlement amounts paid or incurred by them in any action or proceeding,
including any derivative action by or in the right of the Registrant, on
account of their services as directors or executive officers of the Registrant
or as directors or officers of any other Company or enterprise when they are
serving in such capacities at the request of the Registrant. The Company will
not be obligated pursuant to the indemnity agreements to indemnify or advance
expenses to an indemnified party with respect to proceedings or claims
initiated by the indemnified party and not by way of defense, except with
respect to proceedings specifically authorized by the Board of Directors or
brought to enforce a right to indemnification under the indemnity agreement,
the Company's Bylaws or any statute or law. Under the agreements, the Company
is not obligated to indemnify the indemnified party (i) for any expenses
II-1
<PAGE>
incurred by the indemnified party with respect to any proceeding instituted by
the indemnified party to enforce or interpret the agreement, if a court of
competent jurisdiction determines that each of the material assertions made by
the indemnified party in such proceeding was not made in good faith or was
frivolous; (ii) for any amounts paid in settlement of a proceeding unless the
Company consents to such settlement; (iii) with respect to any proceeding
brought by the Company against the indemnified party for willful misconduct,
unless a court determines that each of such claims was not made in good faith
or was frivolous; (iv) on account of any suit in which judgment is rendered
against the indemnified party for an accounting of profits made from the
purchase or sale by the indemnified party of securities of the Company
pursuant to the provisions of (S)16(b) of the Exchange Act and related laws;
(v) on account of the indemnified party's conduct which is finally adjudged to
have been knowingly fraudulent or deliberately dishonest, or to constitute
willful misconduct or a knowing violation of the law; (vi) an account of any
conduct from which the indemnified party derived an improper personal benefit;
(vii) on account of conduct the indemnified party believed to be contrary to
the best interests of the Company or its stockholders; (viii) on account of
conduct that constituted a breach of the indemnified party's duty of loyalty
to the Company or its stockholders; or (ix) if a final decision by a court
having jurisdiction in the matter shall determine that such indemnification is
not lawful.
The indemnification provision in the Bylaws and the indemnification
agreements entered into between the Registrant and its directors and executive
officers, may be sufficiently broad to permit indemnification of the
Registrant's officers and directors for liabilities arising under the
Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) During the three-year period ended May 31, 1998, the Company sold an
aggregate of 1,758,083 shares of unregistered Common Stock to 133 individuals
who were officers, employees or former employees of the Company, for an
aggregate offering price of $1,333,330. These shares were sold pursuant to the
exercise of options issued under the Company's 1988 Stock Option Plan. As to
each employee, officer and director of the Company who was issued such
securities, the Company relied upon Rule 701 of the Securities Act. Each such
person purchased securities of the Company pursuant to a written contract
between such person and the Company; in addition, the Company met the
conditions imposed under Rule 701(b).
(b) During the three-year period ended May 31, 1998, the Company sold an
aggregate of 1,984,000 shares of unregistered Common Stock to eight
individuals who were officers or employees of the Company or an entity
affiliated with a member of the Company's Board of Directors, for an aggregate
offering price of $2,672,750. These shares were sold pursuant to stock
purchase agreements between the Company and such individuals and entities. As
to each person who was issued such securities, the Company relied upon Section
4(2) of the Securities Act.
(c) In May 1997 the Company sold an aggregate of 2,000,000 shares of
unregistered Series E Preferred Stock to certain investors, each of which was
an existing stockholder of the Company, for an aggregate offering price of
$10,000,000. In connection therewith, the Company issued Warrants to seven
investors to purchase an aggregate of 400,000 shares of Series E Preferred
Stock. As to each investor constituting a "U.S. person" (within the meaning of
Regulation S) who was issued such shares of Series E Preferred Stock, the
Company relied upon Section 4(2) of the 1933 Act and Regulation D, Rule 506,
thereunder. The sale of Series E Preferred Stock and the issuance of Warrants
were made in compliance with all of the terms of Rules 501 and 502 of
Regulation D, there were no more than 35 investors (as calculated pursuant to
Rule 501(e) of Regulation D), and each investor who was not an accredited
investor represented to the Company that he or she had such knowledge and
experience in financial and business matters that he or she was capable of
evaluating the merits and risks of the investment.
Appropriate legends were affixed to the share certificates issued in the
transactions described above. All recipients had adequate access, through
their relationships with the Company, to information about the Company.
II-2
<PAGE>
(d) In January 1998, the Company registered with the Commission pursuant to
a Regulation A Offering Statement options granted under the Company's 1997
Stock Plan to purchase up to 3,571,428 of the Company's Common Stock and the
Common Stock issuable upon the exercise of such options. As of May 31, 1998,
an aggregate of 332,625 shares of unregistered Common Stock have been sold
upon exercise of stock options to 23 individuals who were officers, employers
or former employees of the Company for an aggregate offering price of
$495,678.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of Registrant.
3.2* Amended and Restated Certificate of Incorporation of Registrant (to be
effective upon closing of Offering).
3.3 Amended and Restated Bylaws of Registrant.
4.1* Form of Registrant's Common Stock Certificate.
4.2 Second Amended and Restated Modification Agreement dated May 15, 1997.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati P.C.regarding legality of
the securities being issued.
10.1 Form of Indemnification Agreement entered into by Registrant with each
of its directors and executive officers.
10.2* 1997 Stock Plan and forms of related agreements.
10.3 1988 Stock Option Plan and forms of related agreements.
10.4 Second Amended and Restated Modification Agreement dated May 15, 1997
(included in Exhibit 4.2).
10.5 Form of International Distributor Agreement.
10.6 Form of OEM License Agreement.
10.7 Form of Software License Agreement.
10.8 International Distributor Agreement between the Company and EBV
Elektronik GmbH as of December 1, 1997.
10.9 1998 Director Option Plan.
21.1 Subsidiaries of the Registrant.
23.1* Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP (see page II-7).
24.1 Power of Attorney (see page II-6).
27.1 Financial Data Schedule (available in EDGAR format only).
</TABLE>
- --------
* To be filed by amendment.
<TABLE>
<CAPTION>
(B) FINANCIAL STATEMENT SCHEDULE
<S> <C>
Report of Independent Public Accountants on Sched-
ule S-1
Schedule II--Valuation and Qualifying Accounts S-2
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act,
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the California Corporation Law, the Registrant's
Amended and Restated Certificate of Incorporation, the Registrant's Amended
and Restated Bylaws, the Registrant's indemnification agreements or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant 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 hereunder, the
Registrant 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 Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
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 Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement on Form S-1 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Palo
Alto, State of California, on this 1st day of June 1998.
ECHELON CORPORATION
By: /s/ M. Kenneth Oshman
-----------------------------------
M. Kenneth Oshman
Chairman of the Board, President
and Chief Executive Officer
II-5
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints M. Kenneth Oshman and Oliver R. Stanfield and
each of them singly, as true and lawful attorneys-in-fact and agents with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities to sign the Registration Statement filed
herewith and any or all amendments to said Registration Statement (including
post-effective amendments and registration statements filed pursuant to Rule
462 and otherwise), and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission
granting unto said attorneys-in-fact and agents the full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the foregoing, as full to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his substitute, may lawfully
do or cause to be done by virtue hereof.
Witness our hands on the date set forth below.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURES TITLE DATE
/s/ M. Kenneth Oshman Chairman of the June 1, 1998
- ------------------------------------- Board, President
M. KENNETH OSHMAN and Chief Executive
Officer (Principal
Executive Officer)
/s/ Oliver R. Stanfield Vice President of June 1, 1998
- ------------------------------------- Finance and Chief
OLIVER R. STANFIELD Financial Officer
(Principal
Financial Officer
and Principal
Accounting Officer)
/s/ Armas Clifford Markkula, Jr. Vice Chairman June 1, 1998
- -------------------------------------
ARMAS CLIFFORD MARKKULA, JR.
/s/ Bertrand Cambou Director June 1, 1998
- -------------------------------------
BERTRAND CAMBOU
/s/ Robert R. Maxfield Director June 1, 1998
- -------------------------------------
ROBERT R. MAXFIELD
/s/ Richard M. Moley Director June 1, 1998
- -------------------------------------
RICHARD M. MOLEY
/s/ Arthur Rock Director June 1, 1998
- -------------------------------------
ARTHUR ROCK
/s/ Larry W. Sonsini Director June 1, 1998
- -------------------------------------
LARRY W. SONSINI
II-6
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
Registration Statement.
ARTHUR ANDERSEN LLP
San Jose, California
June 1, 1998
II-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Echelon Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Echelon Corporation and subsidiaries
included in this Registration Statement and have issued our report thereon
dated February 17, 1998. Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule
listed in the index above is the responsibility of the Company's management
and is presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
February 17, 1998
S-1
<PAGE>
ECHELON CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------- ---------- ---------- ---------- ---------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ----------------------------------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
Allowance for returns and doubtful
accounts.......................... $174 $304 $-- $478
Year ended December 31, 1996:
Allowance for returns and doubtful
accounts.......................... 478 341 -- 819
Year ended December 31, 1997:
Allowance for returns and doubtful
accounts.......................... 819 -- 257 562
</TABLE>
S-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of Registrant.
3.2* Amended and Restated Certificate of Incorporation of Registrant (to be
effective upon closing of Offering).
3.3 Amended and Restated Bylaws of Registrant.
4.1* Form of Registrant's Common Stock Certificate.
4.2 Second Amended and Restated Modification Agreement dated May 15, 1997.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati P.C.regarding legality of
the securities being issued.
10.1 Form of Indemnification Agreement entered into by Registrant with each
of its directors and executive officers.
10.2* 1997 Stock Plan and forms of related agreements.
10.3 1988 Stock Option Plan and forms of related agreements.
10.4 Second Amended and Restated Modification Agreement dated May 15, 1997
(included in Exhibit 4.2).
10.5 Form of International Distributor Agreement.
10.6 Form of OEM License Agreement.
10.7 Form of Software License Agreement.
10.8 International Distributor Agreement between the Company and EBV
Elektronik GmbH as of December 1, 1997.
10.9 1998 Director Option Plan.
21.1 Subsidiaries of the Registrant.
23.1* Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP (see page II-7).
24.1 Power of Attorney (see page II-6).
27.1 Financial Data Schedule (available in EDGAR format only).
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
EXHIBIT 1.1
Underwriting Agreement
(Date)
NATIONSBANC MONTGOMERY SECURITIES LLC
BANCAMERICA ROBERTSON STEPHENS
VOLPE BROWN WHELAN & COMPANY, LLC
As Representatives of the several Underwriters
c/o NATIONSBANC MONTGOMERY SECURITIES LLC
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
Introductory. Echelon Corporation, a Delaware corporation (the
"Company), proposes to issue and sell to the several underwriters named in
Schedule A (the "Underwriters") an aggregate of [___] shares (the "Firm Common
Shares") of its Common Stock, par value $.01 per share (the "Common Stock"). In
addition, the Company has granted to the Underwriters an option to purchase up
to an additional [___] shares (the "Optional Common Shares") of Common Stock, as
provided in Section 2. The Firm Common Shares and, if and to the extent such
option is exercised, the Optional Common Shares are collectively called the
"Common Shares". NationsBanc Montgomery Securities LLC ("NMSL"), BancAmerica
Robertson Stephens and Volpe Brown Whelan & Company, LLC have agreed to act as
representatives of the several Underwriters (in such capacity, the
"Representatives") in connection with the offering and sale of the Common
Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-[___]), which contains a form of prospectus to be used in connection with
the public offering and sale of the Common Shares. Such registration statement,
as amended, including the financial statements, exhibits and schedules thereto,
in the form in which it was declared effective by the Commission under the
Securities Act of 1933 and the rules and regulations promulgated thereunder
(collectively, the "Securities Act"), including any information deemed to be a
part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434
under the Securities Act, is called the "Registration Statement". Any
registration statement filed by the Company pursuant to Rule 462(b) under the
Securities Act is called the "Rule 462(b) Registration Statement", and from and
after the date and time of filing of the Rule 462(b) Registration Statement the
term "Registration Statement" shall include the Rule 462(b) Registration
Statement. Such prospectus, in the form first used by the Underwriters to
confirm sales of the Common Shares, is called the "Prospectus"; provided,
however, that if the Company has, with the consent of NMSL, elected to rely upon
Rule 434 under the Securities Act,
1.
<PAGE>
the term "Prospectus" shall mean the Company's prospectus subject to completion
(each, a "preliminary prospectus") dated [___] (such preliminary prospectus is
called the "Rule 434 preliminary prospectus"), together with the applicable term
sheet (the "Term Sheet") prepared and filed by the Company with the Commission
under Rules 434 and 424(b) under the Securities Act and all references in this
Agreement to the date of the Prospectus shall mean the date of the Term Sheet.
All references in this Agreement to the Registration Statement, the Rule 462(b)
Registration Statement, a preliminary prospectus, the Prospectus or the Term
Sheet, or any amendments or supplements to any of the foregoing, shall include
any copy thereof filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval System ("EDGAR").
The Company hereby confirms its agreements with the Underwriters as
follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES.
The Company hereby represents, warrants and covenants to each
Underwriter as follows:
(a) Compliance with Registration Requirements. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has complied
to the Commission's satisfaction with all requests of the Commission for
additional or supplemental information with respect to the Registration
Statement, the Prospectus or the transactions contemplated hereby. No stop order
suspending the effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement is in effect and no proceedings for such purpose have
been instituted or are pending or, to the best knowledge of the Company, are
contemplated or threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed complied in
all material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation S-T
under the Securities Act), was identical to the copy thereof delivered to the
Underwriters for use in connection with the offer and sale of the Common Shares.
Each of the Registration Statement, any Rule 462(b) Registration Statement and
any post-effective amendment thereto, at the time it became effective and at all
subsequent times, complied and will comply in all material respects with the
Securities Act and did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. The Prospectus, as
amended or supplemented, as of its date and at all subsequent times, did not and
will not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. The
representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment thereto, or the Prospectus, or any amendments or supplements thereto,
made in reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by the Representative expressly
for use therein. There are no contracts or other documents required to be
described in the Prospectus or to be filed as exhibits to the Registration
2.
<PAGE>
Statement which have not been described or filed as required.
(b) Offering Materials Furnished to Underwriters. The Company has
delivered to each Representative one complete manually signed copy of the
Registration Statement and of each consent and certificate of experts filed as a
part thereof, and conformed copies of the Registration Statement (without
exhibits) and preliminary prospectuses and the Prospectus, as amended or
supplemented, in such quantities and at such places as the Representatives have
reasonably requested for each of the Underwriters.
(c) Distribution of Offering Material By the Company. The Company has
not distributed and will not distribute, prior to the later of the Second
Closing Date (as defined below) and the completion of the Underwriters'
distribution of the Common Shares, any offering material in connection with the
offering and sale of the Common Shares other than a preliminary prospectus, the
Prospectus or the Registration Statement, it being understood that the foregoing
shall not prohibit the distribution of drafts of the preliminary prospectus, the
Prospectus or the Registration Statement to any persons necessary for the
preparation of offering materials and only for that purpose.
(d) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement of,
the Company, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law or public policy and
except as the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting the
rights and remedies of creditors or by general equitable principles.
(e) Authorization of the Common Shares. The Common Shares to be
purchased by the Underwriters from the Company have been duly authorized for
issuance and sale pursuant to this Agreement and, when issued and delivered by
the Company pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) No Applicable Registration or Other Similar Rights. There are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by this Agreement, except for such rights as have been
duly waived or relinquished in accordance with their terms.
(g) No Material Adverse Change. Except as otherwise disclosed in the
Prospectus, subsequent to the respective dates as of which information is given
in the Prospectus: (i) there has been no material adverse change, or any
development that could reasonably be expected to result in a material adverse
change, in the condition, financial or otherwise, or in the earnings, business,
operations or prospects, whether or not arising from transactions in the
ordinary course of business, of the Company and its subsidiaries, considered as
one entity (any such change is called a "Material Adverse Change"); (ii) the
Company and its subsidiaries, considered as one entity, have not incurred any
material liability or obligation, indirect, direct or contingent, not in the
ordinary course of business nor entered into any material transaction or
agreement not in the ordinary course of business; and (iii) there has been no
dividend or distribution of any kind
3.
<PAGE>
declared, paid or made by the Company or, except for dividends paid to the
Company or other subsidiaries, any of its subsidiaries on any class of capital
stock or repurchase or redemption by the Company or any of its subsidiaries of
any class of capital stock.
(h) Independent Accountants. Arthur Andersen LLP, who have expressed
their opinion with respect to the financial statements (which term as used in
this Agreement includes the related notes thereto) and any supporting schedules
filed with the Commission as a part of the Registration Statement and included
in the Prospectus, are independent public or certified public accountants as
required by the Securities Act.
(i) Preparation of the Financial Statements. The financial statements
filed with the Commission as a part of the Registration Statement and included
in the Prospectus present fairly, in all material respects, the consolidated
financial position of the Company and its subsidiaries as of and at the dates
indicated and the results of their operations and cash flows for the periods
specified in conformity with generally accepted accounting principles as applied
in the United States on a consistent basis throughout the periods involved. Any
supporting schedules included in the Registration Statement present fairly, in
all material respects, the information required to be stated therein. Such
financial statements and any such supporting schedules have been prepared in
conformity with generally accepted accounting principles as applied in the
United States applied on a consistent basis throughout the periods involved,
except as may be expressly stated in the related notes thereto. No other
financial statements or supporting schedules are required to be included in the
Registration Statement. The financial data set forth in the Prospectus under the
captions "Prospectus Summary--Summary Consolidated Financial Data", "Selected
Consolidated Financial Data" and "Capitalization" fairly present the information
set forth therein on a basis consistent with that of the audited financial
statements contained in the Registration Statement.
(j) Incorporation and Good Standing of the Company and its
Subsidiaries. Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation and has corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the Prospectus and, in the case of the Company, to enter into
and perform its obligations under this Agreement. The Company is duly qualified
as a foreign corporation to transact business and is in good standing in the
State of California and each other jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or the
conduct of business, except for such jurisdictions (other than the State of
California) where the failure to so qualify or to be in good standing could not
reasonably be expected to, individually or in the aggregate, result in a
Material Adverse Change. All of the issued and outstanding capital stock of each
subsidiary has been duly authorized and validly issued, is fully paid and
nonassessable and, except for directors' qualifying or local ownership shares,
is owned by the Company, directly or through subsidiaries, free and clear of any
security interest, mortgage, pledge, lien, encumbrance or claim. The Company
does not own or control, directly or indirectly, any corporation, association or
other entity other than the subsidiaries listed in Exhibit 22.1 to the
Registration Statement. The Company has no "significant subsidiaries" as that
term is defined in Rule 1-02 (w) of regulation S-X under the Securities Act.
4.
<PAGE>
(k) Capitalization and Other Capital Stock Matters. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding options or warrants described in the
Prospectus). The Common Stock (including the Common Shares) conforms in all
material respects to the description thereof contained in the Prospectus. All of
the issued and outstanding shares of Common Stock have been duly authorized and
validly issued, are fully paid and nonassessable and have been issued in
compliance with federal and state securities laws. None of the outstanding
shares of Common Stock were issued in violation of any preemptive rights, rights
of first refusal or other similar rights to subscribe for or purchase securities
of the Company. There are no authorized or outstanding options, warrants,
preemptive rights, rights of first refusal or other rights to purchase, or
equity or debt securities convertible into or exchangeable or exercisable for,
any capital stock of the Company or any of its subsidiaries other than those
accurately described in the Prospectus. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted thereunder, set forth in the Prospectus accurately and
fairly presents in all material respects the information required to be shown
with respect to such plans, arrangements, options and rights.
(l) Stock Exchange Listing. The Common Shares have been approved for
inclusion on the Nasdaq National Market, subject only to official notice of
issuance.
(m) Non-Contravention of Existing Instruments; No Further
Authorizations or Approvals Required. Neither the Company nor any of its
subsidiaries is in violation of its charter or by-laws or is in default (or,
with the giving of notice or lapse of time, would be in default) ("Default")
under any indenture, mortgage, loan or credit agreement, note, contract,
license, franchise, lease or other instrument to which the Company or any of its
subsidiaries is a party or by which it or any of them may be bound, or to which
any of the property or assets of the Company or any of its subsidiaries is
subject (each, an "Existing Instrument"), except for such Defaults as could not
reasonably be expected to, individually or in the aggregate, result in a
Material Adverse Change. The Company's execution, delivery and performance of
this Agreement and consummation of the transactions contemplated hereby and by
the Prospectus (i) have been duly authorized by all necessary corporate action
and will not result in any violation of the provisions of the charter or by-laws
of the Company or any subsidiary, (ii) will not conflict with or constitute a
breach of, or Default under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or any of
its subsidiaries pursuant to, or require the consent of any other part to, any
Existing Instrument, except for such conflicts, breaches, Defaults, liens,
charges or encumbrances as could not reasonably be expected to, individually or
in the aggregate, result in a Material Adverse Change and (iii) will not result
in any violation of any law, administrative regulation or administrative or
court decree applicable to the Company or any subsidiary. No consent, approval,
authorization or other order of, or registration or filing with, any court or
other governmental or regulatory authority or agency, is required for the
Company's execution, delivery and performance of this Agreement and consummation
of the transactions contemplated hereby and by the Prospectus, except such as
have been obtained or made by the Company and are in full force and effect under
the Securities Act, applicable state
5.
<PAGE>
securities or blue sky laws and from the National Association of Securities
Dealers, Inc. (the "NASD").
(n) No Material Actions or Proceedings. There are no legal or
governmental actions, suits or proceedings pending or, to the best of the
Company's knowledge, threatened (i) against or affecting the Company or any of
its subsidiaries, (ii) which has as the subject thereof any officer or director
of, or property owned or leased by, the Company or any of its subsidiaries or
(iii) relating to environmental or discrimination matters, where in any such
case (A) there is a reasonable possibility that such action, suit or proceeding
might be determined adversely to the Company or such subsidiary and (B) any such
action, suit or proceeding, if so determined adversely, would reasonably be
expected to result in a Material Adverse Change or adversely affect the
consummation of the transactions contemplated by this Agreement. No material
labor dispute with the employees of the Company or any of its subsidiaries, or
with the employees of any significant supplier of the Company, exists or, to the
best of the Company's knowledge, is threatened or imminent.
(o) Intellectual Property Rights. The Company and its subsidiaries
own or possess sufficient trademarks, trade names, patent rights, copyrights,
licenses, approvals, trade secrets and other similar rights (collectively,
"Intellectual Property Rights") reasonably necessary to conduct their businesses
as now conducted; and the expected expiration of any of such Intellectual
Property Rights could not reasonably be expected to result in a Material Adverse
Change. Neither the Company nor any of its subsidiaries has received any notice
of infringement or conflict with asserted Intellectual Property Rights of
others, which infringement or conflict, if the subject of an unfavorable
decision, could not reasonably be expected to result in a Material Adverse
Change.
(p) All Necessary Permits, etc. The Company and each subsidiary
possess such valid and current certificates, authorizations or permits issued by
the appropriate state, federal or foreign regulatory agencies or bodies
necessary to conduct their respective businesses in all material respects, and
neither the Company nor any subsidiary has received any notice of proceedings
relating to the revocation or modification of, or non-compliance with, any such
certificate, authorization or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, could reasonably be
expected to result in a Material Adverse Change.
(q) Title to Properties. The Company and each of its subsidiaries has
good and marketable title to all the properties and assets reflected as owned in
the financial statements referred to in Section 1(i) above or elsewhere in the
Prospectus, in each case free and clear of any security interests, mortgages,
liens, encumbrances, equities, claims and other defects, except such as do not
materially and adversely affect the value of such property and do not materially
interfere with the use made or proposed to be made of such property by the
Company or such subsidiary. The real property, improvements, equipment and
personal property held under lease by the Company or any subsidiary are held
under valid and enforceable leases, with such exceptions as are not material and
do not materially interfere with the use made or proposed to be made of such
real property, improvements, equipment or personal property by the Company or
such subsidiary.
(r) Tax Law Compliance. The Company and its subsidiaries have filed
all
6.
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necessary federal, state and foreign income and franchise tax returns or have
properly requested extensions thereof and have paid all material taxes required
to be paid by any of them and, if due and payable, any related or similar
assessment, fine or penalty levied against any of them. The Company has made
adequate charges, accruals and reserves in the applicable financial statements
referred to in Section 1 ((A)( (i) above in respect of all federal, state and
foreign income and franchise taxes for all periods as to which the tax liability
of the Company or any of its subsidiaries has not been finally determined.
(s) Company Not an "Investment Company". The Company has been advised
of the rules and requirements under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). The Company is not, and after receipt of
payment for the Common Shares will not be, an "investment company" within the
meaning of Investment Company Act and will conduct its business in a manner so
that it will not become subject to the Investment Company Act.
(t) Insurance. Each of the Company and its subsidiaries are insured
by recognized, financially sound and reputable institutions with policies in
such amounts and with such deductibles and covering such risks as are generally
deemed adequate and customary for their businesses including, but not limited
to, policies covering real and personal property owned or leased by the Company
and its subsidiaries against theft, damage, destruction and acts of vandalism.
The Company has no reason to believe that it or any subsidiary will not be able
(i) to renew its existing insurance coverage as and when such policies expire or
(ii) to obtain comparable coverage from similar institutions as may be necessary
or appropriate to conduct its business as now conducted and at a cost that could
not reasonably be expected to result in a Material Adverse Change. Neither of
the Company nor any subsidiary has been denied any insurance coverage which it
has sought or for which it has applied.
(u) No Price Stabilization or Manipulation. The Company has not taken
and will not take, directly or indirectly, any action designed to or that might
be reasonably expected to cause or result in stabilization or manipulation of
the price of the Common Stock to facilitate the sale or resale of the Common
Shares.
(v) Related Party Transactions. There are no business relationships
or related-party transactions involving the Company or any subsidiary or to the
Company's knowledge, any other person required to be described in the Prospectus
which have not been described as required.
(w) No Unlawful Contributions or Other Payments. Neither the Company
nor any of its subsidiaries nor, to the best of the Company's knowledge, any
employee or agent of the Company or any subsidiary, has made any contribution or
other payment to any official of, or candidate for, any federal, state or
foreign office in violation of any law or of the character required to be
disclosed in the Prospectus.
(x) Company's Accounting System. The Company maintains a system of
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in
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accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles as
applied in the United States and to maintain accountability for assets; (iii)
access to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(y) Compliance with Environmental Laws. Except as could not,
individually or in the aggregate, reasonably be expected to result in a Material
Adverse Change (i) neither the Company nor any of its subsidiaries is in
violation of any federal, state, local or foreign law or regulation relating to
pollution or protection of human health or the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or subsurface
strata) or wildlife, including without limitation, laws and regulations relating
to emissions, discharges, releases or threatened releases of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum and petroleum products (collectively, "Materials of Environmental
Concern"), or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Materials of
Environment Concern (collectively, "Environmental Laws"), which violation
includes, but is not limited to, noncompliance with any permits or other
governmental authorizations required for the operation of the business of the
Company or its subsidiaries under applicable Environmental Laws, or
noncompliance with the terms and conditions thereof, nor has the Company or any
of its subsidiaries received any written communication, whether from a
governmental authority, citizens group, employee or otherwise, that alleges that
the Company or any of its subsidiaries is in violation of any Environmental Law;
(ii) there is no claim, action or cause of action filed with a court or
governmental authority, no investigation with respect to which the Company has
received written notice, and no written notice by any person or entity alleging
potential liability of the Company or any of its subsidiaries for investigatory
costs, cleanup costs, governmental responses costs, natural resources damages,
property damages, personal injuries, attorneys' fees or penalties arising out
of, based on or resulting from the presence, or release into the environment, of
any Material of Environmental Concern at any location owned, leased or operated
by the Company or any of its subsidiaries, now or in the past (collectively,
"Environmental Claims"), pending or, to the best of the Company's knowledge,
threatened against the Company or any of its subsidiaries or any person or
entity whose liability for any Environmental Claim the Company or any of its
subsidiaries has retained or assumed either contractually or by operation of
law; and (iii) to the best of the Company's knowledge, there are no past or
present actions, activities, circumstances, conditions, events or incidents,
including, without limitation, the release, emission, discharge, presence or
disposal of any Material of Environmental Concern, that reasonably could result
in a violation of any Environmental Law or form the basis of a potential
Environmental Claim against the Company or any of its subsidiaries or against
any person or entity whose liability for any Environmental Claim the Company or
any of its subsidiaries has retained or assumed either contractually or by
operation of law.
(z) ERISA Compliance. The Company and its subsidiaries and any
"employee benefit plan" (as defined under the Employee Retirement Income
Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, "ERISA"))
8.
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established or maintained by the Company, its subsidiaries or their "ERISA
Affiliates" (as defined below) are in compliance in all material respects with
ERISA. "ERISA Affiliate" means, with respect to the Company or a subsidiary, any
member of any group of organizations described in Sections 414(b),(c),(m) or (o)
of the Internal Revenue Code of 1986, as amended, and the regulations and
published interpretations thereunder (the "Code") of which the Company or such
subsidiary is a member. No "reportable event" (as defined under ERISA) has
occurred or is reasonably expected to occur with respect to any "employee
benefit plan" established or maintained by the Company, its subsidiaries or any
of their ERISA Affiliates. No "employee benefit plan" established or maintained
by the Company, its subsidiaries or any of their ERISA Affiliates, if such
"employee benefit plan" were terminated, would have any "amount of unfunded
benefit liabilities" (as defined under ERISA). Neither the Company, its
subsidiaries nor any of their ERISA Affiliates has incurred or reasonably
expects to incur any liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "employee benefit plan" or (ii) Sections
412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan" established
or maintained by the Company, its subsidiaries or any of their ERISA Affiliates
that is intended to be qualified under Section 401(a) of the Code is so
qualified and nothing has occurred, whether by action or failure to act, which
would cause the loss of such qualification.
(aa) Shares Subject to Lock-Up Agreement. Each (a) holder of a
currently outstanding option issued under the 1988 Stock Option Plan, the 1997
Stock Option Plan or the 1998 Director's Option Plan (collectively, the "Option
Plans"), (b) each person who has acquired shares of Common Stock pursuant to the
exercise of any option granted under the Option Plans, (c) each person that
holds shares of the Company's convertible stock subject to that certain Amended
and Restated Modification Agreement dated as of May 15, 1997 (the "Modification
Agreement"), by and between the Company and certain purchasers identified
therein, or has acquired shares of the Company's capital stock, directly or
indirectly, pursuant to conversion of said shares, and (d) each person that has
acquired shares of Common Stock, directly or indirectly, pursuant to a transfer
of shares from any such persons, is bound by a provision under the Option Plans
and/or the Modification Agreement that none of such options (including
securities issued or issuable upon exercise of such options) or shares, as the
case may be, may be sold or otherwise transferred or disposed of for a period of
180 days after the date of the initial public offering of the Shares (a "Lock-
Up"). Attached hereto as Exhibit C is a true and complete list of all persons
subject to a Lock-Up, specifying the document containing the applicable Lock-Up
provision. The Company has (i) notified each such person that, pursuant to the
terms of the Option Plans and/or Modification Agreement, none of such options or
shares (including securities issued or issuable upon exercise of such options)
or shares, as the case may be, may be sold or otherwise transferred or disposed
of for a period of 180 days after the date of the initial public offering of the
Shares and (ii) has imposed a stop-transfer instruction with the Company's
transfer agent in order to enforce the foregoing Lock-Ups in full.
Any certificate signed by an officer of the Company and delivered to
the Representative or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES.
9.
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The Firm Common Shares. The Company agrees to issue and sell to the
several Underwriters the Firm Common Shares upon the terms herein set forth. On
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the
Underwriters agree, severally and not jointly, to purchase from the Company the
respective number of Firm Common Shares set forth opposite their names on
Schedule A. The purchase price per Firm Common Share to be paid by the several
Underwriters to the Company shall be $[___] per share.
The First Closing Date. Delivery of certificates for the Firm Common
Shares to be purchased by the Underwriters and payment therefor shall be made at
the offices of NMSL, 600 Montgomery Street, San Francisco, California (or such
other place as may be agreed to by the Company and the Representative) at 6:00
a.m. San Francisco time, on [___], or such other time and date not later than
10:30 a.m. San Francisco time, on [___] as the Representative shall designate by
notice to the Company (the time and date of such closing are called the "First
Closing Date"). The Company hereby acknowledges that circumstances under which
the Representatives may provide notice to postpone the First Closing Date as
originally scheduled include, but are in no way limited to, any determination by
the Company or the Representatives to recirculate to the public copies of an
amended or supplemented Prospectus or a delay as contemplated by the provisions
of Section 10.
The Optional Common Shares; the Second Closing Date. In addition, on
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase, severally and
not jointly, up to an aggregate of [___] Optional Common Shares from the Company
at the purchase price per share to be paid by the Underwriters for the Firm
Common Shares. The option granted hereunder is for use by the Underwriters
solely in covering any over-allotments in connection with the sale and
distribution of the Firm Common Shares. The option granted hereunder may be
exercised at any time (but not more than once) upon notice by the
Representatives to the Company, which notice may be given at any time within 30
days from the date of this Agreement. Such notice shall set forth (i) the
aggregate number of Optional Common Shares as to which the Underwriters are
exercising the option, (ii) the names and denominations in which the
certificates for the Optional Common Shares are to be registered and (iii) the
time, date and place at which such certificates will be delivered (which time
and date may be simultaneous with, but not earlier than, the First Closing Date;
and in such case the term "First Closing Date" shall refer to the time and date
of delivery of certificates for the Firm Common Shares and the Optional Common
Shares). Such time and date of delivery, if subsequent to the First Closing
Date, is called the "Second Closing Date" and shall be determined by the
Representatives and shall not be earlier than three nor later than five full
business days after delivery of such notice of exercise. If any Optional Common
Shares are to be purchased, each Underwriter agrees, severally and not jointly,
to purchase the number of Optional Common Shares (subject to such adjustments to
eliminate fractional shares as the Representative may determine) that bears the
same proportion to the total number of Optional Common Shares to be purchased as
the number of Firm Common Shares set forth on Schedule A opposite the name of
such Underwriter bears to the total number of Firm Common Shares. The
Representatives may cancel the option at any time prior to its
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expiration by giving written notice of such cancellation to the Company.
Public Offering of the Common Shares. The Representatives hereby
advise the Company that the Underwriters intend to offer for sale to the public,
as described in the Prospectus, their respective portions of the Common Shares
as soon after this Agreement has been executed and the Registration Statement
has been declared effective as the Representatives, in their sole judgment, have
determined is advisable and practicable.
Payment for the Common Shares. Payment for the Common Shares shall be
made at the First Closing Date (and, if applicable, at the Second Closing Date)
by wire transfer of immediately available funds to the order of the Company.
It is understood that the Representatives have been authorized, for
their own respective accounts and the accounts of the several Underwriters, to
accept delivery of and receipt for, and make payment of the purchase price for,
the Firm Common Shares and any Optional Common Shares the Underwriters have
agreed to purchase. NMSL, individually and not as a Representative of the
Underwriters, may (but shall not be obligated to) make payment for any Common
Shares to be purchased by any Underwriter whose funds shall not have been
received by the Representatives by the First Closing Date or the Second Closing
Date, as the case may be, for the account of such Underwriter, but any such
payment shall not relieve such Underwriter from any of its obligations under
this Agreement.
Delivery of the Common Shares. The Company shall deliver, or cause to
be delivered, to the Representatives for the accounts of the several
Underwriters certificates for the Firm Common Shares at the First Closing Date,
against the irrevocable release of a wire transfer of immediately available
funds for the amount of the purchase price therefor. The Company shall also
deliver, or cause to be delivered, to the Representatives for the accounts of
the several Underwriters, certificates for the Optional Common Shares the
Underwriters have agreed to purchase at the First Closing Date or the Second
Closing Date, as the case may be, against the irrevocable release of a wire
transfer of immediately available funds for the amount of the purchase price
therefor. The certificates for the Common Shares shall be in definitive form and
registered in such names and denominations as the Representatives shall have
requested at least two full business days prior to the First Closing Date (or
the Second Closing Date, as the case may be) and shall be made available for
inspection on the business day preceding the First Closing Date (or the Second
Closing Date, as the case may be) at a location in New York City as the
Representatives may designate. Time shall be of the essence, and delivery at the
time and place specified in this Agreement is a further condition to the
obligations of the Underwriters.
Delivery of Prospectus to the Underwriters. Not later than 12:00 p.m.
on the second business day following the date the Common Shares are released by
the Underwriters for sale to the public, the Company shall deliver or cause to
be delivered copies of the Prospectus in such quantities and at such places as
the Representative shall request.
SECTION 3. ADDITIONAL COVENANTS.
11.
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The Company further covenants and agrees with each Underwriter as
follows:
(a) Representative's Review of Proposed Amendments and Supplements.
During such period beginning on the date hereof and ending on the later of the
First Closing Date or such date, as in the opinion of counsel for the
Underwriters, the Prospectus is no longer required by law to be delivered in
connection with sales by an Underwriter or dealer (the "Prospectus Delivery
Period"), prior to amending or supplementing the Registration Statement
(including any registration statement filed under Rule 462(b) under the
Securities Act) or the Prospectus, the Company shall furnish to the
Representatives for review a copy of each such proposed amendment or supplement
to the Registration Statement, and the Company shall not file any such proposed
amendment or supplement to which the Representatives reasonably object.
(b) Securities Act Compliance. After the date of this Agreement, the
Company shall promptly advise the Representatives in writing (i) of the receipt
of any comments of, or requests for additional or supplemental information from,
the Commission with respect to the Registration Statement, the Prospectus or the
transactions contemplated hereby, (ii) of the time and date of any filing of any
post-effective amendment to the Registration Statement or any amendment or
supplement to any preliminary prospectus or the Prospectus, (iii) of the time
and date that any post-effective amendment to the Registration Statement becomes
effective, (iv) of the issuance by the Commission of any stop order suspending
the effectiveness of the Registration Statement or any post-effective amendment
thereto or of any order preventing or suspending the use of any preliminary
prospectus or the Prospectus or (v) during the two year period following the
date hereof, of any proceedings to remove, suspend or terminate from listing or
quotation the Common Stock from any securities exchange upon which it is listed
for trading or included or designated for quotation, or of the threatening or
initiation of any proceedings for any of such purposes. If the Commission shall
enter any such stop order at any time, the Company will use its best efforts to
obtain the lifting of such order at the earliest possible moment. Additionally,
the Company agrees that it shall comply with the provisions of Rules 424(b),
430A and 434, as applicable, under the Securities Act and will use its
reasonable efforts to confirm that any filings made by the Company under such
Rule 424(b) were received in a timely manner by the Commission.
(c) Amendments and Supplements to the Prospectus and Other Securities
Act Matters. If, during the Prospectus Delivery Period, any event shall occur or
condition exist as a result of which it is necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not misleading,
or if in the opinion of the Representatives or counsel for the Underwriters it
is otherwise necessary to amend or supplement the Prospectus to comply with law,
the Company agrees to promptly prepare (subject to Section 3(a) hereof), file
with the Commission and furnish at its own expense to the Underwriters and to
dealers, amendments or supplements to the Prospectus so that the statements in
the Prospectus as so amended or supplemented will not, in the light of the
circumstances when the Prospectus is delivered to a purchaser, be misleading or
so that the Prospectus, as amended or supplemented, will comply with law in all
material respects.
(d) Copies of any Amendments and Supplements to the Prospectus. The
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<PAGE>
Company agrees to furnish each Representative, without charge, during the
Prospectus Delivery Period, as many copies of the Prospectus and any amendments
and supplements thereto as such Representative may reasonably request.
(e) Blue Sky Compliance. The Company shall cooperate with the
Representatives and counsel for the Underwriters to qualify or register the
Common Shares for sale under (or obtain exemptions from the application of)
state securities or blue sky laws or Canadian provincial Securities laws of
those jurisdictions designated by the Representative, shall comply with such
laws and shall continue such qualifications, registrations and exemptions in
effect so long as required for the distribution of the Common Shares. The
Company shall not be required to qualify as a foreign corporation or to take any
action that would subject it to general service of process in any such
jurisdiction where it is not presently qualified or where it would be subject to
taxation as a foreign corporation where it is not presently so subject. The
Company will advise the Representative promptly after obtaining knowledge
thereof, of the suspension of the qualification or registration of (or any such
exemption relating to) the Common Shares for offering, sale or trading in any
jurisdiction or any initiation or threat of any proceeding for any such purpose,
and in the event of the issuance of any order suspending such qualification,
registration or exemption, the Company shall use its best efforts to obtain the
withdrawal thereof at the earliest possible moment.
(f) Use of Proceeds. The Company shall apply the net proceeds from
the sale of the Common Shares sold by it in the manner described under the
caption "Use of Proceeds" in the Prospectus.
(g) Transfer Agent. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Common Stock.
(h) Earnings Statement. As soon as practicable, the Company will
make generally available to its security holders and to the Representative an
earnings statement (which need not be audited) covering the twelve-month period
after the effective date of the Registration Statement that satisfies the
provisions of Section 11(a) of the Securities Act.
(i) Periodic Reporting Obligations. During the Prospectus Delivery
Period the Company shall file, on a timely basis, with the Commission and the
Nasdaq National Market all reports and documents required to be filed under the
Exchange Act.
(j) Agreement Not To Offer or Sell Additional Securities. During the
period of 180 days following the date of the Prospectus, the Company will not,
without the prior written consent of NMSL (which consent may be withheld at the
sole discretion of NMSL), directly or indirectly, sell, offer, contract or grant
any option to sell, pledge, transfer or establish an open "put equivalent
position" within the meaning of Rule 16a-1(h) under the Exchange Act, or
otherwise dispose of or transfer, or announce the offering of, or file any
registration statement under the Securities Act in respect of, any shares of
Common Stock, options or warrants to acquire shares of the Common Stock or
securities exchangeable or exercisable for or convertible into shares of Common
Stock (other than as contemplated by this Agreement with respect to the Common
Shares); provided, however, that the Company may issue shares of its Common
Stock or options to
13.
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purchase its Common Stock, or Common Stock upon exercise of options, pursuant to
any stock option, stock bonus or other stock plan or arrangement described in
the Prospectus, but only if the holders of such shares, options, or shares
issued upon exercise of such options, agree in writing not to sell, offer,
dispose of or otherwise transfer any such shares or options during such 180 day
period without the prior written consent of NMSL (which consent may be withheld
at the sole discretion of the NMSL).
(k) Future Reports to the Representatives. During the period of five
years hereafter the Company will furnish to the Representatives at 600
Montgomery Street, San Francisco, CA 94111, Attention: _____________ (i) as soon
as practicable after the end of each fiscal year, copies of the Annual Report of
the Company containing the balance sheet of the Company as of the close of such
fiscal year and statements of income, stockholders' equity and cash flows for
the year then ended and the opinion thereon of the Company's independent public
or certified public accountants; (ii) as soon as practicable after the filing
thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly
Report on Form 10-Q, Current Report on Form 8-K or other report filed by the
Company with the Commission, the NASD or any securities exchange; and (iii) as
soon as available, copies of any report or communication of the Company mailed
generally to holders of its capital stock.
(l) Enforcement of Lock-Up Agreement. The Company agrees: (i) to
enforce the terms of each Lock-Up, (ii) to issue stop-transfer instructions to
the transfer agent for the Common Stock with respect to any transaction or
contemplated transaction that would constitute a breach of or default under any
Lock-Up and (iii) upon written request of NMSL, to release from the Lock-Ups
those shares of Common Stock held by those holders set forth in such request. In
addition, except with the prior written consent of NMSL, the Company agrees (i)
not to amend or terminate, or waive any right under, any of the Lock-Ups, or
take any other action that would directly or indirectly have the same effect as
an amendment or termination, or waiver of any right under, any of the Lock-Ups,
that would permit any holder of shares of Common Stock, or securities
convertible into or exercisable or exchangeable for Common Stock, to sell, make
any short sale of, grant any option for the purchase of, or otherwise transfer
or dispose of, any of such shares of Common Stock or other securities prior to
the expiration of 180 days after the date of the Prospectus, and (ii) subject to
the Lock-Ups, not to consent to any sale, short sale, grant of an option for the
purchase of, or other disposition or transfer of shares of Common Stock, or
securities convertible into or exercisable or exchangeable for Common Stock.
NMSL, on behalf of the several Underwriters, may, in its sole
discretion, waive in writing the performance by the Company of any one or more
of the foregoing covenants or extend the time for their performance.
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SECTION 4. PAYMENT OF EXPENSES.
The Company agrees to pay all costs, fees and expenses incurred in
connection with the performance of its obligations hereunder and in connection
with the transactions contemplated hereby, including without limitation (i) all
expenses incident to the issuance and delivery of the Common Shares (including
all printing and engraving costs), (ii) all fees and expenses of the registrar
and transfer agent of the Common Stock, (iii) all necessary issue, transfer and
other stamp taxes in connection with the issuance and sale of the Common Shares
to the Underwriters, (iv) all fees and expenses of the Company's counsel,
independent public or certified public accountants and other advisors, (v) all
costs and expenses incurred in connection with the preparation, printing,
filing, shipping and distribution of the Registration Statement (including
financial statements, exhibits, schedules, consents and certificates of
experts), each preliminary prospectus and the Prospectus, and all amendments and
supplements thereto, and this Agreement, (vi) all filing fees, attorneys' fees
and expenses incurred by the Company or the Underwriters in connection with
qualifying or registering (or obtaining exemptions from the qualification or
registration of) all or any part of the Common Shares for offer and sale under
the state securities or blue sky laws or the provincial securities laws of
Canada, and, if requested by the Representative, preparing and printing a "Blue
Sky Survey" or memorandum, and any supplements thereto, advising the
Underwriters of such qualifications, registrations and exemptions, (vii) the
filing fees incident to, and the reasonable fees and expenses of counsel for the
Underwriters in connection with, the NASD's review and approval of the
Underwriters' participation in the offering and distribution of the Common
Shares, (viii) the fees and expenses associated with including the Common Shares
on the Nasdaq National Market, and (ix) all other fees, costs and expenses
referred to in Item 13 of Part II of the Registration Statement. Except as
provided in this Section 4, Section 6, Section 8 and Section 9 hereof, the
Underwriters shall pay their own expenses, including the fees and disbursements
of their counsel.
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS.
The obligations of the several Underwriters to purchase and pay for
the Common Shares as provided herein on the First Closing Date and, with respect
to the Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy of the representations and warranties on the part of the Company set
forth in Section 1 hereof as of the date hereof and as of the First Closing Date
as though then made and, with respect to the Optional Common Shares, as of the
Second Closing Date as though then made, to the timely performance by the
Company of its covenants and other obligations hereunder, and to each of the
following additional conditions:
(a) Accountants' Comfort Letter. On the date hereof, each
Representative shall have received from Arthur Andersen LLP, independent public
or certified public accountants for the Company, a letter dated the date hereof
addressed to the Underwriters, in form and substance satisfactory to the
Representatives, containing statements and information of the type ordinarily
included in accountant's "comfort letters" to underwriters, delivered according
to Statement of Auditing Standards No. 72 (or any successor bulletin), with
respect to the audited and unaudited financial statements and certain financial
information contained in the Registration Statement and
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the Prospectus (and the Representatives shall have received an additional [___]
conformed copies of such accountants' letter for each of the several
Underwriters).
(b) Compliance with Registration Requirements; No Stop Order; No
Objection from NASD. For the period from and after effectiveness of this
Agreement and prior to the First Closing Date and, with respect to the Optional
Common Shares, the Second Closing Date:
(i) the Company shall have filed the Prospectus with the
Commission (including the information required by Rule 430A under the Securities
Act) in the manner and within the time period required by Rule 424(b) under the
Securities Act; or the Company shall have filed a post-effective amendment to
the Registration Statement containing the information required by such Rule
430A, and such post-effective amendment shall have become effective; or, if the
Company elected to rely upon Rule 434 under the Securities Act and obtained the
Representatives' consent thereto, the Company shall have filed a Term Sheet with
the Commission in the manner and within the time period required by such Rule
424(b);
(ii) no stop order suspending the effectiveness of the
Registration Statement, any Rule 462(b) Registration Statement, or any post-
effective amendment to the Registration Statement, shall be in effect and no
proceedings for such purpose shall have been instituted or threatened by the
Commission; and
(iii) the NASD shall have raised no objection to the fairness
and reasonableness of the underwriting terms and arrangements.
(c) No Material Adverse Change or Ratings Agency Change. For the
period from and after the date of this Agreement and prior to the First Closing
Date and, with respect to the Optional Common Shares, the Second Closing Date:
(i) in the judgment of the Representatives there shall not
have occurred any Material Adverse Change; and
(ii) there shall not have occurred any downgrading, nor shall
any notice have been given of any intended or potential downgrading or of any
review for a possible change that does not indicate the direction of the
possible change, in the rating accorded any securities of the Company or any of
its subsidiaries by any "nationally recognized statistical rating organization"
as such term is defined for purposes of Rule 436(g)(2) under the Securities Act.
(d) Opinion of Counsel for the Company. On each of the First Closing
Date and the Second Closing Date each Representative shall have received the
favorable opinion of Wilson Sonsini Goodrich & Rosati, A Professional
Corporation, counsel for the Company, dated as of such Closing Date, the form of
which is attached as Exhibit A (and the Representatives shall have received an
additional [___] conformed copies of such counsel's legal opinion for each of
the several Underwriters).
(e) Opinion of Counsel for the Underwriters. On each of the First
Closing Date
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and the Second Closing Date each Representative shall have received the
favorable opinion of Brobeck, Phleger & Harrison LLP, counsel for the
Underwriters, dated as of such Closing Date, with respect to the matters set
forth in paragraphs (i), (vii) (with respect to subparagraph (i) thereof only),
(viii), (ix), (x) (xi) and (xiii) (with respect to the captions "Description of
Capital Stock" and "Underwriting" under subparagraph (i) only), and the next-to-
last paragraph of Exhibit A (and the Representatives shall have received an
additional [___] conformed copies of such counsel's legal opinion for each of
the several Underwriters).
(f) Officers' Certificate. On each of the First Closing Date and
the Second Closing Date each Representative shall have received a written
certificate executed by the Chairman of the Board, Chief Executive Officer or
President of the Company and the Chief Financial Officer or Chief Accounting
Officer of the Company, dated as of such Closing Date, to the effect set forth
in subsections (b)(ii) and (c)(ii) of this Section 5, and further to the effect
that:
(i) for the period from and after the date of this Agreement
and prior to such Closing Date, there has not occurred any Material Adverse
Change;
(ii) the representations, warranties and covenants of the
Company set forth in Section 1 of this Agreement are true and correct with the
same force and effect as though expressly made on and as of such Closing Date;
and
(iii) the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at or
prior to such Closing Date.
(g) Bring-down Comfort Letter. On each of the First Closing Date and
the Second Closing Date each Representative shall have received from Arthur
Andersen LLP, independent public or certified public accountants for the
Company, a letter dated such date, in form and substance satisfactory to the
Representatives, to the effect that they reaffirm the statements made in the
letter furnished by them pursuant to subsection (a) of this Section 5, except
that the specified date referred to therein for the carrying out of procedures
shall be no more than three business days prior to the First Closing Date or
Second Closing Date, as the case may be (and the Representatives shall have
received an additional [___] conformed copies of such accountants' letter for
each of the several Underwriters).
(h) Lock-Up Agreement. On the date hereof, the Company shall have
furnished to the Representatives an agreement in the form of Exhibit B hereto
from each director, officer and beneficial owner (as defined and determined
according to Rule 13d-3 under the Exchange Act, except that a one hundred eighty
day period shall be used rather than the sixty day period set forth therein) of
1% or more of the total outstanding shares of Common Stock, and such agreement
shall be in full force and effect on each of the First Closing Date and the
Second Closing Date.
(i) Additional Documents. On or before each of the First Closing Date
and the Second Closing Date, the Representatives and counsel for the
Underwriters shall have received such information, documents and opinions as
they may reasonably require for the purposes of enabling them to pass upon the
issuance and sale of the Common Shares as contemplated herein, or
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in order to evidence the accuracy of any of the representations and warranties,
or the satisfaction of any of the conditions or agreements, herein contained.
If any condition specified in this Section 5 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Optional Common Shares, at any time prior
to the Second Closing Date, which termination shall be without liability on the
part of any party to any other party, except that Section 4, Section 6, Section
8 and Section 9 shall at all times be effective and shall survive such
termination.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES.
If this Agreement is terminated by the Representatives pursuant to
Section 5, Section 7, Section 10 or Section 11, or if the sale to the
Underwriters of the Common Shares on the First Closing Date is not consummated
because of any refusal, inability or failure on the part of the Company to
perform any agreement herein or to comply with any provision hereof, the Company
agrees to reimburse the Representatives and the other Underwriters (or such
Underwriters as have terminated this Agreement with respect to themselves),
severally, upon demand for all out-of-pocket expenses that shall have been
reasonably incurred by the Representatives and the Underwriters in connection
with the proposed purchase and the offering and sale of the Common Shares,
including but not limited to fees and disbursements of counsel, printing
expenses, travel expenses, postage, facsimile and telephone charges.
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT.
This Agreement shall not become effective until the later of (i) the
execution of this Agreement by the parties hereto and (ii) notification by the
Commission to the Company and the Representatives of the effectiveness of the
Registration Statement under the Securities Act.
Prior to such effectiveness, this Agreement may be terminated by any
party by notice to each of the other parties hereto, and any such termination
shall be without liability on the part of (a) the Company to any Underwriter,
except that the Company shall be obligated to reimburse the expenses of the
Representatives and the Underwriters pursuant to Sections 4 and 6 hereof, (b) of
any Underwriter to the Company, or (c) of any party hereto to any other party
except that the provisions of Section 8 and Section 9 shall at all times be
effective and shall survive such termination.
SECTION 8. INDEMNIFICATION.
(a) Indemnification of the Underwriters. The Company agrees to
indemnify and hold harmless each Underwriter, its officers and employees, and
each person, if any, who controls any Underwriter within the meaning of the
Securities Act and the Exchange Act against
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any loss, claim, damage, liability or expense, as incurred, to which such
Underwriter or such controlling person may become subject, under the Securities
Act, the Exchange Act or other federal or state statutory law or regulation, or
at common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of the Company), insofar as, and
to the extent that, such loss, claim, damage, liability or expense (or actions
in respect thereof as contemplated below) arises out of or is based (i) upon any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement, or any amendment thereto, including any information
deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the
Securities Act, or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein not
misleading; or (ii) upon any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission therefrom
of a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; or (iii)
in whole or in part upon any inaccuracy in the representations and warranties of
the Company contained herein; or (iv) in whole or in part upon any failure of
the Company to perform its obligations hereunder or under law; and to reimburse
each Underwriter and each such controlling person for any and all expenses
(including the fees and disbursements of counsel chosen by NMSL) as such
expenses are reasonably incurred by such Underwriter or such controlling person
in connection with investigating, defending, settling, compromising or paying
any such loss, claim, damage, liability, expense or action; provided, however,
that the foregoing indemnity agreement shall not apply to any loss, claim,
damage, liability or expense to the extent, but only to the extent, arising out
of or based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Company by the Representative expressly for use in
the Registration Statement, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto); and provided, further, that with respect to
any preliminary prospectus, the foregoing indemnity agreement shall not inure to
the benefit of any Underwriter from whom the person asserting any loss, claim,
damage, liability or expense purchased Common Shares, or any person controlling
such Underwriter, if copies of the Prospectus were timely delivered to the
Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Common Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or expense. The indemnity agreement
set forth in this Section 8(a) shall be in addition to any liabilities that the
Company may otherwise have.
(b) Indemnification of the Company, its Directors and Officers. Each
Underwriter agrees, severally and not jointly, to indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Securities Act or the Exchange Act, against any loss, claim,
damage, liability or expense, as incurred, to which the Company, or any such
director, officer or controlling person may become subject, under the Securities
Act, the Exchange Act, or other federal or state statutory law or regulation, or
at common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of such
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Underwriter), insofar as such loss, claim, damage, liability or expense (or
actions in respect thereof as contemplated below) arises out of or is based upon
any untrue or alleged untrue statement of a material fact contained in the
Registration Statement, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or arises out of or is 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 not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the Registration
Statement, any preliminary prospectus, the Prospectus (or any amendment or
supplement thereto), in reliance upon and in conformity with written information
furnished to the Company by the Representative expressly for use therein; and to
reimburse the Company, or any such director, officer or controlling person for
any legal and other expense reasonably incurred by the Company, or any such
director, officer or controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action. The Company hereby acknowledges that the only
information that the Underwriters have furnished to the Company expressly for
use in the Registration Statement, any preliminary prospectus or the Prospectus
(or any amendment or supplement thereto) are the statements set forth (A) as the
first paragraph on the inside front cover page of the Prospectus concerning
stabilization by the Underwriters and (B) in the table in the first paragraph
and as the second paragraph under the caption "Underwriting" in the Prospectus;
and the Underwriters confirm that such statements are correct. The indemnity
agreement set forth in this Section 8(b) shall be in addition to any liabilities
that each Underwriter may otherwise have.
(c) Notifications and Other Indemnification Procedures. Promptly
after receipt by an indemnified party under this Section 8 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 8, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 8 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select one separate counsel
to assume such legal defenses and to otherwise participate in the defense of
such action on behalf of such indemnified party or parties. Upon receipt of
notice from the indemnifying party to such indemnified party of such
indemnifying party's election to assume the defense of such action and approval
by the indemnified party of counsel (which approval shall not be unreasonably
withheld), the indemnifying party will not be liable to such indemnified party
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under this Section 8 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with local counsel), approved by the indemnifying
party (NMSL in the case of Section 8(b) and Section 9), representing the
indemnified parties who are parties to such action) or (ii) the indemnifying
party shall not have employed counsel reasonably satisfactory to the indemnified
party to represent the indemnified party within a reasonable time after notice
of commencement of the action, in each of which cases the fees and expenses of
counsel shall be at the expense of the indemnifying party.
(d) Settlements. The indemnifying party under this Section 8 shall
not be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
against any loss, claim, damage, liability or expense by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by Section
8(c) hereof, the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i) such
settlement is entered into more than 30 days after receipt by such indemnifying
party of the aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party, or provided the indemnified party with
reasonable assurance that it will reimburse the indemnifying party, in
accordance with such request prior to the date of such settlement. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement, compromise or consent to the entry of judgment in
any pending or threatened action, suit or proceeding in respect of which any
indemnified party is or could have been a party and indemnity was or could have
been sought hereunder by such indemnified party, unless such settlement,
compromise or consent includes an unconditional release of such indemnified
party from all liability on claims that are the subject matter of such action,
suit or proceeding.
SECTION 9. CONTRIBUTION.
If the indemnification provided for in Section 8 is for any reason
held to be unavailable to or otherwise insufficient to hold harmless an
indemnified party in respect of any losses, claims, damages, liabilities or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount paid or payable by such indemnified party, as incurred, as
a result of any losses, claims, damages, liabilities or expenses referred to
therein (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company, on the one hand, and the Underwriters, on the
other hand, from the offering of the Common Shares pursuant to this Agreement 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, on the one hand, and the Underwriters, on the other hand, in
connection with the statements or omissions or inaccuracies in the
representations and warranties herein which resulted in such losses, claims,
damages, liabilities or expenses, as well
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as any other relevant equitable considerations. The relative benefits received
by the Company, on the one hand, and the Underwriters, on the other hand, in
connection with the offering of the Common Shares pursuant to this Agreement
shall be deemed to be in the same respective proportions as the total net
proceeds from the offering of the Common Shares pursuant to this Agreement
(before deducting expenses) received by the Company, and the total underwriting
discount received by the Underwriters, in each case as set forth on the front
cover page of the Prospectus (or, if Rule 434 under the Securities Act is used,
the corresponding location on the Term Sheet) bear to the aggregate initial
public offering price of the Common Shares as set forth on such cover. The
relative fault of the Company, on the one hand, and the Underwriters, on the
other hand, shall be determined by reference to, among other things, whether any
such untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact or any such inaccurate or alleged
inaccurate representation or warranty relates to information supplied by the
Company, on the one hand, or the Underwriters, on the other hand, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 8(c), any legal or
other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. The provisions set forth in
Section 8(c) with respect to notice of commencement of any action shall apply if
a claim for contribution is to be made under this Section 9; provided, however,
that no additional notice shall be required with respect to any action for which
notice has been given under Section 8(c) for purposes of indemnification.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in this Section 9.
Notwithstanding the provisions of this Section 9, no Underwriter shall
be required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several, and not joint, in proportion to their
respective underwriting commitments as set forth opposite their names in
Schedule A. For purposes of this Section 9, each officer and employee of an
Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company with the meaning of the Securities Act and the Exchange
Act shall have the same rights to contribution as the Company.
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SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS.
If, on the First Closing Date or the Second Closing Date, as the case
may be, any one or more of the several Underwriters shall fail or refuse to
purchase Common Shares that it or they have agreed to purchase hereunder on such
date, and the aggregate number of Common Shares which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase does not
exceed 10% of the aggregate number of the Common Shares to be purchased on such
date, the other Underwriters shall be obligated, severally, in the proportions
that the number of Firm Common Shares set forth opposite their respective names
on Schedule A bears to the aggregate number of Firm Common Shares set forth
opposite the names of all such non-defaulting Underwriters, or in such other
proportions as may be specified by the Representatives with the consent of the
non-defaulting Underwriters, to purchase the Common Shares which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date. If, on the First Closing Date or the Second Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Common
Shares and the aggregate number of Common Shares with respect to which such
default occurs exceeds 10% of the aggregate number of Common Shares to be
purchased on such date, and arrangements satisfactory to the Representatives and
the Company for the purchase of such Common Shares are not made within 48 hours
after such default, this Agreement shall terminate without liability of any
party to any other party except that the provisions of Section 4, Section 8 and
Section 9 shall at all times be effective and shall survive such termination. In
any such case either the Representatives or the Company shall have the right to
postpone the First Closing Date or the Second Closing Date, as the case may be,
but in no event for longer than seven days in order that the required changes,
if any, to the Registration Statement and the Prospectus or any other documents
or arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
10. Any action taken under this Section 10 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
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SECTION 11. TERMINATION OF THIS AGREEMENT.
Prior to the First Closing Date this Agreement may be terminated by
the Representatives by notice given to the Company if at any time (i) trading or
quotation in any of the Company's securities shall have been suspended or
limited by the Commission or by the Nasdaq Stock Market, or trading in
securities generally on either the Nasdaq Stock Market or the New York Stock
Exchange shall have been suspended or limited, or minimum or maximum prices
shall have been generally established on any of such stock exchanges by the
Commission or the NASD; (ii) a general banking moratorium shall have been
declared by any of federal, New York, Delaware or California authorities; (iii)
there shall have occurred any outbreak or escalation of national or
international hostilities or any crisis or calamity, or any change in the United
States or international financial markets, or any substantial change or
development involving a prospective substantial change in United States' or
international political, financial or economic conditions, as in the judgment of
the Representative is material and adverse and makes it impracticable to market
the Common Shares in the manner and on the terms described in the Prospectus or
to enforce contracts for the sale of securities; (iv) in the judgment of the
Representative there shall have occurred any Material Adverse Change; or (v) the
Company shall have sustained a loss by strike, fire, flood, earthquake, accident
or other calamity of such character as in the judgment of the Representative may
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured. Any
termination pursuant to this Section 11 shall be without liability on the part
of (a) the Company to any Underwriter, except that the Company shall be
obligated to reimburse the expenses of the Representative and the Underwriters
pursuant to Sections 4 and 6 hereof, (b) any Underwriter to the Company, or (c)
of any party hereto to any other party except that the provisions of Section 8
and Section 9 shall at all times be effective and shall survive such
termination.
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY.
The respective indemnities, agreements, representations, warranties
and other statements of the Company, of its officers and of the several
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation made by or on behalf of any
Underwriter or the Company or any of its or their partners, officers or
directors or any controlling person, as the case may be, and will survive
delivery of and payment for the Common Shares sold hereunder and any termination
of this Agreement.
SECTION 13. NOTICES.
All communications hereunder shall be in writing and shall be mailed,
hand delivered or telecopied and confirmed to the parties hereto as follows:
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If to the Representative:
NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: 415-249-5558
Attention: Richard A. Smith
with a copy to:
NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: David A. Baylor, Esq.
If to the Company:
Echelon Corporation
4015 Miranda Avenue
Palo Alto, California 94304
Facsimile: (650) 856-7437
Attention: Oliver R. Stanfield
With a copy to:
Wilson Sonsini Goodrich & Rosati, Professional Corporation
650 Page Mill Road
Palo Alto, CA 94303-1050
Facsimile: (650) 493-6811
Attention: John V. Roos
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
SECTION 14. SUCCESSORS.
This Agreement will inure to the benefit of and be binding upon the
parties hereto, including any substitute Underwriters pursuant to Section 10
hereof, and to the benefit of the employees, officers and directors and
controlling persons referred to in Section 8 and Section 9, and in each case
their respective successors, and no other person will have any right or
obligation hereunder. The term "successors" shall not include any purchaser of
the Common Shares as such from any of the Underwriters merely by reason of such
purchase.
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SECTION 15. PARTIAL UNENFORCEABILITY.
The invalidity or unenforceability of any Section, paragraph or provision
of this Agreement shall not affect the validity or enforceability of any other
Section, paragraph or provision hereof. If any Section, paragraph or provision
of this Agreement is for any reason determined to be invalid or unenforceable,
there shall be deemed to be made such minor changes (and only such minor
changes) as are necessary to make it valid and enforceable.
SECTION 16. GOVERNING LAW PROVISIONS.
(a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO
BE PERFORMED IN SUCH STATE.
(b) Consent to Jurisdiction. Any legal suit, action or proceeding arising
out of or based upon this Agreement or the transactions contemplated hereby
("Related Proceedings") may be instituted in the federal courts of the United
States of America located in the City and County of San Francisco or the courts
of the State of California in each case located in the City and County of San
Francisco (collectively, the "Specified Courts"), and each party irrevocably
submits to the exclusive jurisdiction (except for proceedings instituted in
regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. Service of any process, summons, notice or
document by mail to such party's address set forth above shall be effective
service of process for any suit, action or other proceeding brought in any such
court. The parties irrevocably and unconditionally waive any objection to the
laying of venue of any suit, action or other proceeding in the Specified Courts
and irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such suit, action or other proceeding brought in any such
court has been brought in an inconvenient forum.
SECTION 17. GENERAL PROVISIONS.
This Agreement constitutes the entire agreement of the parties to this
Agreement and supersedes all prior written or oral and all contemporaneous oral
agreements, understandings and negotiations with respect to the subject matter
hereof. This Agreement may be executed in two or more counterparts, each one of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument. This Agreement may not be amended or
modified unless in writing by all of the parties hereto, and no condition herein
(express or implied) may be waived unless waived in writing by each party whom
the condition is meant to benefit. The Table of Contents and the Section
headings herein are for the convenience of the parties only and shall not affect
the construction or interpretation of this Agreement.
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Each of the parties hereto acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and is fully informed regarding said provisions. Each of the parties
hereto further acknowledges that the provisions of Sections 8 and 9 hereto
fairly allocate the risks in light of the ability of the parties to investigate
the Company, its affairs and its business in order to assure that adequate
disclosure has been made in the Registration Statement, any preliminary
prospectus and the Prospectus (and any amendments and supplements thereto), as
required by the Securities Act and the Exchange Act.
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to the Company the enclosed copies hereof, whereupon this
instrument, along with all counterparts hereof, shall become a binding agreement
in accordance with its terms.
Very truly yours,
ECHELON CORPORATION
By:____________________________
Oliver R. Stanfield
Vice President of Finance
and Chief Financial Officer
The foregoing Underwriting Agreement is hereby confirmed and accepted by
the Representatives in San Francisco, California as of the date first above
written.
NATIONSBANC MONTGOMERY SECURITIES LLC
BANCAMERICA ROBERTSON STEPHENS
VOLPE BROWN WHELAN & COMPANY, LLC
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By NATIONSBANC MONTGOMERY SECURITIES LLC
By: ______________________
[Name]
[Title]
27.
<PAGE>
SCHEDULE A
Underwriters
Number of
Firm Common Shares
to be Purchased
NationsBanc Montgomery Securities LLC
BancAmerica Robertson Stephens
Volpe Brown Whelan & Company, LLC
[___]
[___]
[___]
[___]
[___]
[___] .
[___]
Total: 5,000,000
[___]
28.
<PAGE>
EXHIBIT A
The final opinion in draft form should be attached as Exhibit A at
the time this Agreement is executed.
Opinion of counsel for the Company to be delivered pursuant to
Section 5(e) of the Underwriting Agreement.
References to the Prospectus in this Exhibit A include any
supplements thereto at the Closing Date.
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Underwriting
Agreement.
(iii) The Company is duly qualified as a foreign corporation to transact
business and is in good standing in the State of California and in each other
jurisdiction in the United States in which such qualification is required,
whether by reason of the ownership or leasing of property or the conduct of
business, except for such jurisdictions (other than the State of California)
where the failure to so qualify or to be in good standing would not,
individually or in the aggregate, result in a Material Adverse Change.
(iv) The authorized, issued and outstanding capital stock of the Company
(including the Common Stock) conform to the descriptions thereof set forth in
the Prospectus. All of the outstanding shares of Common Stock have been duly
authorized and validly issued, are fully paid and nonassessable [and, to the
best of such counsel's knowledge, have been issued in compliance with the
registration and qualification requirements of federal and state securities
laws.] The form of certificate used to evidence the Common Stock is in due and
proper form and complies with all applicable requirements of the charter and by-
laws of the Company and the General Corporation Law of the State of Delaware.
The description of the Company's stock option, stock bonus and other stock plans
or arrangements, and the options or other rights granted and exercised
thereunder, set forth in the Prospectus accurately and fairly presents in all
material respects the information required to be shown with respect to such
plans, arrangements, options and rights.
(v) No stockholder of the Company or any other person has any preemptive
right, right of first refusal or other similar right to subscribe for or
purchase securities of the Company arising (i) by operation of the charter or
by-laws of the Company or the General Corporation Law of the State of Delaware
or (ii) to the best knowledge of such counsel, otherwise.
(vi) The Underwriting Agreement has been duly authorized, executed and
delivered by the Company.
29.
<PAGE>
(vii) The Common Shares to be purchased by the Underwriters from the
Company have been duly authorized for issuance and sale pursuant to the
Underwriting Agreement and, when issued and delivered by the Company pursuant to
the Underwriting Agreement against payment of the consideration set forth
therein, will be validly issued, fully paid and nonassessable.
(viii) The Registration Statement and the Rule 462(b) Registration
Statement, if any, has been declared effective by the Commission under the
Securities Act. To the best knowledge of such counsel, no stop order suspending
the effectiveness of either of the Registration Statement or the Rule 462(b)
Registration Statement, if any, has been issued under the Securities Act and no
proceedings for such purpose have been instituted or are pending or are
contemplated or threatened by the Commission. Any required filing of the
Prospectus and any supplement thereto pursuant to Rule 424(b) under the
Securities Act has been made in the manner and within the time period required
by such Rule 424(b).
(ix) The Registration Statement, including any Rule 462(b) Registration
Statement, the Prospectus, and each amendment or supplement to the Registration
Statement and the Prospectus, as of their respective effective or issue dates
(other than the financial statements and supporting schedules included therein
or in exhibits to or excluded from the Registration Statement, as to which no
opinion need be rendered) comply as to form in all material respects with the
applicable requirements of the Securities Act.
(x) The Common Shares have been approved for quotation on the Nasdaq
National Market.
(xi) The statements (i) in the Prospectus under the captions "Risk
Factors--Anti-Takeover Provisions", "Description of Capital Stock", "Shares
Eligible for Future Sale" and "Underwriting" and (ii) in Item 14 and Item 15 of
the Registration Statement, insofar as such statements constitute matters of
law, summaries of legal matters, the Company's charter or by-law provisions,
documents or legal proceedings, or legal conclusions, has been reviewed by such
counsel and fairly present and summarize, in all material respects, the matters
referred to therein.
(xii) To the best knowledge of such counsel, there are no legal or
governmental actions, suits or proceedings pending or threatened which are
required to be disclosed in the Registration Statement, other than those
disclosed therein.
(xiii) To the best knowledge of such counsel, there are no Existing
Instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or incorporated by reference; and the descriptions thereof
and references thereto are correct in all material respects.
(xiv) No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority or
agency, is required for the Company's execution, delivery and performance of the
Underwriting Agreement and consummation of the transactions
30.
<PAGE>
contemplated thereby and by the Prospectus, except as required under the
Securities Act, applicable state securities or blue sky laws and from the NASD.
(xv) The execution and delivery of the Underwriting Agreement by the
Company and the performance by the Company of its obligations thereunder (other
than performance by the Company of its obligations under the indemnification
section of the Underwriting Agreement, as to which no opinion need be rendered)
(i) have been duly authorized by all necessary corporate action on the part of
the Company; (ii) will not result in any violation of the provisions of the
charter or by-laws of the Company; (iii) will not constitute a breach of, or
Default under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company pursuant to, any Existing
Instrument or document filed as an exhibit to the Registration Statement or
listed on Annex A Hereto; or (iv) to the knowledge of such counsel, will not
result in any violation of any law, administrative regulation or administrative
or court decree applicable to the Company or any subsidiary.
(xvi) The Company is not, and after receipt of payment for the Common
Shares will not be, an "investment company" within the meaning of Investment
Company Act.
(xvii) Except as disclosed in the Prospectus under the caption "Shares
Eligible for Future Sale", to the best knowledge of such counsel, there are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by the Underwriting Agreement, except for such rights
as have been duly waived.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public or certified public accountants for
the Company and with representatives of the Underwriters at which the contents
of the Registration Statement and the Prospectus, and any supplements or
amendments thereto, and related matters were discussed and, although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus (other than as specified above), and
any supplements or amendments thereto, on the basis of the foregoing, nothing
has come to their attention which would lead them to believe that either the
Registration Statement or any amendments thereto, at the time the Registration
Statement or such amendments became effective, contained an untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus, as of its date or at the First Closing Date or the Second Closing
Date, as the case may be, contained an untrue statement of a material fact or
omitted to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no belief as to
the financial statements or schedules or other financial or statistical data
derived therefrom, included in the Registration Statement or the Prospectus or
any amendments or supplements thereto).
In addition, patent counsel to the Company (reasonably satisfactory
to the Underwriters) shall opine that the statements in the Prospectus under the
captions "Risk Factors--Limited Protection of Intellectual Property Rights" and
"Business--Intellectual Property", insofar as such statements relate to patents
and patent law matters, have been revised by such counsel and fairly present and
summarize, in all material respects, the matters referred to therein.
In rendering such opinions, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the General
Corporation Law of the State of
31.
<PAGE>
Delaware, the General Corporation Law of the State of California or the federal
law of the United States, to the extent they deem proper and specified in such
opinion, upon the opinion (which shall be dated the First Closing Date or the
Second Closing Date, as the case may be, shall be satisfactory in form and
substance to the Underwriters, shall expressly state that the Underwriters may
rely on such opinion as if it were addressed to them and shall be furnished to
the Representative) of other counsel of good standing whom they believe to be
reliable and who are satisfactory to counsel for the Underwriters; provided,
however, that such counsel shall further state that they believe that they and
the Underwriters are justified in relying upon such opinion of other counsel,
and (B) as to matters of fact, to the extent they deem proper, on certificates
of responsible officers of the Company and public officials.
32.
<PAGE>
EXHIBIT B
[Date]
NationsBanc Montgomery Securities LLC
BancAmerica Robertson Stephens
Volpe Brown Whelan & Company, LLC
As Representatives of the Several Underwriters
c/o NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
RE: (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company ("Common Stock") or securities convertible into or
exchangeable or exercisable for Common Stock. The Company proposes to carry out
a public offering of Common Stock (the "Offering") for which you will act as the
representatives of the underwriters. The undersigned recognizes that the
Offering will be of benefit to the undersigned and will benefit the Company (by,
among other things, raising additional capital for its operations). The
undersigned acknowledges that you and the other underwriters are relying on the
representations and agreements of the undersigned contained in this letter in
carrying out the Offering and in entering into underwriting arrangements with
the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of NMSL (which consent
may be withheld in its sole discretion), directly or indirectly, sell, offer,
contract or grant any option to sell (including without limitation any short
sale), pledge, transfer, establish an open "put equivalent position" within the
meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, or otherwise
dispose of any shares of Common Stock, options or warrants to acquire shares of
Common Stock, or securities exchangeable or exercisable for or convertible into
shares of Common Stock currently or hereafter owned either of record or
beneficially (as defined in Rule 13d-3 under Securities Exchange Act of 1934, as
amended) by the undersigned, or publicly announce the undersigned's intention to
do any of the foregoing, for a period commencing on the date hereof and
continuing through the close of trading on the date 180 days after the date of
the Prospectus. The undersigned also agrees and consents to the entry of stop
transfer instructions with the Company's transfer agent and registrar against
the transfer of shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock held by the undersigned except in
compliance with the foregoing restrictions.
With respect to the Offering only, the undersigned waives any registration
rights relating to registration under the Securities Act of any Common Stock
owned either of record or beneficially by the undersigned, including any rights
to receive notice of the Offering.
33.
<PAGE>
This agreement is irrevocable and will be binding on the undersigned and
the respective successors, heirs, personal representatives, and assigns of the
undersigned.
Printed Name of Holder
By: _____________________
Signature
Printed Name of Person Signing
(and indicate capacity of person signing if
signing as custodian, trustee, or on behalf
of an entity)
34.
<PAGE>
EXHIBIT C
Lock-Up Arrangements
35.
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ECHELON CORPORATION
Echelon Corporation, a corporation organized and existing under the laws of
the State of Delaware (the "Corporation"), certifies that:
A. The name of the Corporation is Echelon Corporation. Echelon
Corporation was originally incorporated under the name Echelon Systems, Inc.,
and the original Certificate of Incorporation was filed with the Secretary of
State of the State of Delaware on December 7, 1988.
B. Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, this Amended and Restated Certificate restates, integrates
and further amends the provisions of the Corporation's Certificate of
Incorporation.
C. The text of the Amended and Restated Certificate of Incorporation as
heretofore amended or supplemented is restated and further amended to read as
follows:
ONE. The name of this Corporation is Echelon Corporation.
---
TWO. The address of the Corporation's registered office in the State
---
of Delaware is The Corporation Trust Company, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of its registered agent at such
office is The Corporation Trust Company.
THREE. The nature of the business or purposes to be conducted by this
-----
Corporation is to engage in any lawful act or activity for which a corporation
may be organized under the General Corporation Law of Delaware.
FOUR. This Corporation is authorized to issue two classes of shares to
----
be designated respectively Common Stock and Preferred Stock. The total number of
shares of Common Stock this Corporation shall have authority to issue is
50,000,000, with par value of $0.01 per share, and the total number of shares of
Preferred Stock this Corporation shall have authority to issue is 11,000,000,
with par value of $0.01 per share. Of the Preferred Stock, 1,250,000 shares
shall be designated Series B Preferred Stock ("Series B Stock"), 1,608,000
shares shall be designated Series C Preferred Stock ("Series C Stock") and
3,172,000 shares shall be designated Series D Preferred Stock ("Series D
Stock").
The undesignated 4,970,000 shares of Preferred Stock may be issued from
time to time in one or more series. The Board of Directors is authorized to
determine the number of shares of any such series. The Board of Directors is
also authorized to determine or alter the powers, designations, preferences,
rights and restrictions to be imposed upon any wholly unissued series of
Preferred Stock and, within the limits and restrictions stated in any resolution
or resolutions of the Board of Directors
<PAGE>
originally fixing the number of shares constituting any series, to increase (but
not above the total number of authorized shares of the class) or decrease (but
not below the number of shares of such series then outstanding) the number of
shares of any series subsequent to the issue of shares of that series.
The Corporation shall from time to time in accordance with the laws of the
State of Delaware increase the authorized amount of its Common Stock if at any
time the number of shares of Common Stock remaining unissued and available for
issuance shall not be sufficient to permit conversion of the Preferred Stock.
The rights, preferences, privileges and restrictions granted to or imposed
on the Common Stock and Preferred Stock are as follows:
1. Dividends. The holders of the Preferred Stock shall be entitled to
---------
receive when and as declared by the Board of Directors out of any funds legally
available therefor, dividends at the rate of (i) $0.48 per share per annum, on
each outstanding share of Series B Preferred Stock ("Series B Stock"), (ii)
$0.622 per share per annum, on each outstanding share of Series C Preferred
Stock ("Series C Stock") and (iii) $0.80 per share per annum, on each share of
Series D Stock, adjusted for any combinations, consolidations, or stock
distributions or dividends with respect to such shares. No dividends (other than
those payable solely in Common Stock) shall be paid with respect to the Common
Stock during any fiscal year of the Corporation until dividends in the total
amount of $0.48 per share on the Series B Stock, $0.622 per share on the Series
C Stock and $0.80 per share on the Series D Stock (adjusted for any
combinations, consolidations, or stock distributions or dividends with respect
to such shares) shall have been paid or declared and set apart during that
fiscal year. Dividends on the Series B Stock, Series C Stock and Series D Stock
shall not be cumulative and no rights shall accrue to the holders of Series B
Stock, Series C Stock and Series D Stock in the event that the Corporation shall
fail to declare or pay dividends on the Series B Stock in the amount of $0.48
per share, the Series C Stock in the amount of $0.622 per share or the Series D
Stock in the amount of $0.80 per share (adjusted for any combinations,
consolidations, or stock distributions or dividends with respect to such shares)
or in any amount in any previous fiscal year of the Corporation, whether or not
the earnings of the Corporation in that previous fiscal year were sufficient to
pay such dividends in whole or in part. After dividends in the amount of $0.48
per share on the Series B Stock, dividends in the amount of $0.622 per share on
the Series C Stock and dividends in the amount of $0.80 per share on the Series
D Stock (adjusted for any combinations, consolidations, or stock distributions
or dividends with respect to such shares) have been paid or declared and set
apart in any one fiscal year of the Corporation, if the Board shall elect to
declare additional dividends out of funds legally available therefor in that
fiscal year, such additional dividends shall be declared solely on the Common
Stock.
2. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, the holders of Preferred Stock
shall be entitled to receive, prior and
-2-
<PAGE>
in preference to any distribution of any of the assets or surplus funds of the
Corporation to the holders of the Common Stock by reason of their ownership of
such stock, the amount of (i) $6.00 per share for each share of Series B Stock
then held by them, (ii) $7.7736 per share for each share of Series C Stock then
held by them and (iii) $10.00 per share for each share of Series D Stock then
held by them (adjusted for any combinations, consolidations, or stock
distributions or dividends with respect to such shares), and, in addition, the
amount of any declared but unpaid dividends on each share of Preferred Stock
then held by them.
(b) If upon the occurrence of such event, the assets and funds thus
distributed among the holders of the Preferred Stock shall be insufficient to
permit the payment to such holders of the full aforesaid preferential amount,
then the entire assets and funds of the Corporation legally available for
distribution shall be distributed among the holders of the Preferred Stock in
proportion to the aggregate preferential amount of all shares of Preferred Stock
then held by them bears to the aggregate preferential amount of all shares of
Preferred Stock outstanding as of the date of the distribution upon the
occurrence of such event.
(c) In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, after payment has been made to
the holders of Preferred Stock of the full amounts to which they shall be
entitled as aforesaid, the holders of Common Stock shall be entitled to share
ratably in the remaining assets, based on the number of shares of Common Stock
held.
(d) For purposes of this Section 2, a consolidation or merger of the
Corporation with and into any other corporation or corporations, or a sale of
all or substantially all of the assets of the Corporation, or a reorganization
of the Corporation in which more than fifty percent (50%) of the outstanding
stock of the Corporation is exchanged, shall be treated as a liquidation,
dissolution or winding up within the meaning of this paragraph.
3. Voting Rights. The holders of shares of Preferred Stock shall have
-------------
the following voting rights:
(a) Subject to the provision for adjustment hereinafter set forth,
the holder of each share of Preferred Stock shall be entitled to the number of
votes equal to the number of shares of Common Stock into which such share of
Preferred Stock could be converted at the record date for the determination of
the stockholders entitled to vote on such matters, or, if no such record date is
established, at the date such vote is taken or any written consent of the
stockholders is solicited. Holders of Preferred Stock shall be entitled to
notice of any stockholders' meeting in accordance with the Bylaws of the
Corporation. Fractional votes by the holders of Preferred Stock shall not,
however, be permitted and any fractional voting rights shall (after aggregating
all shares into which shares of Preferred Stock held by each holder could be
converted) be rounded to the nearest whole number.
(b) Except as otherwise provided herein or by law, the holders of
shares of Preferred Stock and the holders of shares of Common Stock shall vote
together as one class on all
-3-
<PAGE>
matters submitted to a vote of stockholders of the Corporation, and except as
required by law, holders of Preferred Stock shall have no special voting rights.
4. Conversion. The holders of Preferred Stock shall have conversion
----------
rights as follows (the "Conversion Rights"):
(a) Right to Convert. Subject to the adjustment provisions of this
----------------
Section 4, each share of Preferred Stock shall be convertible, at the option of
the holder and without payment of additional consideration, at any time after
the date of issuance of such share at the office of the Corporation or any
transfer agent for such stock, into such number of fully paid and nonassessable
shares of Common Stock, as is determined (i) in the case of Series B Stock, by
dividing $6.00 by the Series B Conversion Price, (ii) in the case of the Series
C Stock, by dividing $7.7736 by the Series C Conversion Price, and (iii) in the
case of the Series D Stock, by dividing $10.00 by the Series D Conversion Price,
determined as hereinafter provided, in effect at the time of the conversion. The
respective prices at which shares of Common Stock shall be deliverable upon
conversion of shares of each series of Preferred Stock shall initially be $6.00
with respect to shares of Series B Stock (the "Series B Conversion Price"),
$7.7736 with respect to shares of Series C Stock (the "Series C Conversion
Price"), and $10.00 with respect to shares of Series D Stock (the "Series D
Conversion Price"). The term "Conversion Price" as used herein shall refer to
the Series B Conversion Price, the Series C Conversion Price and the Series D
Conversion Price, as applicable. The initial Conversion Price shall be subject
to adjustment as hereinafter provided.
(b) Automatic Conversion. Each share of Preferred Stock shall
--------------------
automatically be converted into shares of Common Stock at the then effective
Conversion Price:
(i) upon the affirmative vote of the holders of a majority of
the outstanding Preferred Stock voting together as a single class to cause all
outstanding shares of Preferred Stock to be converted.
(ii) upon the closing of a firm commitment underwritten public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended, covering the offer and sale of equity securities for
the account of the Corporation to the public at an aggregate price (prior to
underwriter's commissions and offering expenses) of not less than $15,000,000.
In the event of the automatic conversion of the Preferred Stock upon a public
offering as aforesaid, the person(s) entitled to receive the Common Stock
issuable upon such conversion of the Preferred Stock shall not be deemed to have
converted such Preferred Stock until immediately prior to the closing of such
sale of securities.
(c) Mechanics of Conversion. No fractional shares of Common Stock
-----------------------
shall be issued upon conversion of the Preferred Stock. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the then
effective Conversion Price. Before any holder of Preferred Stock shall be
entitled to convert the same into full shares of Common Stock and to receive
certificates therefor, he shall surrender the
-4-
<PAGE>
certificate or certificates therefor, duly endorsed, at the office of the
Corporation or of any transfer agent for the Preferred Stock, and shall give
written notice to the Corporation at such office that he elects to convert the
same; provided, however, that in the event of an automatic conversion pursuant
to Section 4(b), the outstanding shares of Preferred Stock shall be converted
automatically without any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to the
Corporation or its transfer agent, and provided further that the Corporation
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon such automatic conversion unless the certificates evidencing
such shares of Preferred Stock are either delivered to the Corporation or its
transfer agent as provided above, or the holder notifies the Corporation or its
transfer agent that such certificates have been lost, stolen or destroyed and
executes an agreement satisfactory to the Corporation to indemnify the
Corporation from any loss incurred by it in connection with such certificates.
The Corporation shall, as soon as practicable after such delivery, or such
agreement and indemnification in the case of a lost certificate, issue and
deliver at such office to such holder of Preferred Stock, a certificate or
certificates for the number of shares of Common Stock to which he shall be
entitled as aforesaid and a check payable to the holder in the amount of any
cash amounts payable as the result of a conversion into fractional shares of
Common Stock. Such conversion shall be deemed to have been immediately prior to
the close of business on the date of such surrender of the shares of Preferred
Stock to be converted, or in the case of automatic conversion on the date of
closing of the offering, and the person or persons entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock on such
date.
(d) Adjustments to Conversion Price for Diluting Issues.
---------------------------------------------------
(i) Adjustments for Subdivisions, Combinations or Consolidation
-----------------------------------------------------------
of Common Stock. In the event the outstanding shares of Common Stock shall be
- ---------------
subdivided (by stock split, stock dividends or otherwise), into a greater number
of shares of Common Stock, the Conversion Price then in effect shall,
concurrently with the effectiveness of such subdivision, be proportionately
decreased. In the event the outstanding shares of Common Stock shall be combined
or consolidated, by reclassification or otherwise, into a lesser number of
shares of Common Stock, the Conversion Price then in effect shall, concurrently
with the effectiveness of such combination or consolidation, be proportionately
increased.
(ii) Adjustments for Stock Dividends and Other Distributions. In
-------------------------------------------------------
the event the Corporation at any time or from time to time makes, or fixes a
record date for the determination of holders of Common Stock entitled to receive
any distribution (excluding any repurchases of securities by the Corporation not
made on a pro-rata basis from all holders of any class of the Corporation's
securities) payable in property or in securities of the Corporation other than
shares of Common Stock, and other than as otherwise adjusted in this Section 4
or as provided in Section 1, then and in each such event the holders of
Preferred Stock shall receive at the time of such distribution, the amount of
property or the number of securities of the Corporation that they would have
received had their Preferred Stock been converted into Common stock on the date
of such event.
-5-
<PAGE>
(iii) Adjustments for Reclassification, Exchange and
----------------------------------------------
Substitution. Except as provided in Section 2 upon any liquidation, dissolution
- ------------
or winding up of the Corporation, if the Common Stock issuable upon conversion
of the Preferred Stock shall be changed into the same or a different number of
shares of any other class or classes of stock, whether by capital
reorganization, reclassification or otherwise (other than a subdivision or
combination of shares provided for above), the Conversion Price then in effect
shall, concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted such that the Preferred Stock
shall be convertible into, in lieu of the number of shares of Common Stock which
the holders would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock equivalent to the number of shares of
Common Stock that would have been subject to receipt by the holders upon
conversion of the Preferred Stock immediately before that exchange.
(e) No Impairment. The Corporation will not, by amendment of its
-------------
Amended and Restated Certificate of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities, or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed under this
certificate by the Corporation, but will at all times in good faith assist in
the carrying out of all the provisions of Section 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Preferred Stock against impairment.
(f) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Conversion Price pursuant to Section 4, the
Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms of this certificate and cause
independent public accountants selected by the Corporation to verify such
computation and prepare and furnish to each holder of Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Corporation
shall, upon the written request at any time of any holder of Preferred Stock,
furnish or cause to be furnished to such holder a like certificate setting forth
(i) such adjustments and readjustments, (ii) the Conversion Price at the time in
effect, and (iii) the number of shares of Common Stock and the amount, if any,
of other property that at the time would be received upon the conversion of the
Preferred Stock.
(g) Notices of Record Date. In the event of any taking by the
----------------------
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders of such securities who are entitled to
receive any dividend or other distribution whether in cash, property, stock or
other securities, or any right to subscribe for, purchase, or otherwise acquire
any shares of stock of any class or any other securities or property, or to
receive any other right, the Corporation shall mail to each holder of Preferred
Stock at least twenty (20) days prior to the date specified in such notice, a
notice specifying the date on which any such record is to be taken for the
purpose of such dividend, distribution, or rights, and the amount and character
of such dividend, distribution, or right.
-6-
<PAGE>
(h) Reservation of Stock Issuable Upon Conversion. The Corporation
---------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of the Preferred Stock such number of its shares of Common Stock as shall
from time to time be sufficient to effect the conversion of all outstanding
shares of the Preferred Stock. If at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of all then outstanding shares of the Preferred Stock, the Corporation will take
such corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose.
(i) Notices. Any notice required by the provisions of Section 4 to be
-------
given to the holders of shares of Preferred Stock shall be deemed given if
deposited in the United States mail, postage prepaid, and addressed to each
holder of record at his address appearing on the books of the Corporation.
(j) Status of Converted Shares. In the event any shares of Preferred
--------------------------
Stock shall be converted pursuant to Section 4, the shares so converted shall be
cancelled and shall not be reissuable by the Corporation.
5. Amendment. The Amended and Restated Certificate of Incorporation of
---------
the Corporation shall not be further amended without the affirmative vote of the
holders of a majority of the outstanding shares of Preferred Stock, voting
separately as a class, if the amendment would (i) increase or decrease the
aggregate number of authorized shares of Preferred Stock, (ii) increase or
decrease the par value of the shares of Preferred Stock, or (iii) alter or
change the powers, preferences or special rights of the shares of Preferred
Stock so as to affect them adversely.
FIVE. The Corporation is to have perpetual existence.
----
SIX. In furtherance and not in limitation of the powers conferred by
---
statute, the Board of Directors is expressly authorized to make, alter, amend or
repeal the Bylaws of the Corporation.
SEVEN. The number of directors of the Corporation shall be not less
-----
than five (5) nor more than seven (7). The exact number of directors shall be as
set forth in the Bylaws of the Corporation.
EIGHT. Vacancies existing in the Board of Directors for any reason,
-----
and any directorships resulting from any increase in the authorized number of
directors, may be filled between annual meetings of stockholders only by the
Board of Directors acting according to the procedures for the filling of
vacancies set forth in the Bylaws of the Corporation.
NINE. This Article shall become effective immediately upon the
----
Corporation's no longer being subject to Section 2115 of the California
Corporations Code. Upon the effectiveness of
-7-
<PAGE>
this Article, the Board of Directors shall be divided into three classes
consisting of as nearly equal numbers of directors as possible, and designated
Class A, Class B, and Class C. The term of office of Class A shall expire at the
first annual meeting of stockholders following the effectiveness of this
Article, and each third annual meeting of stockholders thereafter; the term of
office of Class B shall expire at the second annual meeting of stockholders
following the effectiveness of this Article, and each third annual meeting of
stockholders thereafter; and the term of office of Class C shall expire at the
third annual meeting of stockholders following the effectiveness of this
Article, and each third annual meeting of stockholders thereafter. If Section
2115 of the California Corporations Code becomes inapplicable to the Corporation
upon the occurrence of an annual stockholders meeting, then the election of
directors at such meeting shall be in accordance with the terms set forth in
this Article NINE. If Section 2115 of the California Corporations Code becomes
inapplicable to the Corporation between annual meetings of stockholders, then as
soon as practicable following the effectiveness of this Article, the directors
then in office shall by resolution of the Board of Directors select which of
such directors shall be Class A directors, Class B directors and Class C
directors. Directors added to the board of directors between annual meetings of
stockholders by reason of an increase in the authorized number of directors
shall belong to the class designated by the Board of Directors; provided however
that the number of board seats designated to belong to Class A, Class B and
Class C must be as nearly equal in number as possible. Following the
effectiveness of this Article, stockholders may effect the removal of a director
only for cause. This provision shall supersede any provision to the contrary in
the Corporation's Bylaws.
TEN. At all elections of directors of the Corporation, if any holder
---
of stock of this Corporation entitled to vote at an election of directors shall
have given the Corporation notice in accordance with the manner therefor set
forth in the Corporation's Bylaws of such holder's intention to cumulate his or
her votes for the election of directors, then each holder of stock or of any
class or classes or of a series or series thereof shall be entitled to as many
votes as shall equal the number of votes which (except for this provision as to
cumulative voting) such holder would be entitled to cast for the election of
directors with respect to his or her shares of stock multiplied by the number of
directors to be elected, and the holder may cast all of such votes for a single
director or may distribute them among the number of directors to be voted for,
or for any two or more of them as such holder may see fit.
ELEVEN. Article TEN of this Amended and Restated Certificate of
------
Incorporation, providing for cumulative voting, shall cease to be effective
immediately upon the Corporation's no longer being subject to Section 2115 of
the California Corporations Code, and any provision to the contrary in the
Bylaws of the Corporation shall then be null and void.
TWELVE. Anything in this Amended and Restated Certificate of
------
Incorporation to the contrary notwithstanding, neither the provisions of this
Article nor the provisions of Article ELEVEN (elimination of cumulative voting),
Article NINE (classification of the Board of Directors), or Article SEVEN
(authorized number of directors) of this Amended and Restated Certificate of
Incorporation nor the provisions of Section 2.3 (special meeting), Section 2.15
(advance notice of stockholder nominees), Section 2.16 (advance notice of
stockholder business), or Section 9.2 (super-
-8-
<PAGE>
majority vote) of the Bylaws shall be repealed or amended, nor shall any
provision inconsistent with the aforementioned provisions be adopted and added
to this Amended and Restated Certificate of Incorporation or the Bylaws except
upon the affirmative vote of not less than two-thirds of the shares of the
Corporation issued and outstanding.
THIRTEEN. Meetings of stockholders may be held within or without the
--------
State of Delaware, as the Bylaws may provide. The books of the Corporation may
be kept (subject to any provision contained in the statutes) outside the State
of Delaware at such place or places as may be designated from time to time by
the Board of Directors or in the Bylaws of the Corporation.
FOURTEEN. To the fullest extent permitted by the Delaware General
--------
Corporation Law, a director of the Corporation shall not be personally liable to
the Corporation or its stock holders for monetary damages for breach of
fiduciary duty as a director, except to the extent such exception from liability
or limitation thereof is not permitted under the Delaware Corporation Law as the
same exists or may hereafter be amended. Neither any amendment nor repeal of
this Article FOURTEEN, nor the adoption of any provision of this Amended and
Restated Certificate of Incorporation inconsistent with this Article FOURTEEN,
shall eliminate or reduce the effect of this Article FOURTEEN in respect of any
matter occurring, or any cause of action, suit or claim that, but for this
Article FOURTEEN, would accrue or arise, prior to such amendment, repeal or
adoption of an inconsistent provision.
FIFTEEN. Advance notice of new business and stockholder nominations
-------
for the election of directors shall be given in the manner and to the extent
provided in the Bylaws of the Corporation. Election of directors need not be by
written ballot unless the Bylaws of the Corporation shall so provide.
SIXTEEN. The Corporation reserves the right to amend, alter, change
-------
or repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
-9-
<PAGE>
IN WITNESS WHEREOF, Echelon Corporation has caused this Amended and
Restated Certificate of Incorporation to be signed by M. Kenneth Oshman, its
President, and attested by Oliver R. Stanfield, its Assistant Secretary, this
29th day of September, 1995.
ECHELON CORPORATION
_______________________________
M. Kenneth Oshman, President
ATTEST:
_______________________________
Oliver R. Stanfield,
Assistant Secretary
-10-
<PAGE>
CERTIFICATE OF DESIGNATION OF RIGHTS, PREFERENCES
AND PRIVILEGES OF
SERIES E PREFERRED STOCK
OF
ECHELON CORPORATION
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
I, M. Kenneth Oshman, the Chief Executive Officer of Echelon Corporation, a
corporation organized and existing under the General Corporation Law of the
State of Delaware, in accordance with the provisions of Section 103 thereof, DO
HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by the
Restated and Amended Certificate of Incorporation of the said Corporation, the
said Board of Directors on February 11, 1997 and April 4, 1997 adopted the
following resolution creating a series of 2,400,000 shares of Preferred Stock
designated as Series E Preferred Stock:
RESOLVED: That pursuant to the authority vested in the Board of Directors
--------
of the Corporation by the Certificate of Incorporation, the Board of Directors
does hereby provide for the issue of a series of Preferred Stock, $.01 par
value, of the Corporation, to be designated Series E Preferred Stock ("Series E
Stock"), initially consisting of 2,400,000 shares and to the extent that the
designations, powers, preferences and relative and other special rights and the
qualifications, limitations and restrictions of the Series E Stock are not
stated and expressed in the Certificate of Incorporation, does hereby fix and
herein state and express such designations, powers, preferences and relative and
other special rights and the qualifications, limitations and restrictions
thereof, as follows (all terms used herein which are defined in the Certificate
of Incorporation shall be deemed to have the meanings provided therein):
Section 1. Designation and Amount. The shares of such series shall be
----------------------
designated as "Series E Stock", par value $.01 per share, and the number of
shares constituting such series shall be 2,400,000.
Section 2. Dividends. The holders of the Preferred Stock shall be
---------
entitled to receive when and as declared by the Board of Directors out of any
funds legally available therefor, dividends at the rate of (i) $0.48 per share
per annum, on each outstanding share of Series B Preferred Stock ("Series B
Stock"), (ii) $0.622 per share per annum, on each outstanding share of Series C
Preferred Stock ("Series C Stock"), (iii) $0.80 per share per annum, on each
share of Series D Preferred Stock ("Series D Stock") and $0.40 per share per
annum, on each share of Series E Stock, adjusted for any combinations,
consolidations, or stock distributions or dividends with respect to such shares.
No
<PAGE>
dividends (other than those payable solely in Common Stock) shall be paid with
respect to the Common Stock during any fiscal year of the Corporation until
dividends in the total amount of $0.48 per share on the Series B Stock, $0.622
per share on the Series C Stock, $0.80 per share on the Series D Stock and $0.40
per share on the Series E Stock (adjusted for any combinations, consolidations,
or stock distributions or dividends with respect to such shares) shall have been
paid or declared and set apart during that fiscal year. Dividends on the Series
B Stock, Series C Stock, Series D Stock and Series E Stock shall not be
cumulative and no rights shall accrue to the holders of Series B Stock, Series C
Stock, Series D Stock and Series E Stock in the event that the Corporation shall
fail to declare or pay dividends on the Series B Stock in the amount of $0.48
per share, the Series C Stock in the amount of $0.622 per share, the Series D
Stock in the amount of $0.80 per share or the Series E Stock in the amount of
$0.40 per share (adjusted for any combinations, consolidations, or stock
distributions or dividends with respect to such shares) or in any amount in any
previous fiscal year of the Corporation, whether or not the earnings of the
Corporation in that previous fiscal year were sufficient to pay such dividends
in whole or in part. After dividends in the amount of $0.48 per share on the
Series B Stock, dividends in the amount of $0.622 per share on the Series C
Stock, dividends in the amount of $0.80 per share on the Series D Stock and
dividends in the amount of $0.40 per share on the Series E Stock (adjusted for
any combinations, consolidations, or stock distributions or dividends with
respect to such shares) have been paid or declared and set apart in any one
fiscal year of the Corporation, if the Board shall elect to declare additional
dividends out of funds legally available therefor in that fiscal year, such
additional dividends shall be declared solely on the Common Stock.
Section 3. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, the holders of Preferred Stock
shall be entitled to receive, prior and in preference to any distribution of any
of the assets or surplus funds of the Corporation to the holders of the Common
Stock by reason of their ownership of such stock, the amount of (i) $6.00 per
share for each share of Series B Stock then held by them, (ii) $7.7736 per share
for each share of Series C Stock then held by them, (iii) $10.00 per share for
each share of Series D Stock then held by them and (iv) $5.00 per share for each
share of Series E Stock then held by them (adjusted for any combinations,
consolidations, or stock distributions or dividends with respect to such
shares), and, in addition, the amount of any declared but unpaid dividends on
each share of Preferred Stock then held by them.
(b) If upon the occurrence of such event, the assets and funds thus
distributed among the holders of the Preferred Stock shall be insufficient to
permit the payment to such holders of the full aforesaid preferential amount,
then the entire assets and funds of the Corporation legally available for
distribution shall be distributed among the holders of the Preferred Stock in
proportion to the aggregate preferential amount of all shares of Preferred Stock
then held by them bears to the aggregate preferential amount of all shares of
Preferred Stock outstanding as of the date of the distribution upon the
occurrence of such event.
-2-
<PAGE>
(c) In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, after payment has been made to
the holders of Preferred Stock of the full amounts to which they shall be
entitled as aforesaid, the holders of Common Stock shall be entitled to share
ratably in the remaining assets, based on the number of shares of Common Stock
held.
(d) For purposes of this Section 3, a consolidation or merger of the
Corporation with and into any other corporation or corporations, or a sale of
all or substantially all of the assets of the Corporation, or a reorganization
of the Corporation in which more than fifty percent (50%) of the outstanding
stock of the Corporation is exchanged, shall be treated as a liquidation,
dissolution or winding up within the meaning of this paragraph.
Section 4. Voting Rights. The holders of shares of Series E Stock shall
-------------
have the following voting rights:
(a) Subject to the provision for adjustment hereinafter set forth, the
holder of each share of Series E Stock shall be entitled to the number of votes
equal to the number of shares of Common Stock into which such share of Series E
Stock could be converted at the record date for the determination of the
stockholders entitled to vote on such matters, or, if no such record date is
established, at the date such vote is taken or any written consent of the
stockholders is solicited. Holders of Series E Stock shall be entitled to notice
of any stockholders' meeting in accordance with the Bylaws of the Corporation.
Fractional votes by the holders of Series E Stock shall not, however be
permitted and any fractional voting rights shall (after aggregating all shares
into which shares of Series E Stock held by each holder could be converted) be
rounded to the nearest whole number.
(b) Except as otherwise provided herein or by law, the holders of
shares of Preferred Stock and the holders of shares of Common Stock shall vote
together as one class on all matters submitted to a vote of stockholders of the
Corporation, and except as required by law, holders of Preferred Stock shall
have no special voting rights.
Section 5. Conversion. The holders of Series E Stock shall have
----------
conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Subject to the adjustment provisions of this
----------------
Section 5, each share of Series E Stock shall be convertible, at the option of
the holder and without payment of additional consideration, at any time after
the date of issuance of such share at the office of the Corporation or any
transfer agent for such stock, into such number of fully paid and nonassessable
shares of Common Stock, as is determined by dividing $5.00 by the Series E
Conversion Price, determined as hereinafter provided, in effect at the time of
the conversion. The price at which shares of Common Stock shall be deliverable
upon conversion of shares of Series E Stock shall initially be $5.00 (the
"Series E Conversion Price"). The term "Conversion Price" as used herein shall
refer to the Series E Conversion Price. The initial Conversion Price shall be
subject to adjustment as hereinafter provided.
-3-
<PAGE>
(b) Automatic Conversion. Each share of Series E Stock shall
--------------------
automatically be converted into shares of Common Stock at the then effective
Conversion Price:
(i) upon the affirmative vote of the holders of a majority of
the outstanding Preferred Stock voting together as a single class to cause all
outstanding shares of Preferred Stock to be converted.
(ii) upon the closing of a firm commitment underwritten public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended, covering the offer and sale of equity securities for
the account of the Corporation to the public at an aggregate price (prior to
underwriter's commissions and offering expenses) of not less than $15,000,000.
In the event of the automatic conversion of the Series E Stock upon a public
offering as aforesaid, the person(s) entitled to receive the Common Stock
issuable upon such conversion of the Series E Stock shall not be deemed to have
converted such Series E Stock until immediately prior to the closing of such
sale of securities.
(c) Mechanics of Conversion. No fractional shares of Common Stock
------------------------
shall be issued upon conversion of the Series E Stock. In lieu of any fractional
shares to which the holder would otherwise be entitled, the Corporation shall
pay cash equal to such fraction multiplied by the then effective Conversion
Price. Before any holder of Series E Stock shall be entitled to convert the same
into full shares of Common Stock and to receive certificates therefor, he shall
surrender the certificate or certificates therefor, duly endorsed, at the office
of the Corporation or of any transfer agent for the Series E Stock, and shall
give written notice to the Corporation at such office that he elects to convert
the same; provided, however, that in the event of an automatic conversion
pursuant to Section 5(b), the outstanding shares of Series E Stock shall be
converted automatically without any further action by the holders of such shares
and whether or not the certificates representing such shares are surrendered to
the Corporation or its transfer agent, and provided further that the Corporation
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon such automatic conversion unless the certificates evidencing
such shares of Series E Stock are either delivered to the Corporation or its
transfer agent as provided above, or the holder notifies the Corporation or its
transfer agent that such certificates have been lost, stolen or destroyed and
executes an agreement satisfactory to the Corporation to indemnify the
Corporation from any loss incurred by it in connection with such certificates.
The Corporation shall, as soon as practicable after such delivery, or such
agreement and indemnification in the case of a lost certificate, issue and
deliver at such office to such holder of Series E Stock, a certificate or
certificates for the number of shares of Common Stock to which he shall be
entitled as aforesaid and a check payable to the holder in the amount of any
cash amounts payable as the result of a conversion into fractional shares of
Common Stock. Such conversion shall be deemed to have been immediately prior to
the close of business on the date of such surrender of the shares of Series E
Stock to be converted, or in the case of automatic conversion on the date of
closing of the offering, and the person or persons entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock on such
date.
-4-
<PAGE>
(d) Adjustments to Conversion Price for Diluting Issues.
---------------------------------------------------
(i) Adjustments for Subdivisions, Combinations or Consolidation
-----------------------------------------------------------
of Common Stock. In the event the outstanding shares of Common Stock shall be
- ---------------
subdivided (by stock split, stock dividends or otherwise), into a greater number
of shares of Common Stock, the Conversion Price then in effect shall,
concurrently with the effectiveness of such subdivision, be proportionately
decreased. In the event the outstanding shares of Common Stock shall be combined
or consolidated, by reclassification or otherwise, into a lesser number of
shares of Common Stock, the Conversion Price then in effect shall, concurrently
with the effectiveness of such combination or consolidation, be proportionately
increased.
(ii) Adjustments for Stock Dividends and Other Distributions. In
-------------------------------------------------------
the event the Corporation at any time or from time to time makes, or fixes a
record date for the determination of holders of Common Stock entitled to receive
any distribution (excluding any repurchases of securities by the Corporation not
made on a pro-rata basis from all holders of any class of the Corporation's
securities) payable in property or in securities of the Corporation other than
shares of Common Stock, and other than as otherwise adjusted in this Section 5
or as provided in Section 2, then and in each such event the holders of Series E
Stock shall receive at the time of such distribution, the amount of property or
the number of securities of the Corporation that they would have received had
their Series E Stock been converted into Common Stock on the date of such event.
(iii) Adjustments for Reclassification, Exchange and
----------------------------------------------
Substitution. Except as provided in Section 3 upon any liquidation, dissolution
- ------------
or winding up of the Corporation, if the Common Stock issuable upon conversion
of the Series E Stock shall be changed into the same or a different number of
shares of any other class or classes of stock, whether by capital
reorganization, reclassification or otherwise (other than a subdivision or
combination of shares provided for above), the Conversion Price then in effect
shall, concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted such that the Series E Stock shall
be convertible into, in lieu of the number of shares of Common Stock which the
holders would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock equivalent to the number of shares of
Common Stock that would have been subject to receipt by the holders upon
conversion of the Series E Stock immediately before that exchange.
(e) No Impairment. The Corporation will not, by amendment of its
-------------
Restated and Amended Certificate of Incorporation or its Certificate of
Designation of Rights, Preferences and Privileges of Series E Preferred Stock,
or through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities, or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms to be
observed or performed under this certificate by the Corporation, but will at all
times in good faith assist in the carrying out of all the provisions of Section
5 and in the taking of all such action as may be necessary or appropriate in
order to protect the Conversion Rights of the holders of the Series E Stock
against impairment.
(f) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Conversion Price pursuant to Section 5, the
Corporation at its expense shall
-5-
<PAGE>
promptly compute such adjustment or readjustment in accordance with the terms of
this certificate and cause independent public accountants selected by the
Corporation to verify such computation and prepare and furnish to each holder of
Series E Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of any holder of
Series E Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii) the
Conversion Price at the time in effect, and (iii) the number of shares of Common
Stock and the amount, if any, of other property that at the time would be
received upon the conversion of the Series E Stock.
(g) Notices of Record Date. In the event of any taking by the
----------------------
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders of such securities who are entitled to
receive any dividend or other distribution whether in cash, property, stock or
other securities, or any right to subscribe for, purchase, or otherwise acquire
any shares of stock of any class or any other securities or property, or to
receive any other right, the Corporation shall mail to each holder of Series E
Stock at least twenty (20) days prior to the date specified in such notice, a
notice specifying the date on which any such record is to be taken for the
purpose of such dividend, distribution, or rights, and the amount and character
of such dividend, distribution, or right.
(h) Reservation of Stock Issuable Upon Conversion. The Corporation
---------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of the Series E Stock such number of its shares of Common Stock as shall
from time to time be sufficient to effect the conversion of all outstanding
shares of the Series E Stock. If at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of all then outstanding shares of the Series E Stock, the Corporation will take
such corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose.
(i) Notices. Any notice required by the provisions of Section 5 to be
-------
given to the holders of shares of Series E Stock shall be deemed given if
deposited in the United States mail, postage prepaid, and addressed to each
holder of record at his address appearing on the books of the Corporation.
(j) Status of Converted Shares. In the event any shares of Series E
--------------------------
Stock shall be converted pursuant to Section 5, the shares so converted shall be
cancelled and shall not be reissuable by the Corporation.
-6-
<PAGE>
IN WITNESS WHEREOF, Echelon Corporation has caused this Certificate to be
signed by M. Kenneth Oshman, its Chief Executive Officer, this 6th day of May,
1997.
_____________________________________
M. Kenneth Oshman
Chief Executive Officer
-7-
<PAGE>
EXHIBIT 3.3
AMENDED AND RESTATED BYLAWS
OF
ECHELON CORPORATION
(as amended through May 29, 1998)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I CORPORATE OFFICES............................................. 1
1.1 REGISTERED OFFICE............................................. 1
1.2 OTHER OFFICES................................................. 1
ARTICLE II MEETINGS OF STOCKHOLDERS..................................... 1
2.1 PLACE OF MEETINGS............................................. 1
2.2 ANNUAL MEETING................................................ 1
2.3 SPECIAL MEETING............................................... 2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS.............................. 2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.................. 2
2.6 QUORUM........................................................ 2
2.7 ADJOURNED MEETING; NOTICE..................................... 3
2.8 CONDUCT OF BUSINESS........................................... 3
2.9 VOTING........................................................ 3
2.10 WAIVER OF NOTICE.............................................. 3
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING....... 4
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS... 5
2.13 PROXIES....................................................... 5
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE......................... 6
2.15 ADVANCE NOTICE OF STOCKHOLDER NOMINEES........................ 6
2.16 ADVANCE NOTICE OF STOCKHOLDER BUSINESS........................ 7
ARTICLE III DIRECTORS................................................... 8
3.1 POWERS........................................................ 8
3.2 NUMBER OF DIRECTORS........................................... 8
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS....... 8
3.4 RESIGNATION AND VACANCIES..................................... 8
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE...................... 9
3.6 REGULAR MEETINGS.............................................. 9
3.7 SPECIAL MEETINGS; NOTICE...................................... 9
3.8 QUORUM........................................................ 10
3.9 WAIVER OF NOTICE.............................................. 10
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING............. 10
3.11 FEES AND COMPENSATION OF DIRECTORS............................ 11
3.12 APPROVAL OF LOANS TO OFFICERS................................. 11
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
3.13 REMOVAL OF DIRECTORS.......................................... 11
ARTICLE IV COMMITTEES................................................... 11
4.1 COMMITTEES OF DIRECTORS....................................... 11
4.2 COMMITTEE MINUTES............................................. 12
4.3 MEETINGS AND ACTION OF COMMITTEES............................. 12
ARTICLE V OFFICERS...................................................... 13
5.1 OFFICERS...................................................... 13
5.2 APPOINTMENT OF OFFICERS....................................... 13
5.3 SUBORDINATE OFFICERS.......................................... 13
5.4 REMOVAL AND RESIGNATION OF OFFICERS........................... 14
5.5 VACANCIES IN OFFICES.......................................... 14
5.6 CHAIRMAN OF THE BOARD......................................... 14
5.7 PRESIDENT..................................................... 14
5.8 VICE PRESIDENTS............................................... 14
5.9 SECRETARY..................................................... 15
5.10 CHIEF FINANCIAL OFFICER....................................... 15
5.11 ASSISTANT SECRETARY........................................... 15
5.12 ASSISTANT TREASURER........................................... 16
5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS................ 16
5.14 AUTHORITY AND DUTIES OF OFFICERS.............................. 16
ARTICLE VI INDEMNITY.................................................... 16
6.1 THIRD PARTY ACTIONS........................................... 16
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION................. 18
6.3 SUCCESSFUL DEFENSE............................................ 18
6.4 DETERMINATION OF CONDUCT...................................... 18
6.5 PAYMENT OF EXPENSES IN ADVANCE................................ 19
6.6 INDEMNITY NOT EXCLUSIVE....................................... 19
6.7 INSURANCE INDEMNIFICATION..................................... 19
6.8 THE CORPORATION............................................... 20
6.9 EMPLOYEE BENEFIT PLANS........................................ 20
6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES... 20
ARTICLE VII RECORDS AND REPORTS......................................... 21
7.1 MAINTENANCE AND INSPECTION OF RECORDS......................... 21
7.2 INSPECTION BY DIRECTORS....................................... 22
</TABLE>
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<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
7.3 ANNUAL STATEMENT TO STOCKHOLDERS.............................. 22
ARTICLE VIII GENERAL MATTERS............................................ 22
8.1 CHECKS........................................................ 22
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS.............. 22
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES........................ 22
8.4 SPECIAL DESIGNATION ON CERTIFICATES........................... 23
8.5 LOST CERTIFICATES............................................. 23
8.6 CONSTRUCTION; DEFINITIONS..................................... 24
8.7 DIVIDENDS..................................................... 24
8.8 FISCAL YEAR................................................... 24
8.9 SEAL.......................................................... 24
8.10 TRANSFER OF STOCK............................................. 24
8.11 STOCK TRANSFER AGREEMENTS..................................... 24
8.12 REGISTERED STOCKHOLDERS....................................... 25
ARTICLE IX AMENDMENTS................................................... 26
9.1 AMENDMENTS BY STOCKHOLDERS AND DIRECTORS...................... 26
9.2 SUPERMAJORITY VOTE............................................ 26
</TABLE>
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<PAGE>
BYLAWS
------
OF
--
ECHELON CORPORATION
-------------------
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is The Corporation Trust Company.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish other offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the registered office
of the corporation.
2.2 ANNUAL MEETING
--------------
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. In the absence of such designation
the annual meeting of stockholders shall be held on the second Tuesday of March
of each year at 10:00 a.m. However, if such day falls on a legal holiday, then
the meeting shall be held at the same time and place on the next succeeding
business day. At the meeting, directors shall be elected and any other proper
business may be transacted.
<PAGE>
2.3 SPECIAL MEETING
---------------
Except as otherwise required by law, a special meeting of the stockholders
may be called only by the Board of Directors, the Chairman of the Board, or the
President; provided however, that if at any time no directors remain in office,
then a special meeting for the purpose of electing directors may be called in
accordance with the procedure set forth in the Bylaws. No business may be
transacted at such special meeting otherwise than as specified in the notice of
such meeting.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------
All notices of meetings with stockholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.5 of these bylaws not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notice shall specify the
place, date, and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at such shareholder's address as it appears on the records of the
corporation. An affidavit of the Secretary or an Assistant Secretary or of the
transfer agent of the corporation that the notice has been given shall, in the
absence of fraud, be prima facie evidence of the facts stated therein.
2.6 QUORUM
------
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stock holders for the transaction of business
except as otherwise provided by statute or by the certificate of incorporation.
If, however, such quorum is not present or represented at any meeting of the
stockholders, then either (i) the Chairman of the meeting or (ii) the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
-2-
<PAGE>
2.7 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time or place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.8 CONDUCT OF BUSINESS
-------------------
The chairman of any meeting of stockholders shall determine the order of
business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of business.
2.9 VOTING
------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.12 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation
Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint
owners of stock and to voting trusts and other voting agreements).
Except as provided in the last paragraph of this Section 2.9, or as may be
otherwise provided in the certificate of incorporation, each stockholder shall
be entitled to one vote for each share of capital stock held by such
stockholder.
At a stockholders' meeting at which directors are to be elected, each
stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of votes which such stockholder normally
is entitled to cast) if the candidates' names have been properly placed in
nomination (in accordance with these bylaws) prior to commencement of the voting
and the stockholder requesting cumulative voting or any other stockholder voting
at the meeting in person or by proxy has given notice prior to commencement of
the voting of the stockholder's intention to cumulate votes. If cumulative
voting is properly requested, each holder of stock, or of any class or classes
or of a series or series thereof, who elects to cumulate votes shall be entitled
to as many votes as equals the number of votes which (absent this provision as
to cumulative voting) such holder would be entitled to cast for the election of
directors with respect to the holder's shares of stock multiplied by the number
of directors to be elected by the holder, and the holder may cast all of such
votes for a single director or may distribute them among the number to be voted
for, or for any two or more of them, as the holder may see fit.
2.10 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the
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<PAGE>
person entitled to notice, whether before or after the time stated therein,
shall be deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders need be specified in any written
waiver of notice unless so required by the certificate of incorporation or these
bylaws.
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter to be taken at any annual or special meeting of
stockholders of a corporation, or any action that may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
-4-
<PAGE>
Notwithstanding the foregoing provisions of this Section 2.11, this Section
2.11 shall be null and void effective upon the closing of a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, covering the offer and sale of
equity securities for the account of the Corporation to the public at an
aggregate price (prior to underwriter's commissions and offering expenses) of
not less than $15,000,000.
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
-----------------------------------------------------------
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held.
(ii) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the board of directors is necessary, shall be the day on which the first
written consent is expressed.
(iii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.13 PROXIES
-------
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for the stockholder by a written
proxy, signed by the stockholder and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission or otherwise) by the
stockholder or the stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that
-5-
<PAGE>
it is irrevocable shall be governed by the provisions of Section 212(c) of the
General Corporation Law of Delaware.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present. Such list shall
presumptively determine the identity of the stockholders entitled to vote at the
meeting and the number of shares held by each of them.
2.15 ADVANCE NOTICE OF STOCKHOLDER NOMINEES
--------------------------------------
Nominations of persons for election to the Board of Directors of the
corporation may be made at a meeting of stockholders by or at the direction of
the Board of Directors or by any stockholder of the corporation entitled to vote
in the election of directors at the meeting who complies with the notice
procedures set forth in this Section. Such nominations, other than those made by
or at the direction of the Board of Directors, shall be made pursuant to timely
notice in writing to the Secretary of the corporation. To be timely, a
stockholder's notice shall be delivered to or mailed and received at the
principal executive offices of the corporation not less than twenty (20) days
nor more than sixty (60) days prior to the meeting; provided, however, that in
the event less than thirty (30) days notice or prior public disclosure of the
date of the meeting is given or made to stockholders, notice by the stockholder
to be timely must be so received not later than the close of business on the
tenth day following the day on which such notice of the date of the meeting was
mailed or such public disclosure closure was made. Such stockholder's notice
shall set forth (a) as to each person, if any, whom the stockholder proposes to
nominate for election or re-election as a director: (i) the name, age, business
address and residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the class and number of shares of the
corporation which are beneficially owned by such person, (iv) any other
information relating to such person that is required by law to be disclosed in
solicitations of proxies for election of directors, and (v) such person's
written consent to being named as a nominee and to serving as a director if
elected; and (b) as to the stockholder giving the notice: (i) the name and
address, as they appear on the corporation's books, of such stockholder, and
(ii) the class and number of shares of the corporation which are beneficially
owned by such stockholder, and (iii) a description of all arrangements or
understandings between such stockholder and each nominee and any other person or
persons (naming such person or persons) relating to the nomination. At the
request of the Board of Directors any person nominated by the Board for election
as a director shall furnish to the Secretary of the corporation that information
required to be set forth in the stockholder's notice of nomination which
pertains to the nominee. No person shall be eligible for election as a director
of the corporation unless nominated in
-6-
<PAGE>
accordance with the procedures set forth in this Section. The chairman of the
meeting shall, if the facts warrant, determine and declare at the meeting that a
nomination was not made in accordance with the procedures prescribed by these
Bylaws, and if he should so determine, he shall so declare at the meeting and
the defective nomination shall be disregarded.
2.16 ADVANCE NOTICE OF STOCKHOLDER BUSINESS
--------------------------------------
At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (a) as specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the Board of Directors, (b) otherwise properly brought before the
meeting by or at the direction of the Board of Directors, or (c) otherwise
properly brought before the meeting by a stockholder. Business to be brought
before an annual meeting by a stockholder shall not be considered properly
brought if the stockholder has not given timely notice thereof in writing to the
Secretary of the corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
corporation not less than twenty (20) nor more than sixty (60) days prior to the
meeting; provided, however, that in the event that less than thirty (30) days
notice or prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the tenth day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure was made. A stockholder's notice to the Secretary shall set forth as
to each matter the stockholder proposes to bring before the annual meeting: (i)
a brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (ii)
the name and address of the stockholder proposing such business, (iii) the class
and number of shares of the corporation which are beneficially owned by the
stockholder, (iv) any material interest of the stockholder in such business, and
(v) any other information that is required by law to be provided by the
stockholder in his capacity as a proponent of a stockholder proposal.
Notwithstanding anything in these bylaws to the contrary, no business shall be
conducted at any annual meeting except in accordance with the procedures set
forth in this Section. The chairman of the annual meeting shall, if the facts
warrant, determine and declare at the meeting that business was not properly
brought before the meeting and in accordance with the provisions of this
Section, and, if he should so determine, he shall so declare at the meeting that
any such business not properly brought before the meeting shall not be
transacted.
-7-
<PAGE>
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
-------------------
The Board of Directors shall consist of seven (7) persons until changed by
a proper amendment of this Section 3.2.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
-------------------------------------------------------
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not be stock holders unless so required by the
certificate of incorporation or these bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to fill
a vacancy, shall hold office until his or her successor is elected and qualified
or until the director's earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign at any time upon written notice to the attention of
the Secretary of the corporation. When one or more directors so resigns and the
resignation is effective at a future date, a majority of the directors then in
office, including those who have so resigned, shall have power to fill such
vacancy or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each director so chosen shall hold
office as provided in this section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class
-8-
<PAGE>
may be filled by a majority of the directors then in office, although less than
a quorum, or by a sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
The board of directors of the corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
3.7 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two (2) directors.
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<PAGE>
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.8 QUORUM
------
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.9 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these bylaws.
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
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<PAGE>
3.11 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, the board of directors shall have the authority to fix the compensation
of directors.
3.12 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.13 REMOVAL OF DIRECTORS
--------------------
Unless otherwise restricted by statute, by the certificate of incorporation
or by these bylaws, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors; provided, however, that, so long
as shareholders of the corporation are entitled to cumulative voting, if less
than the entire board is to be removed, no director may be removed without cause
if the votes cast against the director's removal would be sufficient to elect
the director if then cumulatively voted at an election of the entire board of
directors.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of such director's term of office.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more committees, with each committee to consist of one
or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not such
member or members constitute a quorum, may unanimously appoint
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<PAGE>
another member of the board of directors to act at the meeting in the place of
any such absent or disqualified member. Any such committee, to the extent
provided in the resolution of the board of directors or in the bylaws of the
corporation, shall have and may exercise all the powers and authority of the
board of directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers that may require it; but no such committee shall have the power or
authority to (i) amend the certificate of incorporation (except that a committee
may, to the extent authorized in the resolution or resolutions providing for the
issuance of shares of stock adopted by the board of directors as provided in
Section 151(a) of the General Corporation Law of Delaware, fix the designations
and any of the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the corporation or the
conversion into, or the exchange of such shares for, shares of any other class
or classes or any other series of the same or any other class or classes of
stock of the corporation or fix the number of shares of any series of stock or
authorize the increase or decrease of the shares of any series), (ii) adopt an
agreement of merger or consolidation under Sections 251 or 252 of the General
Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease
or exchange of all or substantially all of the corporation's property and
assets, (iv) recommend to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or (v) amend the bylaws of the corporation; and,
unless the board resolution establishing the committee, the bylaws or the
certificate of incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend, to authorize the issuance of
stock, or to adopt a certificate of ownership and merger pursuant to Section 253
of the General Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
-----------------
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings and meetings by tele phone), Section 3.6 (regular meetings),
Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9
(waiver of notice), and Section 3.10 (action without a meeting), with such
changes in the context of those bylaws as are necessary to substitute the
committee and its members for the board of directors and its members; provided,
however, that the time of regular meetings of committees may be determined
either by resolution of the board of directors or by resolution of the
committee, that special meetings of committees may also be called by resolution
of the board of directors and that notice of special meetings of committees
shall also be given to all alternate members, who shall have the right to attend
all meetings of the committee. The board of directors may adopt rules for the
government of any committee not inconsistent with the provisions of these
bylaws.
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ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a president, a secretary, and a
chief financial officer. The corporation may also have, at the discretion of
the board of directors, a chairman of the board, one or more vice presidents,
one or more assistant vice presidents, one or more assistant secretaries, one or
more assistant treasurers, and any such other officers as may be appointed in
accordance with the provisions of Section 5.3 of these bylaws. Any number of
offices may be held by the same person.
5.2 APPOINTMENT OF OFFICERS
-----------------------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall
be appointed by the board of directors, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or empower the president to appoint,
such other officers and agents as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
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5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
--------------------
Any vacancy occurring in any office of the corporation shall be filled by
the board of directors.
5.6 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him or her
by the board of directors or as may be prescribed by these bylaws. If there is
no president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT
---------
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction, and control of the business and the officers of the corporation. The
president shall preside at all meetings of the stockholders and, in the absence
or nonexistence of a chairman of the board, at all meetings of the board of
directors. The president shall have the general powers and duties of management
usually vested in the office of president of a corporation and shall have such
other powers and duties as may be prescribed by the board of directors or these
bylaws.
5.8 VICE PRESIDENTS
---------------
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform
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such other duties as from time to time may be prescribed for them respectively
by the board of directors, these bylaws, the president or the chairman of the
board.
5.9 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at stockholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. The secretary shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
-----------------------
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other valuables in
the name and to the credit of the corporation with such depositories as may be
designated by the board of directors. The chief financial officer shall disburse
the funds of the corporation as may be ordered by the board of directors, shall
render to the president and directors, whenever they request it, an account of
all his or her transactions as chief financial officer and of the financial
condition of the corporation, and shall have other powers and perform such other
duties as may be prescribed by the board of directors or these bylaws.
The chief financial officer shall be the treasurer of the corporation.
5.11 ASSISTANT SECRETARY
-------------------
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The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as may be
prescribed by the board of directors or these bylaws.
5.12 ASSISTANT TREASURER
-------------------
The assistant treasurer, or, if there is more than one, the assistant
treasurers, in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the chief financial officer or in the event of his or
her inability or refusal to act, perform the duties and exercise the powers of
the chief financial officer and shall perform such other duties and have such
other powers as may be prescribed by the board of directors or these bylaws.
5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, the president, any vice president, the chief
financial officer, the secretary or assistant secretary of this corporation, or
any other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
5.14 AUTHORITY AND DUTIES OF OFFICERS
--------------------------------
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
ARTICLE VI
INDEMNITY
---------
6.1 THIRD PARTY ACTIONS
-------------------
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partner-
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ship, joint venture trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement (if such
settlement is approved in advance by the corporation, which approval shall not
be unreasonably withheld) actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
of nolo contendere or its equivalent, shall not, of itself, create a plea
---- ----------
presumption that the person did not act in good faith and in a manner which such
person reasonably believed to be in or not opposed to the best interest of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
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6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION
---------------------------------------------
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person is or was a director, officer, employee or
agent of corporation, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including attorneys'
fees) and amounts paid in settlement (if such settlement is approved in advance
by the corporation, which approval shall not be unreasonably withheld) actually
and reasonably incurred by such person in connection with the defense or
settlement of such action or suit if the person acted in good faith and in
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Delaware Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Delaware Court of
Chancery or such other court shall deem proper. Notwithstanding any other
provision of this Article VI, no person shall be indemnified hereunder for any
expenses or amounts paid in settlement with respect to any action to recover
short-swing profits under Section 16(b) of the Securities Exchange Act of 1934,
as amended.
6.3 SUCCESSFUL DEFENSE
------------------
To the extent that a director, officer, employee or agent of the corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Sections 6.1 and 6.2, or in defense of any claim,
issue or matter therein, such person shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by the person in
connection therewith.
6.4 DETERMINATION OF CONDUCT
------------------------
Any indemnification under Sections 6.1 and 6.2 (unless ordered by a court)
shall be made by the corporation only as authorized in the specific case upon a
determination that the indemnification of the director, officer, employee or
agent is proper in the circumstances because the person has met the applicable
standard of conduct set forth in Sections 6.1 and 6.2. Such determination shall
be made (1) by the Board of Directors or the Executive Committee by a majority
vote of a quorum consisting of directors who were not parties to such action,
suit or proceeding or (2) or if such quorum is not obtainable or, even if
obtainable, a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (3) by the stockholders. Notwithstanding the
foregoing, a director, officer, employee or agent of the Corporation shall be
entitled to contest any determination that the director, officer, employee or
agent has not met the applicable standard of conduct set forth in Sections 6.1
and 6.2 by petitioning a court of competent jurisdiction.
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6.5 PAYMENT OF EXPENSES IN ADVANCE
------------------------------
Expenses incurred in defending a civil or criminal action, suit or
proceeding, by an individual who may be entitled to indemnification pursuant to
Section 6.1 or 6.2, shall be paid by the corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of the director, officer, employee or agent to repay such amount if
it shall ultimately be determined that the individual is not entitled to be
indemnified by the corporation as authorized in this Article VI.
6.6 INDEMNITY NOT EXCLUSIVE
-----------------------
The indemnification and advancement of expenses provided by or granted
pursuant to the other sections of this Article VI shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in their official
capacity and as to action in another capacity while holding such office.
6.7 INSURANCE INDEMNIFICATION
-------------------------
The corporation shall have the power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against the
person and incurred by the person in any such capacity or arising out of the
person's status as such, whether or not the corporation would have the power to
indemnify such person against such liability under the provisions of this
Article VI.
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6.8 THE CORPORATION
---------------
For purposes of this Article VI, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under and subject to the provisions of this Article VI (including,
without limitation the provisions of Section 6.4) with respect to the resulting
or surviving corporation as the person would have with respect to such
constituent corporation if its separate existence had continued.
6.9 EMPLOYEE BENEFIT PLANS
----------------------
For purposes of this Article VI, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this Article
VI.
6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES
-----------------------------------------------------------
The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article VI shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such person.
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ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS OF RECORDS
------------------------------------------------
The corporation shall, either at its principal executive officer or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent so to act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, showing the address of each stockholder and the number of
shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
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7.2 INSPECTION BY DIRECTORS
-----------------------
Any director shall have the right to examine the corporation's stock ledger,
a list of its stockholders, and its other books and records for a purpose
reasonably related to his or her position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
--------------------------------
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 CHECKS
------
From time to time, the board of directors shall determine by resolution which
person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
--------------------------------------
The shares of the corporation shall be represented by certificates, provided
that the board of directors of the corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
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represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the chief
financial officer or an assistant treasurer, or the secretary or an assistant
secretary of such corporation representing the number of shares registered in
certificate form. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if the person were such
officer, transfer agent or registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly paid
and subject to call for the remainder of the consideration to be paid therefor.
Upon the face or back of each stock certificate issued to represent any such
partly paid shares, upon the books and records of the corporation in the case of
uncertificated partly paid shares, the total amount of the consideration to be
paid therefor and the amount paid thereon shall be stated. Upon the declaration
of any dividend on fully paid shares, the corporation shall declare a dividend
upon partly paid shares of the same class, but only upon the basis of the
percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.5, no new certificates for shares shall
be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or the owner's legal representative, to give the
corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate or uncertificated shares.
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8.6 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
8.7 DIVIDENDS
---------
The directors of the corporation, subject to any restrictions contained in
(i) the General Corporation Law of Delaware or (ii) the certificate of
incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
corporation's capital stock.
The directors of the corporation may set apart out of any of the funds of the
corporation available for dividends a reserve or reserves for any proper purpose
and may abolish any such reserve. Such purposes shall include but not be limited
to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR
-----------
The fiscal year of the corporation shall be fixed by resolution of the board
of directors and may be changed by the board of directors.
8.9 SEAL
----
The corporation may adopt a corporate seal, which shall be adopted and which
may be altered by the board of directors, and may use the same by causing it or
a facsimile thereof to be impressed or affixed or in any other manner
reproduced.
8.10 TRANSFER OF STOCK
-----------------
Upon surrender to the corporation or the transfer agent of the corporation of
a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
-------------------------
The corporation shall have power to enter into and perform any agreement with
any number of stockholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
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8.12 REGISTERED STOCKHOLDERS
-----------------------
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
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ARTICLE IX
AMENDMENTS
----------
9.1 AMENDMENTS BY STOCKHOLDERS AND DIRECTORS
----------------------------------------
The bylaws of the corporation may be adopted, amended or repealed by the
stockholders entitled to vote; provided, however, that the corporation may, in
its certificate of incorporation, confer the power to adopt, amend or repeal
bylaws upon the directors. The fact that such power has been so conferred upon
the directors shall not divest the stockholders of the power, nor limit their
power to adopt, amend or repeal bylaws.
9.2 SUPERMAJORITY VOTE
------------------
Notwithstanding anything to the contrary in the bylaws, neither Section 2.3
(special meeting), Section 2.15 (advance notice of stockholder nominees),
Section 2.16 (advance notice of stockholder business), nor this Section 9.2
(supermajority vote) of the bylaws shall be repealed or amended, nor shall any
provision inconsistent with the aforementioned provisions be adopted and added
to the bylaws except upon the affirmative vote of not less than two-thirds of
the shares of the corporation issued and outstanding.
Amended and Restated Bylaws adopted by the Board of Directors of the
Corporation at Palo Alto, California, this 29th day of May, 1998.
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EXHIBIT 4.2
SECOND AMENDED AND RESTATED MODIFICATION AGREEMENT
This Agreement is made as of the 15th day of May, 1997 between Echelon
Corporation, a Delaware corporation ("Echelon"), Motorola, Inc., a Delaware
corporation ("Motorola"), Quantum Industrial Partners LDC, a Cayman Islands
exempted limited duration company ("Quantum"), EdVenture Capital Corporation, a
Michigan corporation ("EdVenture") (Motorola, Quantum and EdVenture are
collectively referred to hereinafter as the "Series B, C and/or D Purchasers"),
M. Kenneth Oshman ("Oshman"), A. C. Markkula, Jr. ("Markkula"), and certain
entities controlled by Oshman and Markkula (collectively, the "Oshman and
Markkula Entities"), those purchasers of shares of Series A Preferred Stock of
Echelon and certain of their transferees (the "Series A Purchasers") pursuant to
the Series A Preferred Stock Purchase Agreement dated as of January 6, 1989 (the
"Series A Agreement"), and those purchasers of shares of Series E Preferred
Stock of Echelon (the "Series E Purchasers") pursuant to two Series E Preferred
Stock Purchase Agreements, each dated as of May 15, 1997 (collectively, the
"Series E Agreement").
RECITALS
--------
A. Pursuant to the Amended and Restated Modification Agreement dated
October 7, 1994 (the "Prior Modification Agreement"), the Series A Purchasers,
Motorola, EdVenture, Quantum, Oshman, Markkula, and certain entities controlled
by Oshman and Markkula, were granted certain rights with respect to the
registration of Echelon's securities under the Securities Act of 1933, as
amended (the "Securities Act"), as set forth in Section 1 of the Prior
Modification Agreement.
B. On October 22, 1991, all 6,249,500 shares of Echelon's outstanding
Series A Preferred Stock automatically converted into 6,249,500 shares of
Echelon's Common Stock pursuant to the automatic conversion provisions of
Echelon's Restated and Amended Certificate of Incorporation.
C. Echelon proposes to sell to the Series E Purchasers 2,000,000 shares
of its Series E Preferred Stock (the "Series E Preferred") pursuant to the
Series E Agreement. Echelon further proposes to grant to certain of the Series E
Purchasers warrants to purchase up to 400,000 shares of the Series E Preferred
(the "Series E Warrants"). Echelon desires to give the Series E Purchasers the
rights as set forth herein with respect to the Series E Preferred, including the
Series E Preferred issuable upon exercise of the Series E Warrants.
D. Echelon has requested, and the Series A Purchasers, Motorola, Quantum,
EdVenture, Oshman, Markkula and certain entities controlled by Oshman and
Markkula have agreed, that the registration rights set forth in Section 1 of the
Prior Modification Agreement shall be of no further
<PAGE>
force and effect, and that the rights granted herein to the Series A Purchasers,
Motorola, Quantum, EdVenture, Oshman, Markkula, certain entities controlled by
Oshman and Markkula, and the Series E Purchasers shall supersede the
registration rights granted in the Prior Modification Agreement.
E. Pursuant to Section 3.3 of the Prior Modification Agreement, the
holders of a majority of the Registrable Securities (as defined in the Prior
Modification Agreement) may amend the provisions of the Prior Modification
Agreement on behalf of all of the parties to the Prior Modification Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1
RESTRICTIONS ON TRANSFERABILITY OF SECURITIES;
----------------------------------------------
COMPLIANCE WITH SECURITIES ACT; REGISTRATION RIGHTS
---------------------------------------------------
1.1 Certain Definitions. As used in this Agreement, the following terms
-------------------
shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission or any
----------
other federal agency at the time administering the Securities Act.
"Conversion Stock" means the Common Stock issued or issuable pursuant
----------------
to conversion of the Preferred Stock and the Common Stock issued upon the
conversion of the Series A Preferred Stock.
"Executive Stock" means any shares of Common Stock beneficially owned
---------------
by Oshman and Markkula and entities controlled by Oshman and Markkula, whether
beneficially owned as of the date of this Agreement or acquired hereafter.
"Holder" shall mean (i) Oshman, (ii) Markkula, (iii) entities
------
controlled by Oshman and Markkula, (iv) any Series A Purchaser holding
Registrable Securities, (v) Motorola, (vi) Quantum, (vii) EdVenture, (viii) any
Series E Purchaser and (ix) any such person holding Registrable Securities to
whom the rights under this Section 1 have been transferred in accordance with
Section 1.14 hereof.
"Initiating Holders" shall mean any Holders or transferees of Holders
------------------
under Section 1.14 hereof who in the aggregate are Holders of greater than 50%
of the Registrable Securities.
"Investor" shall mean any Series A Purchaser, Motorola, Quantum,
--------
EdVenture, Oshman, Markkula, certain entities controlled by Oshman and Markkula,
or any Series E Purchaser.
-2-
<PAGE>
"Preferred Stock" shall mean the Series B Preferred Stock ("Series B
---------------
Preferred"), the Series C Preferred Stock ("Series C Preferred"), the Series D
Preferred Stock (the "Series D Preferred") and the Series E Preferred, including
the Series E Preferred issuable upon exercise of the Series E Warrants.
"Registrable Securities" means (i) the Executive Stock, (ii) the
----------------------
Conversion Stock, and (iii) any Common Stock of Echelon issued or issuable in
respect of the Executive Stock or Conversion Stock upon any stock split, stock
dividend, recapitalization, or similar event, or any Common Stock otherwise
issued or issuable with respect to the Preferred Stock, provided, however, that
shares of Common Stock or other securities shall only be treated as Registrable
Securities if and so long as they have not been (A) sold to or through a broker
or dealer or underwriter in a public distribution or a public securities
transaction or (B) sold or available for sale in the opinion of counsel to
Echelon within a given three month period pursuant to Rule 144 or any other
applicable exemption that allows for resale free of the registration
requirements set forth under Section 5 of the Securities Act.
The terms "register," "registered" and "registration" refer to a
-------- ---------- ------------
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses, except as otherwise
---------------------
stated below, incurred by Echelon in complying with Sections 1.5, 1.6 and 1.7
hereof, including, without limitation, all registration, qualification and
filing fees, printing expenses, escrow fees, fees and disbursements of counsel
for Echelon, blue sky fees and expenses, the expense of any special audits
incident to or required by any such registration (but excluding the compensation
of regular employees of Echelon which shall be paid in any event by Echelon) and
the reasonable fees and disbursements of one counsel for all Holders in the
event of a requested registration provided for in Section 1.5 hereof and in the
event of two Company registrations pursuant to Section 1.6 hereof.
"Restricted Securities" shall mean the securities of Echelon required
---------------------
to bear the legend set forth in Section 1.3 hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
--------------
any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts, selling
----------------
commissions and stock transfer taxes applicable to the securities registered by
the Holders and, except as set forth above, all reasonable fees and
disbursements of counsel for any Holder.
1.2 Restrictions on Transferability. The Preferred Stock and the
-------------------------------
Conversion Stock (as defined above) shall not be sold, assigned, transferred or
pledged except upon the conditions specified in this Section 1, which conditions
are intended to ensure compliance with the provisions of the Securities Act.
Each Investor will cause any proposed purchaser, assignee, transferee, or
pledgee of the Preferred Stock or such Common Stock held by an Investor to agree
to take and hold such securities subject to the provisions and upon the
conditions specified in this Section 1.
-3-
<PAGE>
1.3 Restrictive Legend. Each certificate representing (i) the Preferred
------------------
Stock, (ii) the Conversion Stock and (iii) any other securities issued in
respect of the Preferred Stock or the Conversion Stock upon any stock split,
stock dividend, recapitalization, merger, consolidation or similar event, shall
(unless otherwise permitted by the provisions of Section 1.4 below) be stamped
or otherwise imprinted with a legend in the following form (in addition to any
legend required under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF
SUCH REGISTRATION OR UNLESS THE COMPANY RECEIVES AN OPINION OF
COUNSEL REASON ABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR
TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF SAID ACT. COPIES OF THE AGREEMENT COVERING THE
PURCHASE OF THESE SHARES AND RESTRICTING THEIR TRANSFER MAY BE
OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD
OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE
PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION.
Each Investor and Holder consents to Echelon making a notation on its
records and giving instructions to any transfer agent of the Preferred Stock or
the Common Stock in order to implement the restrictions on transfer established
in this Section 1.
1.4 Notice of Proposed Transfers. The holder of each certificate
----------------------------
representing Restricted Securities by acceptance thereof agrees to comply in all
respects with the provisions of this Section 1.4. Prior to any proposed sale,
assignment, transfer or pledge of any Restricted Securities (other than, except
as otherwise provided below, (i) a transfer not involving a change in beneficial
ownership or (ii) in transactions involving the distribution without
consideration of Restricted Securities by any of the Investors to any of its
partners, or retired partners, or to the estate of any of its partners or
retired partners), unless there is in effect a registration statement under the
Securities Act covering the proposed transfer, the holder thereof shall give
written notice to Echelon of such holder's intention to effect such transfer,
sale, assignment or pledge. Each such notice shall describe the manner and
circumstances of the proposed transfer, sale, assignment or pledge in sufficient
detail, and shall be accompanied, at such holder's expense by either (i) an
unqualified written opinion of legal counsel who shall, and whose legal opinion
shall be, reasonably satisfactory to Echelon addressed to Echelon, to the effect
that the proposed transfer of the Restricted Securities may be effected without
registration under the Securities Act, or (ii) a "no action" letter from the
Commission to the effect that the transfer of such securities without
registration will not result in a recommendation by the staff of the Commission
that action be taken with respect thereto, whereupon the holder of such
Restricted Securities shall be entitled to transfer such Restricted Securities
in accordance with the terms of the notice delivered by the holder to Echelon.
Each certificate evidencing the Restricted Securities transferred as above
provided shall bear, except if such transfer is made pursuant to Rule 144, the
appropriate restrictive legend set forth in Section 1.3 above, except that such
certificate shall not bear such restrictive legend if in the opinion of counsel
for such holder
-4-
<PAGE>
and Echelon such legend is not required in order to establish compliance with
any provision of the Securities Act. Notwithstanding anything in this Section
1.4 to the contrary, prior to the closing of Echelon's first underwritten public
offering pursuant to an effective registration statement under the Securities
Act, Echelon may decline to allow any transfer of Restricted Securities which
would result in Echelon becoming subject to the reporting requirements of the
Securities Act or the Securities Exchange Act of 1934, as amended.
1.5 Requested Registration.
----------------------
(a) Request for Registration. In case Echelon shall receive from
------------------------
Initiating Holders a written request that Echelon effect any registration,
qualification or compliance with respect to not less than 1,500,000 shares
(appropriately adjusted for stock splits, stock dividends, recapitalizations and
the like) of Registrable Securities, Echelon will:
(i) promptly give written notice of the proposed registration,
qualification or compliance to all other Holders; and
(ii) as soon as practicable, use its best efforts to effect such
registration, qualification or compliance (including, without limitation,
appropriate qualification under applicable blue sky or other state securities
laws and appropriate compliance with applicable regulations issued under the
Securities Act and any other governmental requirements or regulations) as may be
so requested and as would permit or facilitate the sale and distribution of all
or such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder or
Holders joining in such request as are specified in a written request received
by Echelon within 20 days after receipt of such written notice from Echelon;
Provided, however, that Echelon shall not be obligated to take any
action to effect any such registration, qualification or compliance pursuant to
this Section 1.5:
(1) In any particular jurisdiction in which Echelon would
be required to execute a general consent to service of process in effecting such
registration, qualification or compliance unless Echelon is already subject to
service in such jurisdiction and except as may be required by the Securities
Act;
(2) Prior to the date one year after the effective date of
Echelon's first registered public offering of its stock;
(3) During the period starting with the date sixty (60)
days prior to Echelon's estimated date of filing of, and ending on the date
three (3) months immediately following the effective date of, any registration
statement pertaining to securities of Echelon (other than a registration of
securities in a Rule 145 transaction or with respect to an employee benefit
plan), provided that Echelon is actively employing in good faith all reasonable
efforts to cause such registration statement to become effective;
(4) After Echelon has effected two such registrations
pursuant to this subparagraph 1.5(a), and such registrations have been declared
or ordered effective; provided,
-5-
<PAGE>
however, that if a registration request made by the Initiating Holders is
subsequently withdrawn at any time by the request of the Holders of a majority
of the Registrable Securities to be registered, the Holders shall forfeit their
right to one requested registration pursuant to this Section 1.5; provided
further, however, that if at the time of such withdrawal, the Holders have
learned of a materially adverse change in the financial condition, business or
prospects of Echelon from that known to the Initiating Holders at the time of
their request, the withdrawal shall not result in such a forfeit of the Holder's
rights to a requested registration pursuant to this Section 1.5;
(5) If Echelon shall furnish to such Holders a certificate
signed by the President of Echelon stating that in the good faith judgment of
the Board of Directors it would be seriously detrimental to Echelon or its
stockholders for a registration statement to be filed in the near future, then
Echelon's obligation to use its best efforts to register, qualify or comply
under this Section 1.5 shall be deferred for a period not to exceed one hundred
twenty (120) days from the date of receipt of written request from the
Initiating Holders.
Subject to the foregoing clauses (1) through (5), Echelon shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable, after receipt of the request or requests of
the Initiating Holders.
(b) Underwriting. In the event that a registration pursuant to Section
------------
1.5 is for a registered public offering involving an underwriting, Echelon shall
so advise the Holders as part of the notice given pursuant to Section 1.5(a)(i).
In such event, the right of any Holder to registration pursuant to Section 1.5
shall be conditioned upon such Holder's participation in the underwriting
arrangements required by this Section 1.5, and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent requested shall be
limited to the extent provided herein.
Echelon shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the managing underwriter selected for such underwriting by a
majority in interest of the Initiating Holders, but subject to Echelon's
reasonable approval. Notwithstanding any other provision of this Section 1.5, if
the managing underwriter advises the Initiating Holders in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then Echelon shall so advise all Holders of Registrable Securities
and the number of shares of Registrable Securities that may be included in the
registration and underwriting shall be allocated among all Holders thereof in
pro portion, as nearly as practicable, to the respective amounts of Registrable
Securities held by such Holders at the time of filing the registration
statement. No Registrable Securities excluded from the underwriting by reason of
the underwriter's marketing limitation shall be included in such registration.
To facilitate the allocation of shares in accordance with the above provisions,
Echelon or the underwriters may round the number of shares allocated to any
Holder to the nearest 100 shares.
If any Holder of Registrable Securities disapproves of the terms of
the underwriting, such person may elect to withdraw therefrom by written notice
to Echelon, the managing underwriter and the Initiating Holders. The Registrable
Securities and/or other securities so withdrawn shall also be withdrawn from
registration, and such Registrable Securities shall not be transferred in a
public distribution prior to ninety (90) days after the effective date of such
registration, or such other shorter period of time as the underwriters may
require.
-6-
<PAGE>
1.6 Company Registration.
--------------------
(a) Notice of Registration. If at any time or from time to time
----------------------
Echelon shall determine to register any of its securities, either for its own
account or the account of a security holder or holders, other than (i) a
registration relating solely to employee benefit plans or (ii) a registration
relating solely to a Commission Rule 145 transaction, Echelon will:
(i) promptly give to each Holder written notice thereof
(Echelon shall further provide Motorola with such notice a list of the
jurisdictions in which Echelon intends to qualify under the blue sky laws of
such jurisdictions); and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests, made within 20 days after receipt of such written notice from
Echelon, by any Holder.
(b) Underwriting. If the registration of which Echelon gives notice
------------
is for a registered public offering involving an underwriting, Echelon shall so
advise the Holders as a part of the written notice given pursuant to Section
1.6(a)(i). In such event the right of any Holder to registration pursuant to
Section 1.6 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of Registrable Securities in the underwriting to
the extent provided herein. All Holders proposing to distribute their securities
through such underwriting shall (together with Echelon and the other holders
distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the managing underwriter selected
for such underwriting by Echelon. Notwithstanding any other provision of this
Section 1.6, if the managing underwriter or Echelon determines that marketing
factors require a limitation of the number of shares to be underwritten, the
managing underwriter or Echelon may limit or exclude entirely the Registrable
Securities to be included in such registration. Echelon shall so advise all
Holders and other holders distributing their securities through such
underwriting and the number of shares of Registrable Securities that may be
included in the registration and underwriting shall be allocated among all
Holders and such other holders in proportion, as nearly as practicable, to the
respective amounts of Registrable Securities held by such Holders and such other
holders at the time of filing the registration statement. To facilitate the
allocation of shares in accordance with the above provisions, Echelon may round
the number of shares allocated to any Holder or holder to the nearest 100
shares. If any Holder or holder disapproves of the terms of any such
underwriting, he may elect to withdraw therefrom by written notice to Echelon
and the managing underwriter. Any securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration, and shall not be
transferred in a public distribution prior to ninety (90) days after the
effective date of the registration statement relating thereto, or such other
shorter period of time as the underwriters may require.
(c) Right to Terminate Registration. Echelon shall have the right to
-------------------------------
terminate or withdraw any registration initiated by it under this Section 1.6
prior to the effectiveness of such registration whether or not any Holder has
elected to include securities in such registration.
-7-
<PAGE>
1.7 Registration on Form S-3.
------------------------
(a) If any Holder or Holders holding in the aggregate not less than
5% of the then outstanding Registrable Securities request that Echelon file a
registration statement on Form S-3 (or any successor form to Form S-3) for a
public offering of shares of the Registrable Securities the reasonably
anticipated aggregate price to the public of which, net of underwriting
discounts and commissions, would exceed $1,000,000, and Echelon is a registrant
entitled to use Form S-3 to register the Registrable Securities for such an
offering, Echelon shall use its best efforts to cause such Registrable
Securities to be registered for the offering on such form and to cause such
Registrable Securities to be qualified in such jurisdictions as the Holder or
Holders may reasonably request; provided, however, that Echelon shall not be
required to effect more than one registration pursuant to this Section 1.7 in
any six (6) month period. The substantive provisions of Section 1.5(b) shall be
applicable to each registration initiated under this Section 1.7.
(b) Notwithstanding the foregoing, Echelon shall not be obligated to
take any action pursuant to this Section 1.7: (i) in any particular jurisdiction
in which Echelon would be required to execute a general consent to service of
process in effecting such registration, qualification or compliance unless
Echelon is already subject to service in such jurisdiction and except as may be
required by the Securities Act; (ii) if Echelon, within ten (10) days of the
receipt of the request of the initiating Holders, gives notice of its bona fide
intention to effect the filing of a registration statement with the Commission
within ninety (90) days of receipt of such request (other than with respect to a
registration statement relating to a Rule 145 transaction, an offering solely to
employees or any other registration which is not appropriate for the
registration of Registrable Securities); (iii) during the period starting with
the date sixty (60) days prior to Echelon's estimated date of filing of, and
ending on the date six (6) months immediately following, the effective date of
any registration statement pertaining to securities of Echelon (other than a
registration of securities in a Rule 145 transaction or with respect to an
employee benefit plan), provided that Echelon is actively employing in good
faith all reasonable efforts to cause such registration statement to become
effective; or (iv) if Echelon shall furnish to such Holder a certificate signed
by the President of Echelon stating that in the good faith judgment of the Board
of Directors it would be seriously detrimental to Echelon or its stockholders
for registration statements to be filed in the near future, then Echelon's
obligation to use its best efforts to file a registration statement shall be
deferred for a period not to exceed 120 days from the receipt of the request to
file such registration by such Holder.
1.8 Limitations on Subsequent Registration Rights. From and after the
---------------------------------------------
Closing Date, Echelon shall not enter into any agreement granting any holder or
prospective holder of any securities of Echelon registration rights with respect
to such securities unless (i) such new registration rights, including standoff
obligations, are on a pari passu basis with those rights of the Holders
hereunder; or (ii) such new registration rights, including standoff obligations,
are subordinate to the registration rights granted Holders hereunder.
1.9 Expenses of Registration.
------------------------
(a) All Registration Expenses incurred in connection with (i) two
(2) registrations pursuant to Section 1.5, and (ii) all registrations pursuant
to Section 1.6, shall be borne by Echelon. Unless otherwise stated, all Selling
Expenses relating to securities registered on behalf of the Holders
-8-
<PAGE>
and all other Registration Expenses shall be borne by the Holders of such
securities pro rata on the basis of the number of shares so registered.
(b) All Registration Expenses and Selling Expenses incurred in
connection with a registration pursuant to Section 1.7 shall be borne pro rata
by the Holder or Holders requesting the registration on Form S-3 according to
the number of Registrable Securities included in such registration.
1.10 Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by Echelon pursuant to this Section 1,
Echelon will keep each Holder advised in writing as to the initiation of each
registration, qualification and compliance and as to the completion thereof. At
its expense Echelon will:
(a) Prepare and file with the Commission a registration statement
with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for at least one hundred
eighty (180) days or until the distribution described in the Registration
Statement has been completed; and
(b) Furnish to the Holders participating in such registration and to
the underwriters of the securities being registered such reasonable number of
copies of the registration statement, preliminary prospectus, final prospectus
and such other documents as such underwriters may reasonably request in order to
facilitate the public offering of such securities.
1.11 Indemnification.
---------------
(a) Echelon will indemnify each Holder, each of its officers and
directors and partners, and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Section 1, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, qualification or compliance, or based on any 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 in which they were made, not misleading, or any violation by
Echelon of the Securities Act or any rule or regulation promulgated under the
Securities Act applicable to Echelon in connection with any such registration,
qualification or compliance, and Echelon will reimburse each such Holder, each
of its officers and directors, and each person controlling such Holder, each
such underwriter and each person who controls any such underwriter, for any
legal and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage, liability or
action, provided that Echelon will not be liable in any such case to the extent
that any such claim, loss, damage, liability or expense arises out of or is
based on any untrue statement or omission or alleged untrue statement or
omission, made in reliance upon and in
-9-
<PAGE>
conformity with written information furnished to Echelon by an instrument duly
executed by such Holder, controlling person or underwriter and stated to be
specifically for use therein.
(b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify Echelon, each of its directors and
officers, each underwriter, if any, of Echelon's securities covered by such a
registration statement, each person who controls Echelon or such underwriter
within the meaning of Section 15 of the Securities Act, and each other such
Holder, each of its officers and directors and each person controlling such
Holder within the meaning of Section 15 of the Securities Act, against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such registration statement, prospectus, offering
circular or other document, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse Echelon, such Holders,
such directors, officers, persons, underwriters or control persons for any legal
or any other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to Echelon by an instrument
duly executed by such Holder and stated to be specifically for use therein.
Notwithstanding the foregoing, the liability of each Holder hereunder shall be
limited to the proceeds received by such Holder from the sale of securities
under such Registration Statement. In no event will any Holder be required to
enter into any agreement or undertaking in connection with any registration
under this Section 1 providing for any indemnification or contribution
obligations on the part of such Holder greater than such Holder's obligations
under this Section 1.11.
(c) Each party entitled to indemnification under this Section 1.11
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Section 1 unless the failure to give such notice is
materially prejudicial to an Indemnifying Party's ability to defend such action
and provided further, that the Indemnifying Party shall not assume the defense
for matters as to which there is a conflict of interest or separate and
different defenses. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.
1.12 Information by Holder. The Holder or Holders of Registrable
---------------------
Securities included in any registration shall furnish to Echelon such
information regarding such Holder or Holders, the Registrable Securities held by
them and the distribution proposed by such Holder or Holders as
-10-
<PAGE>
Echelon may request in writing and as shall be required in connection with any
registration, qualification or compliance referred to in this Section 1.
1.13 Rule 144 Reporting. With a view to making available the benefits of
------------------
certain rules and regulations of the Commission which may at any time permit the
sale of the Restricted Securities to the public without registration, after such
time as a public market exists for the Common Stock of Echelon, Echelon agrees
to use its best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times after
the effective date that Echelon becomes subject to the reporting requirements of
the Securities Act or the Securities Exchange Act of 1934, as amended;
(b) Use its best efforts to file with the Commission in a timely
manner all reports and other documents required of Echelon under the Securities
Act and the Securities Exchange Act of 1934, as amended (at any time after it
has become subject to such reporting requirements); and
(c) So long as an Investor owns any Restricted Securities to furnish
to the Investor forthwith upon request a written statement by Echelon as to its
compliance with the reporting requirements of said Rule 144 (at any time after
ninety (90) days after the effective date of the first registration statement
filed by Echelon for an offering of its securities to the general public), and
of the Securities Act and the Securities Exchange Act of 1934, as amended (at
any time after it has become subject to such reporting requirements), a copy of
the most recent annual or quarterly report of Echelon, and such other reports
and documents of Echelon and other information in the possession of or
reasonably obtainable by Echelon as an Investor may reasonably request in
availing itself of any rule or regulation of the Commission allowing an Investor
to sell any such securities without registration.
1.14 Transfer of Registration Rights. The rights to cause Echelon
-------------------------------
to register securities granted Holders under Sections 1.5, 1.6 and 1.7 may be
assigned to a transferee or assignee reasonably acceptable to Echelon in
connection with any transfer or assignment of Registrable Securities by a Holder
provided that: (i) such transfer may otherwise be effected in accordance with
applicable securities laws, and (ii) such assignee or transferee acquires at
least 100,000 shares of Registrable Securities issued upon conversion thereof
(appropriately adjusted for stock splits, stock dividends, recapitalizations and
the like). Notwithstanding the foregoing, the rights to cause Echelon to
register securities may be assigned to any constituent partner of an Investor
without compliance with item (ii) above, provided written notice thereof is
promptly given to Echelon.
1.15 Standoff Agreement. Each Holder agrees, in connection with Echelon's
------------------
initial public offering of Echelon's securities that, upon request of Echelon or
the underwriters managing any underwritten offering of Echelon's securities, not
to sell, make any short sale of, loan, grant any option for the purchase of, or
otherwise dispose of any Registrable Securities (other than those included in
the registration) without the prior written consent of Echelon or such
underwriters, as the case may be, for such period of time (not to exceed one
hundred eighty (180) days) from the effective date of such registration as may
be requested by the underwriters; provided, that the officers and directors of
Echelon who own stock of Echelon also agree to such restrictions.
-11-
<PAGE>
1.16 Termination of Registration Rights. The registration rights granted
----------------------------------
pursuant to Section 1 shall terminate as to each Holder at the earlier of (i)
such time as a public market for Echelon's Common Stock exists and all
Registrable Securities held by such Holder may, in the opinion of counsel to
Echelon (which opinion shall be concurred in by counsel for such Holder), be
sold within a given three (3) month period pursuant to Rule 144 or any other
applicable exemption that allows for resale free of registration or, other than
with respect to affiliates of Echelon, or (ii) on the expiration of ten (10)
years following the date of this Agreement.
SECTION 2
TERMINATION OF PRIOR MODIFICATION AGREEMENT
-------------------------------------------
In consideration of the rights granted herein, the Prior Modification
Agreement is hereby null and void and of no further force and effect.
SECTION 3
MISCELLANEOUS
-------------
3.1 Governing Law. This Agreement shall be governed in all respects by
-------------
the internal laws of the State of Delaware.
3.2 Successor and Assigns. Except as otherwise provided herein, the
---------------------
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
3.3 Entire Agreement; Amendment. This Agreement constitutes the full and
---------------------------
entire understanding and agreement between the parties with regard to the
subjects hereof and thereof. Neither this Agreement nor any term hereof may be
amended, waived, discharged, or terminated other than by a written instrument
signed by Echelon and the holders of a majority of the Registrable Securities.
3.4 Effectiveness. This Agreement in its entirety shall be effective upon
-------------
the execution by Echelon, the Series E Purchasers and the record holders of a
majority of (i) the Common Stock held by Oshman and Markkula and entities
controlled by Oshman and Markkula, (ii) the Common Stock issued or issuable upon
conversion of the outstanding Series B Preferred, Series C Preferred and Series
D Preferred, and (iii) the Common Stock issued upon conversion of the Series A
Preferred, which conversion occurred on October 22, 1991.
3.5 Aggregation of Stock. All shares of Preferred Stock and Common Stock
--------------------
held or acquired by affiliated entities or persons shall be aggregated together
for the purpose of determining the availability of any rights under this
Agreement.
-12-
<PAGE>
3.6 Notices, etc. 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 or by messenger,
addressed (a) if to a Holder, to the address of such Holder as set forth on the
records of Echelon, or to such address as such Holder shall have furnished to
Echelon in writing, or, until any such Holder so furnishes an address to
Echelon, then to the address of the last holder of such Registrable Securities
who has so furnished an address to the Company, or (b) if to Echelon, one copy
shall be sent to 4015 Miranda Avenue, Palo Alto, California 94304 and addressed
to the attention of the President, or at such other address as Echelon shall
have furnished to the Investors.
3.7 Delays or Omissions. Except as expressly provided herein, no delay or
-------------------
omission to exercise any right, power, or remedy occurring to any Holder, upon
any breach or default of Echelon under this Agreement, shall impair any such
right, power or remedy of such Holder nor shall it be construed to be a waiver
of any such breach or default, or an acquiescence therein, as of or in any
similar breach or default therein occurring, nor shall any waiver of any single
breach or default be deemed a waiver of any other breach or default theretofore
or thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any Holder of any breach or default under this
Agreement, or any waiver on the part of any Holder of any provisions or
conditions of this Agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies, either under
this Agreement or by law or otherwise afforded to any Holder, shall be
cumulative and not alternative.
3.8 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which may be executed by less than all of the parties,
each of which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.
3.9 Titles and Subtitles. The titles and subtitles used in this Agreement
--------------------
are used for convenience only and are not considered in construing or
interpreting this Agreement.
-13-
<PAGE>
The foregoing agreement is hereby executed as of the date first above
written.
ECHELON CORPORATION
By:
--------------------------------
Oliver R. Stanfield,
Vice President
"SERIES B, C AND/OR D PURCHASERS"
MOTOROLA, INC.
By:
--------------------------------
Title:
-----------------------------
QUANTUM INDUSTRIAL PARTNERS LDC
By
---------------------------------
Title:
EDVENTURE CAPITAL CORPORATION
By:
--------------------------------
Title:
-----------------------------
-14-
<PAGE>
"OSHMAN AND MARKKULA ENTITIES"
------------------------------------------------
M. Kenneth Oshman and
------------------------------------------------
Barbara S. Oshman, Trustees of the Oshman
Trust Dated July 10, 1979
------------------------------------------------
Armas Clifford Markkula, Jr. and
------------------------------------------------
Linda K. Markkula, Trustees of the Arlin Trust,
Dated May 29, 1980
------------------------------------------------
Armas Clifford Markkula, Jr. and
------------------------------------------------
Linda K. Markkula, Trustees of the Restated
Arlin Trust Dated 12/12/90
MARKKULA FAMILY LIMITED PARTNERSHIP
By:
---------------------------------------------
Title:__________________________________________
------------------------------------------------
Thomas E. Bailard, Trustee of the Kristi Kathryn
Markkula Trust Dated October 28, 1980
-15-
<PAGE>
"SERIES A PURCHASERS"
--------------------------------------------------
Gibson Anderson, Jr. and Margaret Anderson,
Trustees of the Gibson and Margaret Anderson
Trust U/A Dated July 21, 1982
ASSOCIATED VENTURE INVESTORS
-----------------------------------------------
Title:
--------------------------------------------
ASSOCIATED VENTURE INVESTORS-PGF
By:
-----------------------------------------------
Title:
--------------------------------------------
ASSOCIATED VENTURE INVESTORS II
By:
-----------------------------------------------
Title:
--------------------------------------------
AVI PARTNERS N.V.
By:
-----------------------------------------------
Title:
--------------------------------------------
-16-
<PAGE>
AVI PARTNERS II N.V.
By:
-----------------------------------------------
Title:
--------------------------------------------
------------------------------------------------
Stanley Bac
------------------------------------------------
David F. Bellet
________________________________________________
David F. Bellet - Trustee Profit Sharing Plan
DLJSC - Cust. FBO David F. Bellet
BESSEMER VENTURE PARTNERS II L.P.
By:_____________________________________________
Title:__________________________________________
------------------------------------------------
Gene Pearce Carter and
------------------------------------------------
Patricia Jo-Ann Carter Trustees, Carter Family
Trust UDT 4/29/85
CHAMBERLAIN FAMILY ASSOCIATES
By:
-----------------------------------------------
Title:
--------------------------------------------
-17-
<PAGE>
-----------------------------------------------
Sidney R. Cohen
CPFIC, INC.
By:_____________________________________________
Title:__________________________________________
CROWN ASSOCIATES III, A LIMITED PARTNERSHIP
By:
-----------------------------------------------
Title:
------------------------------------------
CROWN-GLYNN ASSOCIATES, A LIMITED PARTNERSHIP
By:
-----------------------------------------------
Title:
------------------------------------------
------------------------------------------------
Tully M. Friedman, Trustee
Tully M. Friedman Revocable Trust U/A/D
1/3/80
------------------------------------------------
Robert Gemmell, Jr.
-18-
<PAGE>
GLYNN EMERGING OPPORTUNITY FUND
By:
---------------------------------------------
Title:
------------------------------------------
------------------------------------------------
John W. Glynn, Jr. Trustee, Glynn Family Trust
U/A/D 6/27/94
GLYNN VENTURES III, L.P.
By:
---------------------------------------------
Title:
------------------------------------------
------------------------------------------------
Michael P. Groom, Trustee or his Successor,
Under the Michael P. Groom Revocable Living
Trust Dated August 6, 1991
________________________________________________
John J. Hagenbuch
THE FRANCES J. HARRIS IRA
By:
---------------------------------------------
Title:__________________________________________
-19-
<PAGE>
THE STEPHEN E. HARRIS IRA
By:
---------------------------------------------
Title:__________________________________________
------------------------------------------------
F. Warren Hellman and
-------------------------------------------------
Patricia Christina Hellman, Trustees of the
Hellman Family Revocable Trust, Dated
December 17, 1984, as the same has been and
may be amended
STANLEY & MARION HERZSTEIN REVOCABLE TRUST
By:
-----------------------------------------------
Title:
------------------------------------------
------------------------------------------------
Douglas M. Kaplan, Trustee for the Aimee E.
Loewenstern 1980 Trust
------------------------------------------------
William E. Kerwin
KLEINER PERKINS CAUFIELD & BYERS IV
By:_____________________________________________
Title:__________________________________________
-20-
<PAGE>
________________________________________________
David J. Larson
------------------------------------------------
Stephen L. LaVaute
________________________________________________
Patricia A. Livingston, Trustee of Trust B Under
the Anthony R. Livingston and Patricia A.
Livingston Revocable Trust Dated February 23,
1990
------------------------------------------------
Karen Loewenstern
------------------------------------------------
Walter Loewenstern, Jr., Trustee of the Walter
Loewenstern, Jr. Separate Property Trust U/D/T
Dated February 12, 1990
------------------------------------------------
Armas Clifford Markkula, Jr. and
------------------------------------------------
Linda Kathryn Markkula, Trustees of the
Restated Arlin Trust Dated 12/12/90
MATRIX PARTNERS II, L.P.
By:
-----------------------------------------------
Title:
------------------------------------------
------------------------------------------------
Robert R. Maxfield, Trustee UA DTD 12/14/87,
as Amended
-21-
<PAGE>
MAYFIELD ASSOCIATES
By:
---------------------------------------------
Title:
------------------------------------------
MAYFIELD VI
By:
---------------------------------------------
Title:
------------------------------------------
------------------------------------------------
Philip M. McGrath and
------------------------------------------------
Mary E. McGrath, as Community Property
------------------------------------------------
Daryl Messinger
MOHR, DAVIDOW VENTURES II
By: WHD/LGM Partners, General Partner
By:
---------------------------------------------
Title: William H. Davidow, General Partner
------------------------------------------------
Richard M. Moley
-22-
<PAGE>
NEUBERGER & BERMAN TRUST
COMPANY TRUSTEE THE CROWN TRUST
By:
---------------------------------------------
Title:
------------------------------------------
THE 1976 MOLDAW FAMILY TRUST
By:
---------------------------------------------
Title:
------------------------------------------
NSH ASSOCIATES
By:
---------------------------------------------
Title:
------------------------------------------
O-S VENTURES
By:
---------------------------------------------
Title:
------------------------------------------
DAVID ROSS OSHMAN FIRST 1976 TRUST
By:_____________________________________________
Title:__________________________________________
-23-
<PAGE>
------------------------------------------------
M. Kenneth Oshman and
------------------------------------------------
Barbara S. Oshman, Trustees of the M. Kenneth
Oshman and Barbara S. Oshman Trusts Dated
July 10, 1979
------------------------------------------------
M. Kenneth Oshman, Trustee of the Elizabeth
Lee Melchor 1982 Trust
------------------------------------------------
M. Kenneth Oshman, Trustee of the Laura
Saunders Melchor 1984 Trust
------------------------------------------------
M. Kenneth Oshman, Trustee of the William
Lane Melchor 1983 Trust
PETER LAWRENCE OSHMAN SEPARATE PROPERTY TRUST
By:_____________________________________________
Title:__________________________________________
MARGO PERLSTEIN PARMACET TRUST
By:
---------------------------------------------
Title:
------------------------------------------
------------------------------------------------
Robert Pinzler
-24-
<PAGE>
------------------------------------------------
Bradley Robins
------------------------------------------------
Arthur Rock
------------------------------------------------
Laurance S. Rockefeller
------------------------------------------------
Steven J. Rosston
ROYBAL FAMILY TRUST: PHILIP M.
ROYBAL & JULIE A. ROYBAL, TRUSTEES
U/D 6/28/82
By:
---------------------------------------------
Title:
------------------------------------------
------------------------------------------------
Fayez Sarofim
SAXE FAMILY PARTNERSHIP
By:
---------------------------------------------
Title:
------------------------------------------
SECOND VENTURES, L.P.
By:_____________________________________________
Title:__________________________________________
-25-
<PAGE>
------------------------------------------------
William P. Sharpe
------------------------------------------------
Henry Singleton
3COM CORPORATION
By:_____________________________________________
Title:__________________________________________
U.S. VENTURE PARTNERS III
By:_____________________________________________
Title:__________________________________________
U.S.V. ENTREPRENEUR PARTNERS
By:_____________________________________________
Title:__________________________________________
VENROCK ASSOCIATES
By:
---------------------------------------------
Title:
------------------------------------------
-26-
<PAGE>
VENROCK ASSOCIATES II, L.P.
By:
---------------------------------------------
Title:
------------------------------------------
J.H. WHITNEY & CO.
By:
---------------------------------------------
Title:
------------------------------------------
WS INVESTMENT COMPANY 88B
By:
---------------------------------------------
Title:__________________________________________
-27-
<PAGE>
"SERIES E PURCHASERS"
/s/ M. Kenneth Oshman
-------------------------------------------
M. Kenneth Oshman and
/s/ Barbara Oshman
-------------------------------------------
Barbara S. Oshman,
Trustees of the Oshman Trust
Dated July 10, 1979
O-S VENTURES
By: /s/ M. Kenneth Oshman
-------------------------------------
Title: Managing General Partner
/s/ Armas Clifford Markkula, Jr.
-------------------------------------------
Armas Clifford Markkula, Jr. and
/s/ Linda K. Markkula
-------------------------------------------
Linda K. Markkula, Trustees of the Restated
Arlin Trust Dated 12/12/90
MARKKULA FAMILY LIMITED
PARTNERSHIP
By /s/ Armas Markkula, Jr.
---------------------------------------
Name:
Title:
/s/ Robert R. Maxfield
-------------------------------------------
Robert R. Maxfield
Trustee, UA DTD 12/14/87, as Amended
<PAGE>
/s/ Richard M. Moley
-----------------------------
Richard M. Moley
/s/ Arthur Rock
-----------------------------
Arthur Rock
VENROCK ASSOCIATES
By: /s/ Peter O. Crisp
-------------------------
Title: General Partner
----------------------
VENROCK ASSOCIATES II, L.P.
By: /s/ Peter O. Crisp
-------------------------
Peter O.Crisp
Title: General Partner
----------------------
/s/ Gibson Anderson, Jr
-----------------------------
Gibson Anderson, Jr. and
/s/ Margaret Anderson
-----------------------------
Margaret Anderson
As Trustees of the Gibson
and Margaret Anderson Trust
U/A dated 7/21/82
<PAGE>
/s/ G.F. Anderson
-------------------------------------------
G.F. Anderson
/s/ Kay M. Anderson
-------------------------------------------
Kay M. Anderson
/s/ Nola Hardin Anderson
-------------------------------------------
Nola Hardin Anderson
/s/ Overton S. Anderson
-------------------------------------------
Overton S. Anderson
/s/ Thomas E. Bailard
-------------------------------------------
Thomas E. Bailard, As Trustee of the Kristi
Kathryn Markkula Trust Dated
October 28, 1980
<PAGE>
/s/ Martin Bantle
------------------------------------------
Martin Bantle
/s/ Jason Bernstein
------------------------------------------
Jason Bernstein, as
Custodian for David Lawrence Bernstein
under the California Uniform Transfers to
Minors Act
/s/ Ronald E. Bernstein
------------------------------------------
Ronald E. Bernstein
/s/ James A. Capolongo
------------------------------------------
James A. Capolongo
/s/ Gene Pearce Carter
------------------------------------------
Gene Pearce Carter and
/s/ Patricia Jo-Ann Carter
------------------------------------------
Patricia Jo-Ann Carter
Trustees, Carter Family Trust
UTD 4/29/85
<PAGE>
CHARLES SCHWAB & CO., INC. FBO
ROBERT N. HERZSTEIN SEP-IRA ACCT.
#OD4319-1837
By /s/ Joseph Aldridge
---------------------
Name: JOSEPH ALDRIDGE
Title: ACTING BRANCH MANAGER
Charles Schwab & Co., Inc. does not represent that it has satisfied Section
5.1(c) on page 8 in signing this document nor does Charles Schwab & Co., Inc.
represent that it has analyzed this investment's merits and risk in any way.
This account is self-directed and the investment decision is solely the
customer's responsibility. Schwab is acting only as custodian and upon the
client's express instructions.
/s/ Howard D. Chastain, Jr.
----------------------------
Howard D. Chastain, Jr.
/s/ Charlie Chung
----------------------------
Charlie Chung
/s/ Glenn B. Dahl
----------------------------
Glenn B. Dahl
EDVENTURE CAPITAL CORPORATION
By: [SIGNATURE ILLEGIBLE]
-----------------------
Title: President
<PAGE>
/s/ Dana Foy
--------------------------------------------
Dana Foy and
/s/ Patricia Foy
--------------------------------------------
Patricia Foy
/s/ Tully M. Friedman
--------------------------------------------
Tully M. Friedman, as Trustee of the
Tully M. Friedman Revocable
Trust U/A/D 1/3/80
/s/ Michael P. Groom
--------------------------------------------
Michael P. Groom, Trustee or his Successor,
Under the Michael P. Groom Revocable
Living Trust dated 8/6/91
/s/ Stephen E. Harris
--------------------------------------------
Stephen E. Harris and
/s/ Frances J. Harris
--------------------------------------------
Frances J. Harris
/s/ F. Warren Hellman
--------------------------------------------
F. Warren Hellman and
/s/ Patricia Christina Hellman
--------------------------------------------
Patricia Christina Hellman
As Trustees of the Hellman Family
Revocable Trust Dated 12/17/84, as the
same has been and may be amended
<PAGE>
/s/ Hector Hernandez
-------------------------------------------
Hector Hernandez
/s/ Jurgen Hertel
-------------------------------------------
Jurgen Hertel
/s/ [SIGNATURE ILLEGIBLE]
-------------------------------------------
Name: Trustee of the Stanley ad Marion
Herzstein Revocable Trust
/s/ George Michael Hey
----------------------------------------
George Michael Hey
/s/ Kazuyo Kawakita
-------------------------------------------
Kazuyo Kawaki
<PAGE>
/s/ Julia A. Lim
------------------------------------
Julia A. Lim
____________________________________
Jack L. Melchor,
____________________________________
Norman J. Melchor and/or
/s/ Gregory L. Melchor
------------------------------------
Gregory L. Melchor
As Trustees under Revocable Trust
dtd 4/16/82, as amended, FBO Jack L.
Melchor and Norma J. Melchor
NEST EGG FAMILY LIMITED
PARTNERSHIP
By /s/ David E. Waldron
----------------------------------
Title: General Partner
/s/ Edward Parmacek
------------------------------------
Edward Parmacek
/s/ Margo Perlstein Parmacek
------------------------------------
Margo Perlstein Parmacek
As Trustee of the
Margo Perlstein Parmacek Trust
<PAGE>
/s/ Todd Parmacek
------------------------
Todd Parmacek
/s/ Mukesh Patel
------------------------
Mukesh Patel
/s/ Darlene A. Pierce
------------------------
Darlene A. Pierce
/s/ Karen M. Sanchez
------------------------
Karen M. Sanchez
/s/ Masami Takai
------------------------
Masami Takai
<PAGE>
/s/ W. Woodruff Tompkins
--------------------------------------------
W. Woodruff Tompkins, as Trustee for the
W. Woodruff Tompkins Trust (Restated) Dated
February 22, 1988
TRANSCORP C/F WILLIAM E. MILLER IRA
By: /s/ David J. Effrein
-----------------------------------------
Name: David J. Effrein
Title: Trust Officer
<PAGE>
EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
-------------------------
THIS INDEMNIFICATION AGREEMENT ("Agreement") is made as of this _____ day
of ___________, 19__, by and between Echelon Corporation, a Delaware corporation
(the "Company"), and _______________ ("Indemnitee").
WHEREAS, the Company and Indemnitee recognize the increasing difficulty in
obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting officers and directors
to expensive litigation risks at the same time as the availability and coverage
of liability insurance has been severely limited;
WHEREAS, Indemnitee does not regard the current protection available as
adequate given the present circumstances, and Indemnitee and other officers and
directors of the Company may not be willing to serve as officers and directors
without additional protection; and
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve as officers and directors of
the Company and to indemnify its officers and directors so as to provide them
with the maximum protection permitted by law.
NOW, THEREFORE, in consideration for the Indemnitee's agreement to continue
to serve the corporation, the Company and Indemnitee hereby agree as follows:
1. INDEMNIFICATION.
---------------
(a) Third Party Proceedings. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while an
officer or director or by reason of the fact that Indemnitee is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) actually and reasonably incurred by
Indemnitee in connection with such action, suit or proceeding if Indemnitee
acted in good faith and in a manner Indemnitee reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe Indemnitee's
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
---------------
its equivalent, shall not, of itself, create a presumption that (i) Indemnitee
did not act in good faith and in a manner which Indemnitee reasonably believed
to be in or not opposed to the
<PAGE>
best interests of the Company, or (ii) with respect to any criminal action or
proceeding, Indemnitee had reasonable cause to believe that Indemnitee's conduct
was unlawful.
(b) Proceedings by or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding by or
in the right of the Company or any subsidiary of the Company to procure a
judgment in its favor by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while an
officer or director or by reason of the fact that Indemnitee is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees) and, to the fullest extent
permitted by law, amounts paid in settlement actually and reasonably incurred by
Indemnitee in connection with the defense or settlement of such action, suit or
proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the Company
and its shareholders, except that no indemnification shall be made in respect of
any claim, issue or matter as to which Indemnitee shall have been finally
adjudicated by court order or judgment to be liable to the Company in the
performance of Indemnitee's duty to the Company and its shareholders unless and
only to the extent that the court in which such action, suit or proceeding is or
was pending shall determine upon application that, in view of all the
circumstances of the case, Indemnitee is fairly and reasonably entitled to
indemnity for such expenses and then only to the extent that the court shall
determine.
(c) Mandatory Payment of Expenses. To the extent that Indemnitee has
-----------------------------
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Subsections (a) and (b) of this Section 1 or the
defense of any claim, issue or matter therein, Indemnitee shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
Indemnitee in connection therewith.
2. EXPENSES; INDEMNIFICATION PROCEDURE.
-----------------------------------
(a) Advancement of Expenses. The Company may advance all expenses
-----------------------
reasonably incurred by Indemnitee in connection with the investigation, defense,
settlement or appeal of any civil or criminal action, suit or proceeding
referenced in Section 1(a) or (b) hereof (but not amounts actually paid in
settlement of any such action, suit or proceeding). Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall ultimately be determined that Indemnitee is not entitled to be indemnified
by the Company as authorized hereby. The advances to be made hereunder shall be
paid by the Company to Indemnitee within twenty (20) days following delivery of
a written request therefor by Indemnitee to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to his or her right to be indemnified under this Agreement,
give the Company notice in writing as soon as practicable of any claim made
against Indemnitee for which indemnification is being or will be sought under
this Agreement. Notice to the Company shall be directed to the President of the
Company at the address designated below the Company's signature hereto, or such
other address as
-2-
<PAGE>
the Company shall designate in writing to Indemnitee. Notice shall be deemed
received on the third business day after the date postmarked if sent by domestic
certified or registered mail, properly addressed; otherwise notice shall be
deemed received when such notice shall actually be received by the Company. In
addition, Indemnitee shall give the Company such information and cooperation as
it may reasonably require and as shall be within Indemnitee's power.
(c) Procedure. Any indemnification provided for in Section 1 shall
---------
be made no later than forty-five (45) days after receipt of the written request
of Indemnitee. If a claim under this Agreement, under any statute, or under any
provision of the Company's Certificate of Incorporation or By-laws providing for
indemnification, is not paid in full by the Company within forty-five (45) days
after a written request for payment thereof has first been received by the
Company, Indemnitee may, but need not, at any time thereafter bring an action
against the Company to recover the unpaid amount of the claim and, subject to
Section 12 of this Agreement, Indemnitee shall also be entitled to be paid for
the reasonable expenses (including attorneys' fees) of bringing such action. It
shall be a defense to any such action (other than an action brought to enforce a
claim for expenses incurred in connection with any action, suit or proceeding in
advance of its final disposition) that Indemnitee has not met the standards of
conduct which make it permissible under applicable law for the Company to
indemnify Indemnitee for the amount claimed, but Indemnitee shall be entitled to
receive interim payments of expenses pursuant to Subsection 2(a) unless and
until such defense may be finally adjudicated by court order or judgment from
which no further right of appeal exists. It is the parties' intention that if
the Company contests Indemnitee's right to indemnification, the question of
Indemnitee's right to indemnification shall be for the court to decide, and
neither the failure of the Company (including its Board of Directors, any
committee or subgroup of the Board of Directors, independent legal counsel, or
its stockholders) to have made a determination that indemnification of
Indemnitee is proper in the circumstances because Indemnitee has met the
applicable standard of conduct required by applicable law, nor an actual
determination by the Company (including its Board of Directors, any committee or
subgroup of the Board of Directors, independent legal counsel, or its
stockholders) that Indemnitee has not met such applicable standard of conduct,
shall create a presumption that Indemnitee has or has not met the applicable
standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice
------------------
of a claim pursuant to Section 2(b) hereof the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of Indemnitee, all amounts payable as a result of such proceeding in accordance
with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be
--------------------
obligated under Section 2(a) hereof to pay the reasonable expenses of any
proceeding against Indemnitee, the Company, if appropriate, shall be entitled to
assume the defense of such proceeding, with counsel approved by Indemnitee,
which approval shall not be unreasonably withheld, upon the delivery to
Indemnitee of written notice of its election so to do. After delivery of such
notice, approval of such counsel by Indemnitee and the retention of such counsel
by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with
respect to the same proceeding, provided that (i) Indemnitee shall have the
right to
-3-
<PAGE>
employ his or her counsel in any such proceeding at Indemnitee's expense; and
(ii) if (A) the employment of counsel by Indemnitee has been previously
authorized by the Company, (B) Indemnitee shall have reasonably concluded that
there may be a conflict of interest between the Company and Indemnitee in the
conduct of any such defense, or (C) the Company shall not, in fact, have
employed counsel to assume the defense of such proceeding, then the reason able
fees and expenses of Indemnitee's counsel shall be at the expense of the
Company.
3. ADDITIONAL INDEMNIFICATION RIGHTS; NON-EXCLUSIVITY.
--------------------------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement,
-----
the Company hereby agrees to indemnify the Indemnitee to the full extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's Bylaws or by statute. In the event of any
change, after the date of this Agreement, in any applicable law, statute, or
rule which expands the right of a Delaware corporation to indemnify a member of
its board of directors or an officer, such changes shall be, ipso facto, within
---- -----
the purview of Indemnitee's rights and the Company's obligations, under this
Agreement. In the event of any change in any applicable law, statute, or rule
which narrows the right of a Delaware corporation to indemnify a member of its
board of directors or an officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement shall have
no effect on this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall not be deemed exclusive of any rights to which an Indemnitee may be
entitled under the Company's Certificate of Incorporation, the Company's Bylaws,
any agreement, any vote of stockholders or disinterested directors, the Delaware
General Corporation Law, or otherwise, both as to action in Indemnitee's
official capacity and as to action in another capacity while holding such
office. The indemnification provided under this Agreement shall continue as to
Indemnitee for any action taken or not taken while serving in an indemnified
capacity even though Indemnitee may have ceased to serve in such capacity at the
time of any action, suit or other covered proceeding.
4. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred by him or her in the investigation, defense, appeal or settlement of
any civil or criminal action, suit or proceeding, but not, however, for the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion of such expenses, judgments, fines or penalties to which Indemnitee
is entitled.
5. MUTUAL ACKNOWLEDGEMENT. Both the Company and Indemnitee acknowledge
----------------------
that in certain instances, federal law or applicable public policy may prohibit
the Company from indemnifying its directors and officers under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the Securities and
Exchange Commission to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
-4-
<PAGE>
6. DIRECTORS' AND OFFICERS' LIABILITY INSURANCE. The Company shall, from
--------------------------------------------
time to time, make the good faith determination whether or not it is practicable
for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among
other considerations, the Company will weigh the costs of obtaining such
insurance coverage against the protection afforded by such coverage. In all
policies of directors' and officers' liability insurance, Indemnitee shall be
named as an insured in such a manner as to provide Indemnitee the same rights
and benefits as are accorded to the most favorably insured of the Company's
directors, if Indemnitee is a director; or of the Company's officers, if
Indemnitee is not a director of the Company but is an officer; or of the
Company's key employees, if Indemnitee is not an officer or director but is a
key employee. Notwithstanding the foregoing, the Company shall have no
obligation to obtain or maintain such insurance if the Company determines in
good faith that such insurance is not reasonably available, the premium costs
for such insurance are disproportionate to the amount of coverage provided, the
coverage provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or if Indemnitee is covered by similar insurance
maintained by a subsidiary or parent of the Company.
7. SEVERABILITY. Nothing in this Agreement is intended to require or
------------
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 7. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
8. EXCEPTIONS. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 145 of the Delaware General Corporation Law, but such indemnification or
advancement of expenses may be provided by the Company in specific cases if the
Board of Directors has approved the initiation or bringing of such suit; or
(b) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous;
(c) Insured Claims. To indemnify Indemnitee for expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties,
-5-
<PAGE>
and amounts paid in settlement) which have been paid directly to Indemnitee by
an insurance carrier under a policy of directors' and officers' liability
insurance maintained by the Company or any parent or subsidiary of the Company;
or
(d) Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
9. EFFECTIVENESS OF AGREEMENT. This Agreement shall be effective as of
--------------------------
the date set forth on the first page and may apply to acts or omissions of
Indemnitee which occurred prior to such date if Indemnitee was an officer,
director, employee or other agent of the Company, or was serving at the request
of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, at the time such act or
omission occurred.
10. SUBROGATION. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the
corporation effectively to bring suit to enforce such rights.
11. CONTINUATION OF INDEMNIFICATION. All agreements and obligations of
-------------------------------
the Company contained herein shall continue during the period that Indemnitee is
a director, officer or agent of the Company and shall continue thereafter so
long as Indemnitee shall be subject to any possible claim or threatened, pending
or completed action, suit or proceeding, whether civil, criminal, arbitrational,
administrative or investigative, by reason of the fact that Indemnitee was
serving in the capacity referred to herein.
12. AMENDMENT AND TERMINATION. No amendment, modification, termination or
-------------------------
cancellation of this Agreement shall be effective unless in writing signed by
both parties hereto.
13. CONSTRUCTION OF CERTAIN PHRASES.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
if Indemnitee is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, Indemnitee shall stand in
the same position under the provisions of this Agreement with respect to the
resulting or surviving corporation as Indemnitee would have with respect to such
constituent corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company"
-6-
<PAGE>
shall include any service as a director, officer, employee or agent of the
Company which imposes duties on, or involves services by, such director,
officer, employee or agent with respect to an employee benefit plan, its
participants, or beneficiaries; and if Indemnitee acted in good faith and in a
manner Indemnitee reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to
have acted in a manner "not opposed to the best interests of the Company" as
referred to in this Agreement.
14. COUNTERPARTS. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
15. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
----------------------
Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
16. ATTORNEYS' FEES. In the event that any action is instituted by
---------------
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and reasonable expenses,
including reasonable attorneys' fees, incurred by Indemnitee with respect to
such action, unless as a part of such action the court of competent jurisdiction
determines that each of the material assertions made by Indemnitee as a basis
for such action were not made in good faith or were frivolous. In the event of
an action instituted by or in the name of the Company under this Agreement or to
enforce or interpret any of the terms of this Agreement, Indemnitee shall be
entitled to be paid all court costs and expenses, including attorneys' fees,
incurred by Indemnitee in defense of such action (including with respect to
Indemnitee's counterclaims and crossclaims made in such action), unless as a
part of such action the court determines that each of Indemnitee's material
defenses to such action was made in bad faith or was frivolous.
17. NOTICE. All notices, requests, demands and other communications under
------
this Agreement shall be in writing and shall be deemed duly given on the third
business day after the date postmarked, if mailed by domestic certified or
registered mail with postage prepaid, or, if delivered by other means, on the
date actual notice is received. Addresses for notice to either party are as
shown on the signature page of this Agreement or as subsequently modified by
written notice.
18. CONSENT TO JURISDICTION. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of Delaware.
19. CHOICE OF LAW. This Agreement shall be governed by and its provisions
-------------
construed in accordance with the laws of the State of Delaware, as applied to
contracts between Delaware residents entered into and to be performed entirely
within Delaware.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
ECHELON CORPORATION
By:____________________________
Its:___________________________
Address: 4015 Miranda Avenue
Palo Alto, CA 94304
AGREED TO AND ACCEPTED:
INDEMNITEE:
__________________________________
Address: ________________________
________________________
________________________
-8-
<PAGE>
EXHIBIT 10.3
ECHELON CORPORATION
1988 STOCK OPTION PLAN
(as amended through February 1, 1995)
1. Purposes of the Plan. The purposes of this Stock Option Plan are to
--------------------
attract and retain the best available personnel, to provide additional incentive
to the Employees and Consultants of Echelon Systems Corporation (the "Company")
and to promote the success of the Company's business.
Options granted hereunder may be either Incentive Stock Options or
Nonstatutory Stock Options, at the discretion of the Board and as reflected in
the terms of the written option agreement. The Board also has the discretion to
grant Stock Purchase Rights.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Board" shall mean the Committee, if one has been appointed, or the
-----
Board of Directors of the Company, if no Committee is appointed.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Committee" shall mean the Committee appointed by the Board of
---------
Directors in accordance with Section 4(a) of the Plan, if one is appointed.
(d) "Common Stock" shall mean the Common Stock of the Company.
------------
(e) "Company" shall mean Echelon Corporation, a Delaware corporation.
-------
(f) "Consultant" shall mean any person who is engaged by the Company or
----------
any Parent or Subsidiary to render consulting services and is compensated for
such consulting services, and any director of the Company whether compensated
for such services or not; provided that if and in the event the Company
registers any class of any equity security pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the term
Consultant shall thereafter not include directors who are not compensated for
their services or are paid only a director's fee by the Company.
(g) "Continuous Status as an Employee or Consultant" shall mean the
----------------------------------------------
absence of any interruption or termination of service as an Employee or
Consultant, as applicable. Continuous Status as an Employee or Consultant shall
not be considered interrupted in the case of sick leave, military leave, or any
other leave of absence approved by the Board; provided that such leave is for a
period of not more than 90 days or reemployment upon the expiration of such
leave is guaranteed by contract or statute.
<PAGE>
(h) "Employee" shall mean any person, including officers and directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(i) "Incentive Stock Option" shall mean an Option intended to qualify
----------------------
as an incentive stock option within the meaning of Section 422 of the Code.
(j) "Nonstatutory Stock Option" shall mean an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(k) "Option" shall mean a stock option granted pursuant to the Plan.
------
(l) "Optioned Stock" shall mean the Common Stock subject to an Option.
--------------
(m) "Optionee" shall mean an Employee or Consultant who receives an
--------
Option.
(n) "Parent" shall mean a "parent corporation," whether now or
------
hereafter existing, as defined in Section 425(e) of the Code.
(o) "Plan" shall mean this 1988 Stock Option Plan.
----
(p) "Purchaser" shall mean an Employee or Consultant who exercises a
---------
Stock Purchase Right.
(q) "Share" shall mean a share of the Common Stock, as adjusted in
-----
accordance with Section 11 of the Plan.
(r) "Stock Purchase Right" shall mean a right to purchase Common Stock
--------------------
pursuant to the Plan.
(s) "Subsidiary" shall mean a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 425(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
-------------------------
the Plan, the maximum aggregate number of shares under the Plan is 8,900,000
shares of Common Stock. The Shares may be authorized, but unissued, or
reacquired Common Stock.
If an Option or Stock Purchase Right should expire or become
unexercisable for any reason without having been exercised in full, then the
unpurchased Shares which were subject thereto shall, unless the Plan shall have
been terminated, become available for future grant or sale under the Plan.
-2-
<PAGE>
4. Administration of the Plan.
--------------------------
(a) Procedure. The Plan shall be administered by the Board of
--------
Directors of the Company.
(i) Subject to subparagraph (ii), the Board of Directors may
appoint a Committee consisting of not less than two members of the Board of
Directors to administer the Plan on behalf of the Board of Directors, subject to
such terms and conditions as the Board of Directors may prescribe. Once
appointed, the Commit tee shall continue to serve until otherwise directed by
the Board of Directors. Members of the Board who are either eligible for Options
and/or Stock Purchase Rights or have been granted Options and/or Stock Purchase
Rights may vote on any matters affecting the administration of the Plan or the
grant of any Options and/or Stock Purchase Rights pursuant to the Plan, except
that no such member shall act upon the granting of an Option and/or Stock
Purchase Right to such member, but any such member may be counted in determining
the existence of a quorum at any meeting of the Board during which action is
taken with respect to the granting of Options and/or Stock Purchase Rights to
the member.
(ii) Notwithstanding the foregoing subparagraph (i), if and in
any event the Company registers any class of any equity security pursuant to
Section 12 of the Exchange Act, from the effective date of such registration
until six months after the termination of such registration, any grants of
Options and/or Stock Purchase Rights to officers or directors shall only be made
by the Board of Directors; provided, however, that if a majority of the Board of
Directors is eligible to participate in this Plan or any other stock option or
other stock plan of the Company or any of its affiliates, or has been eligible
at any time during the prior one-year period (or, if shorter, the period
following the initial registration of the Company's equity securities under
Section 12 of the Exchange Act) any grants of Options and/or Stock Purchase
Rights to directors must be made by, or only in accordance with the
recommendation of, a Committee consisting of three or more persons, who may but
need not be directors or employees of the Company, appointed by the Board of
Directors and having full authority to act in the matter, none of whom is
eligible to participate in this Plan or any other stock option or other stock
plan of the Company or any of its affiliates, or has been eligible at any time
during the prior one-year period (or, if shorter, the period following the
initial registration of the Company's equity securities under Section 12 of the
Exchange Act). Any Committee administering the Plan with respect to grants to
officers who are not also directors shall conform to the requirements of the
preceding sentence. Once appointed, the Committee shall continue to serve until
otherwise directed by the Board of Directors.
(iii) Subject to the foregoing subparagraphs (i) and (ii), from
time to time the Board of Directors may increase the size of the Committee and
appoint additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies however caused, or
remove all members of the Committee and thereafter directly administer the Plan.
-3-
<PAGE>
(b) Powers of the Board. Subject to the provisions of the Plan, the
-------------------
Board shall have the authority, in its discretion: (i) to grant Incentive Stock
Options, Nonstatutory Stock Options or Stock Purchase Rights; (ii) to determine,
upon review of relevant information and in accordance with Section 7 of the
Plan, the fair market value of the Common Stock; (iii) to determine the exercise
price per share of Options or Stock Purchase Rights, to be granted, which
exercise price shall be determined in accordance with Section 7 of the Plan;
(iv) to determine the Employees or Consultants to whom, and the time or times at
which, Options or Stock Purchase Rights shall be granted and the number of
shares to be represented by each Option or Stock Purchase Right; (v) to
interpret the Plan; (vi) to prescribe, amend and rescind rules and regulations
relating to the Plan; (vii) to determine the terms and provisions of each Option
and Stock Purchase Right granted (which need not be identical) and, with the
consent of the holder thereof, modify or amend any provisions (including
provisions relating to exercise price) of any Option or Stock Purchase Right;
(viii) to accelerate or defer (with the consent of the Optionee) the exercise
date of any Option; (ix) to authorize any person to execute on behalf of the
Company any instrument required to effectuate the grant of an Option or Stock
Purchase Right previously granted by the Board; (x) to reduce the exercise price
of any Option to the then fair market value if the fair market value of the
Common Stock covered by such Option shall have declined since the date the
Option was granted; and (xi) to make all other determinations deemed necessary
or advisable for the administration of the Plan.
(c) Effect of Board's Decision. All decisions, determinations and
--------------------------
interpretations of the Board shall be final and binding on all Optionees,
Purchasers and any other holders of any Options or Stock Purchase Rights granted
under the Plan.
5. Eligibility.
-----------
(a) Options and Stock Purchase Rights may be granted to Employees and
Consultants provided that Incentive Stock Options may only be granted to
Employees. An Employee or Consultant who has been granted an Option or Stock
Purchase Right may, if such Employee or Consultant is otherwise eligible, be
granted additional Option(s) or Stock Purchase Right(s).
(b) Each Option shall be designated in the written option agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate fair market
value of the Shares with respect to which Options designated as Incentive Stock
Options are exercisable for the first time by any Optionee during any calendar
year (under all plans of the Company) exceeds $100,000, such Options shall be
treated as Nonstatutory Stock Options.
(c) For purposes of Section 5(b), Options shall be taken into account
in the order in which they were granted, and the fair market value of the Shares
shall be determined as of the time the Option with respect to such Shares is
granted.
(d) The Plan shall not confer upon any Optionee or holder of a Stock
Purchase Right any right with respect to continuation of employment by or the
rendition of services to the
-4-
<PAGE>
Company, nor shall it interfere in any way with his or her right or the
Company's right to terminate his or her employment or services at any time, with
or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by vote of the
holders of a majority of the outstanding shares of the Company entitled to vote
on the adoption of the Plan. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 14 of the Plan.
7. Exercise Price and Consideration.
--------------------------------
(a) The per Share exercise price for the Shares to be issued pursuant
to exercise of an Option or Stock Purchase Right shall be such price as is
determined by the Board, but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the fair
market value per Share on the date of grant.
(B) granted to any Employee, the per Share exercise price shall
be no less than 100% of the fair market value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a person who, at the time of the grant of such
Option, owns stock representing more than ten percent (10%) of the voting power
of all classes of stock of the Company or any Parent or Subsidiary, the per
Share exercise price shall be no less than 110% of the fair market value per
Share on the date of the grant.
(B) granted to any person, the per Share exercise price shall
be no less than 85% of the fair market value per Share on the date of grant.
(iii) In the case of a Stock Purchase Right granted to any person,
the per Share exercise price shall be no less than 85% of the fair market value
per Share on the date of grant.
For purposes of this Section 7(a), in the event that an Option or Stock
Purchase Right is amended to reduce the exercise price, the date of grant of
such Option or Stock Purchase Right shall thereafter be considered to be the
date of such amendment.
(b) The fair market value shall be determined by the Board in its
discretion; provided, however, that where there is a public market for the
Common Stock, the fair market value
-5-
<PAGE>
per Share shall be the mean of the bid and asked prices (or the closing price
per share if the Common Stock is listed on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") National Market System of the
Common Stock for the date of grant, as reported in the Wall Street Journal (or,
if not so reported, as otherwise reported by the NASDAQ System) or, in the event
the Common Stock is listed on a stock exchange, the fair market value per Share
shall be the closing price on such exchange on the date of grant of the Option
or Stock Purchase Right, as reported in the Wall Street Journal.
(c) The consideration to be paid for the Shares to be issued upon
exercise of an Option or Stock Purchase Right, including the method of payment,
shall be determined by the Board (and, in the case of an Incentive Stock Option,
shall be determined at the time of grant), and may consist entirely of (i) cash,
(ii) check, (iii) promissory note, (iv) other Shares of Common Stock which (x)
either have been owned by the Optionee for more than six (6) months on the date
of surrender or were not acquired directly or indirectly, from the Company, and
(y) have a fair market value on the date of surrender equal to the aggregate
exercise price of the Shares as to which said Option shall be exercised, (v)
authorization from the Company to retain from the total number of Shares as to
which the Option is exercised that number of Shares having a fair market value
on the date of exercise equal to the exercise price for the total number of
Shares as to which the Option is exercised; (vi) delivery of a properly executed
exercise notice together with irrevocable instructions to a broker to promptly
deliver to the Company the amount of sale or loan proceeds required to pay the
exercise price; (vii) any combination of such methods of payment; or (viii) such
other consideration and method of payment for the issuance of Shares to the
extent permitted under applicable laws. Notwithstanding the foregoing, Incentive
Stock Options outstanding as of April 17, 1989 may only be exercised by cash or
with Shares of Common Stock (as described in (iv) above).
8. Options.
-------
(a) Term of Option. The term of each Option shall be ten (10) years
--------------
from the date of grant thereof or such shorter term as may be provided in the
Option Agreement. However, in the case of an Option granted to an Optionee who,
at the time the Option is granted, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the term of the Option shall be five (5) years from the date of
grant thereof or such shorter time as may be provided in the Option Agreement.
(b) Exercise of Option.
------------------
(i) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Board, including performance criteria with respect to the
Company and/or the Optionee, and as shall be permissible under the terms of the
Plan.
An Option may not be exercised for a fraction of a Share.
-6-
<PAGE>
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 7 of the Plan. Until
the issuance (as evidenced by the appropriate entry on the books of the Company
or of a duly authorized transfer agent of the Company) of the stock certificate
evidencing such Shares, no right to vote or receive dividends or any other
rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such stock certificate promptly upon exercise of the Option. In the
event that the exercise of an Option is treated in part as the exercise of an
Incentive Stock Option and in part as the exercise of a Nonstatutory Stock
Option pursuant to Section 5(b), the Company shall issue a separate stock
certificate evidencing the Shares treated as acquired upon exercise of an
Incentive Stock Option and a separate stock certificate evidencing the Shares
treated as acquired upon exercise of a Nonstatutory Stock Option and shall
identify each such certificate accordingly in its stock transfer records. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(ii) Termination of Status as an Employee or Consultant. In the event
--------------------------------------------------
of termination of an Optionee's Continuous Status as an Employee or Consultant
(as the case may be), such Optionee may, but only within thirty (30) days (or,
in the case of a Nonstatutory Stock Option, such other period of time not
exceeding six (6) months as determined by the Board) after the date of such
termination (but in no event later than the date of expiration of the term of
such Option as set forth in the Option agreement), exercise the Option to the
extent that such Employee or Consultant was entitled to exercise it at the date
of such termination. To the extent that such Employee or Consultant was not
entitled to exercise the Option at the date of such termination, or if such
Employee or Consultant does not exercise such Option (which such Employee or
Consultant was entitled to exercise) within the time specified herein, the
Option shall terminate.
(iii) Disability of Optionee. Notwithstanding the provisions of Section
----------------------
8(b)(ii) above, in the event of termination of an Optionee's Continuous Status
as an Employee or Consultant as a result of his or her disability, Optionee may,
but only within twelve (12) months from the date of such termination (but in no
event later than the date of expiration of the term of such Option as set forth
in the Option Agreement), exercise the Option to the extent that such Employee
or Consultant was entitled to exercise it at the date of such termination;
provided, however, that if such disability is not a "disability" as such term is
defined in Section 22(e)(3) of the Code, in the case of an Incentive Stock
Option such Incentive Stock Option shall automatically convert to a Nonstatutory
Stock Option on the day three months and one day following such termination. To
the extent that such Employee or Consultant was not entitled to exercise the
Option at the date of such termination, or if
-7-
<PAGE>
such Employee or Consultant does not exercise such Option (which such Employee
or Consultant was entitled to exercise) within the time specified herein, the
Option shall terminate.
(iv) Death of Optionee. In the event of the death of an Optionee, the
-----------------
Option may be exercised, at any time within twelve (12) months (but in no event
later than the date of expiration of the term of such Option as set forth in the
Option agreement), by the Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only to the extent
of the right to exercise had accrued at the date of death.
9. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. After the Board of Directors determines that
------------------
it will offer an Employee or Consultant a Stock Purchase Right, it shall deliver
to the offeree a stock purchase agreement setting forth the terms, conditions
and restrictions relating to the offer, including the number of Shares which
such person shall be entitled to purchase, and the time within which such person
must accept such offer, which shall in no event exceed six (6) months from the
date upon which the Board of Directors or its Committee made the determination
to grant the Stock Purchase Right. The offer shall be accepted by execution of a
stock purchase agreement in the form determined by the Board of Directors.
(b) Issuance of Shares. Forthwith after payment therefor, the Shares
------------------
purchased shall be duly issued; provided, however, that the Board may require
that the Purchaser make adequate provision for any Federal and State withholding
obligations of the Company as a condition to the Purchaser purchasing such
Shares.
(c) Repurchase Option. Unless the Board determines otherwise, the stock
-----------------
purchase agreement shall grant the Company a repurchase option exercisable upon
the voluntary or involuntary termination of the Purchaser's employment with the
Company for any reason (including death or disability). If the Board so
determines, the purchase price for shares repurchased may be paid by
cancellation of any indebtedness of the Purchaser to the Company. The repurchase
option shall lapse at such rate as the Board may determine.
(d) Other Provisions. The stock purchase agreement or stock bonus
----------------
agreement shall contain such other terms, provisions and conditions not
inconsistent with the Plan as may be determined by the Board of Directors.
10. Non-Transferability of Options and Stock Purchase Rights. The Options
--------------------------------------------------------
and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee or Purchaser, only by the Optionee or Purchaser.
11. Adjustments Upon Changes in Capitalization or Merger. Subject to any
-----------------------------------------------------
required action by the shareholders of the Company, the number of shares of
Common Stock covered by each
-8-
<PAGE>
outstanding Option and Stock Purchase Right, and the number of shares of Common
Stock which have been authorized for issuance under the Plan but as to which no
Options or Stock Purchase Rights have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, or repurchase of Shares from a Purchaser upon termination of his
or her employment or consulting relationship, as well as the price per share of
Common Stock covered by each such outstanding Option or Stock Purchase Right,
shall be proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the Common Stock of the
Company or the payment of a stock dividend with respect to the Common Stock or
any other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be
deemed to have been "effected without receipt of consideration." Such adjustment
shall be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an Option or Stock Purchase Right.
In the event of the proposed dissolution or liquidation of the Company, the
Board shall notify the Optionee at least fifteen (15) days prior to such
proposed action. To the extent it has not been previously exercised, the Option
will terminate immediately prior to the consummation of such proposed action.
In the event of a merger of the Company with or into another corporation, the
Option shall be assumed or an equivalent option shall be substituted by such
successor corporation or a parent or subsidiary of such successor corporation.
With respect to any Option granted prior to the issuance of the amending order
by the California Department of Corporations (the "Department") increasing the
number of shares qualified for issuance under the Plan to 5,800,000, in the
event that such successor corporation does not agree to assume such Option or to
substitute an equivalent option, the Board shall, in lieu of such assumption or
substitution, provide for the Optionee to have the right to exercise such Option
as to all of the Optioned Stock, including Shares as to which such Option would
not otherwise be exercisable. If the Board makes an Option fully exercisable in
lieu of assumption or substitution in the event of a merger, the Board shall
notify the Optionee that the Option shall be fully exercisable for a period of
fifteen (15) days from the date of such notice, and the Option will terminate
upon the expiration of such period. With respect to any Option granted after
the issuance of the amending order by the Department increasing the number of
shares qualified for issuance under the Plan to 5,800,000, in the event that
such successor corporation does not agree to assume such Option or to substitute
an equivalent option, the Option shall terminate as of the date of the closing
of the merger. For the purposes of this paragraph, the Option shall be deemed
to be assumed if, following the merger, the option confers the right to
purchase, for each Share of Optioned Stock subject to the Option immediately
prior to the merger, the consideration (whether stock, cash, or other securities
or property) received in the merger by holders of Common Stock for each Share
held on the effective date of the transaction (and if such holders were offered
a choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares); provided, however, that if such
consideration received in the merger was not solely common
-9-
<PAGE>
stock of the successor corporation or its Parent, the Board of Directors may,
with the consent of the successor corporation and the Optionee, provide for the
consideration to be received upon the exercise of the Option, for each Share of
Optioned Stock subject to the Option, to be solely common stock of the successor
corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger.
12. Time of Granting Options. The date of grant of an Option or Stock
------------------------
Purchase Right shall, for all purposes, be the date on which the Board makes the
determination granting such Option or Stock Purchase Right. Notice of the
determination shall be given to each Employee or Consultant to whom an Option or
Stock Purchase Right is so granted within a reasonable time after the date of
such grant.
13. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may amend or terminate the
-------------------------
Plan from time to time in such respects as the Board may deem advisable;
provided that, to the extent necessary to comply with Rule 16b-3 promulgated
under the Exchange Act or with Section 422 of the Code (or any other successor
or applicable law or regulation), the Company shall obtain shareholder approval
of any Plan amendment in such a manner and to such a degree as is required by
the applicable law, rule or regulation.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options or Stock Purchase Rights
already granted and such Options or Stock Purchase Rights shall remain in full
force and effect as if this Plan had not been amended or terminated, unless
mutually agreed otherwise between the Optionee or Purchaser (as the case may be)
and the Board, which agreement must be in writing and signed by the Optionee or
Purchaser (as the case may be) and the Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option or Stock Purchase Rights unless the
exercise of such Option or Stock Purchase Rights and the issuance and delivery
of such Shares pursuant thereto shall comply with all relevant provisions of
law, including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the Shares may then be listed, and
shall be further subject to the approval of counsel for the Company with respect
to such compliance.
As a condition to the exercise of an Option or Stock Purchase Rights,
the Company may require the person exercising such Option or Stock Purchase
Rights to represent and warrant at the time of any such exercise that the Shares
are being purchased only for investment and without any present intention to
sell or distribute such Shares if, in the opinion of counsel for the Company,
such a representation is required by any of the aforementioned relevant
provisions of law.
-10-
<PAGE>
15. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.
16. Option and Stock Purchase Agreements. Options shall be evidenced by
------------------------------------
written Option agreements in such form as the Board shall approve. Upon the
exercise of Stock Purchase Rights, the Purchaser shall sign a stock purchase
agreement in such form as the Board shall approve.
17. Information to Optionees and Purchasers. The Company shall provide to
---------------------------------------
each Optionee, not less frequently than annually, copies of annual financial
statements. The Company shall also provide such statements to each individual
who acquires Shares pursuant to the Plan while such individual owns such Shares.
The Company shall not be required to provide such statements to key employees
whose duties in connection with the Company assure their access to equivalent
information.
-11-
<PAGE>
ECHELON CORPORATION
INCENTIVE STOCK OPTION AGREEMENT
Echelon Corporation, a Delaware corporation (the "Company"), has granted to
________ (the "Optionee"), an option (the "Option") to purchase a total of
________ shares of Common Stock (the "Shares"), at the price determined as
provided herein, and in all respects subject to the terms, definitions and
provisions of the 1988 Stock Option Plan (the "Plan") adopted by the Company,
which is incorporated herein by reference. Unless otherwise defined herein, the
terms defined in the Plan shall have the same defined meanings herein.
1. Nature of the Option. This Option is intended to qualify as an
--------------------
Incentive Stock Option as defined in Section 422 of the Code.
2. Exercise Price. The exercise price is $________ for each share of
--------------
Common Stock, which price is not less than the fair market value per share of
the Common Stock on the date of grant.
3. Exercise of Option. This Option shall be exercisable during its term
------------------
in accordance with the provisions of Section 9 of the Plan as follows:
(i) Right to Exercise.
------------------
(a) Subject to subsections 3(i)(b), (c), (d) and (e) below,
this Option shall vest cumulatively, as follows:
<TABLE>
<CAPTION>
On or After Number of Shares
- --------------------- ---------------------
<S> <C>
___________ ________Shares
___________ an additional ________Shares
___________ an additional ________Shares
___________ an additional ________Shares
</TABLE>
This Option may be exercised in whole or in part at any time, as to Shares
which have not yet vested under the above vesting schedule; provided, however,
that the Optionee shall execute as a condition to such exercise of this Option,
the Restricted Stock Purchase Agreement attached hereto as Exhibit A.
(b) This Option may not be exercised for a fraction of a
share.
(c) In the event of Optionee's death, disability or other
termination of employment, the exercisability of the Option is governed by
Sections 7 and 8, and 9 subject to the limitations contained in subsections
3(i)(d) and (e).
<PAGE>
(d) In no event may this Option be exercised after the date of
expiration of the term of this Option as set forth in Section 11 below.
(e) In no event may this Option become exercisable at a time or
times which, when this Option is aggregated with all other incentive stock
options granted to Optionee by the Company or any Parent or Subsidiary, would
result in Shares having an aggregate fair market value (determined for each
Share as of the date of grant of the option covering such share) in excess of
$100,000 becoming first available for purchase upon exercise of one or more
incentive stock options during any calendar year.
(ii) Method of Exercise. This Option shall be exercisable by written
------------------
notice which shall state the election to exercise the Option, the number of
Shares in respect of which the Option is being exercised, and such other
representations and agreements as to the holder's investment intent with respect
to such shares of Common Stock as may be required by the Company pursuant to the
provisions of the Plan. Such written notice shall be signed by the Optionee and
shall be delivered in person or by certified mail to the Secretary of the
Company. The written notice shall be accompanied by payment of the exercise
price. This Option shall be deemed to be exercised upon receipt by the Company
of such written notice accompanied by the exercise price.
No Shares will be issued pursuant to the exercise of an Option unless such
issuance and such exercise shall comply with all relevant provisions of law and
the requirements of any stock exchange upon which the Shares may then be listed.
Assuming such compliance, for income tax purposes the Shares shall be considered
transferred to the Optionee on the date on which the Option is exercised with
respect to such Shares.
4. Optionee's Representations. In the event the Shares purchasable
--------------------------
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended, at the time this Option is exercised,
Optionee shall, concurrently with the exercise of all or any portion of this
Option, deliver to the Company his Investment Representation Statement in the
form attached hereto as Exhibit B, and shall read the applicable rules of the
Commissioner of Corporations attached to such Investment Representation
Statement.
5. Method of Payment. Payment of the exercise price shall be by any of
-----------------
the following, or a combination thereof, at the election of the Optionee:
(i) cash;
(ii) check; or
(iii) surrender of other shares of Common Stock of the Company which
(A) either have been owned by the Optionee for more than six (6) months on the
date of surrender or were not acquired, directly or indirectly, from the Company
and (B) have a fair market value on the date of surrender equal to the exercise
price of the Shares as to which the Option is being exercised.
-2-
<PAGE>
6. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the shareholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
promulgated by the Federal Reserve Board. As a condition to the exercise of this
Option, the Company may require Optionee to make any representation and warranty
to the Company as may be required by any applicable law or regulation.
7. Termination of Status as an Employee. In the event of termination of
------------------------------------
Optionee's Continuous Status as an Employee, he may, but only within thirty (30)
days after the date of such termination (but in no event later than the date of
expiration of the term of this Option as set forth in Section 11 below),
exercise this Option to the extent that he was entitled to exercise it at the
date of such termination. To the extent that he was not entitled to exercise
this Option at the date of such termination, or if he does not exercise this
Option within the time specified herein, the Option shall terminate.
8. Disability of Optionee. Notwithstanding the provisions of Section 7
----------------------
above, in the event of termination of Optionee's Continuous Status as an
Employee as a result of his total and permanent disability (as defined in
Section 22(e)(3) of the Code), he may, but only within twelve (12) months from
the date of termination of employment (but in no event later than the date of
expiration of the term of this Option as set forth in Section 11 below),
exercise his Option to the extent he was entitled to exercise it at the date of
such termination. To the extent that he was not entitled to exercise the Option
at the date of termination, or if he does not exercise such Option (which he was
entitled to exercise) within the time specified herein, the Option shall
terminate.
9. Death of Optionee. In the event of the death of Optionee, the Option
-----------------
may be exercised, at any time within twelve (12) months following the date of
death (but in no event later than the date of expiration of the term of this
Option as set forth in Section 11 below), by Optionee's estate or by a person
who acquired the right to exercise the Option by bequest or inheritance, but
only to the extent of the right to exercise that had accrued at the date of
death.
10. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by him. The terms of this
Option shall be binding upon the executors, administrators, heirs, successors
and assigns of the Optionee.
11. Term of Option. This Option may not be exercised more than five (5)
--------------
years from the date of grant of this Option, and may be exercised during such
term only in accordance with the Plan and the terms of this Option.
12. Early Disposition of Stock. Optionee understands that if he disposes
--------------------------
of any Shares received under this Option within two (2) years after the date of
this Agreement or within one (1) year after such Shares were transferred to him,
he will be treated for federal income tax purposes as
-3-
<PAGE>
having received ordinary income at the time of such disposition in an amount
generally measured by the difference between the price paid for the Shares and
the lower of the fair market value of the Shares at the date of the exercise or
the fair market value of the Shares at the date of disposition. Optionee hereby
---------------
agrees to notify the Company in writing within 30 days after the date of any
- ----------------------------------------------------------------------------
such disposition. Optionee understands that if he disposes of such Shares at
- ----------------
any time after the expiration of such two-year and one-year holding periods, any
gain on such sale will be taxed as long-term capital gain.
DATE OF GRANT: _________
ECHELON CORPORATION,
a Delaware corporation
By: _________________________
Title: Vice President of Finance
-4-
<PAGE>
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
SECTION 3 HEREOF IS EARNED ONLY BY CONTINUING EMPLOYMENT AT THE WILL OF THE
COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR
ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT
NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS
INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH
RESPECT TO CONTINUATION OF EMPLOYMENT BY THE COMPANY, NOR SHALL IT INTERFERE
IN ANY WAY WITH HIS RIGHT OR THE COMPANY'S RIGHT TO TERMINATE HIS EMPLOYMENT AT
ANY TIME, WITH OR WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and certain information
related thereto and represents that he is familiar with the terms and provisions
thereof, and hereby accepts this Option subject to all of the terms and
provisions thereof. Optionee has reviewed the Plan and this Option in their
entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Option and fully understands all provisions of the Option.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Board upon any questions arising under the Plan.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.
Dated: _________________
______________________________
_______, Optionee
Residence Address:
______________________________
______________________________
-5-
<PAGE>
EXHIBIT A
---------
ECHELON CORPORATION
RESTRICTED STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made between _______________ (the "Purchaser") and
Echelon Corporation, a Delaware corporation (the "Company"), as of
__________19__.
RECITALS
--------
(1) Pursuant to the exercise of a stock option granted to the Purchaser
under the Company's 1988 Stock Option Plan, and pursuant to the Incentive Stock
Option Agreement (the "Option Agreement") dated _____________, 19__ by and
between the Company and the Purchaser, the Purchaser has elected to purchase
________ of those shares which have become vested under the vesting schedule set
forth in Section 3(i) of the Option Agreement ("Vested Shares") and _________
shares which have not yet vested under such schedule ("Unvested Shares"). (The
Vested Shares and the Unvested Shares are sometimes collectively referred to
herein as the "Shares").
(2) As required by the Option Agreement in the event of the Purchaser's
election to exercise the option as to Unvested Shares, this Agreement gives the
Company the right to repurchase at cost certain of the Unvested Shares in the
event of a termination of the Purchaser's employment with the Company prior to
the date upon which they would have vested under the Option Agreement.
1. Company's Option to Repurchase. If the Purchaser's employment with the
------------------------------
Company is terminated for any reason (a "Termination"), the Company (or its
assignee under this Agreement) shall have the right and option to purchase from
the Purchaser, or the Purchaser's personal representative, as the case may be
(the "Company Option"), at the price paid by Purchaser for such shares (the
"Option Price"), up to that number of shares which would, if the option had not
been so exercised, have been Unvested as of the date of Termination. The Option
Agreement is hereby incorporated by reference and made a part of this Agreement.
2. Procedure for Exercise of Company Option.
----------------------------------------
(a) Upon the occurrence of a Termination, the Company may exercise
the Company Option by delivering personally or by first class mail, to Purchaser
(or his or her transferee or legal representative, as the case may be), within
60 days of the Termination, a notice in writing indicating the Company's
intention to exercise the Company Option and setting forth a date for closing
(the "Closing") not later than thirty (30) days from the mailing of such notice.
The Closing shall take place at the Company's principal executive offices. At
the Closing, the holder of the certificates for the Unvested Shares being
transferred shall deliver the stock certificate or certificates evidencing the
Unvested Shares, and the Company shall deliver the purchase price therefor.
<PAGE>
(b) Whenever the Company shall have the right to purchase the
Unvested Shares pursuant to this Agreement, the Company may, upon written notice
to the Purchaser, assign to one or more persons the right to exercise all or
part of the Company's purchase rights. Each such assignee shall have the right
to exercise such right in its own name and for its own account. If the Company
Option is assigned by the Company and the fair market value of the shares, as
determined by the Board of Directors of the Company, exceeds the repurchase
price, and such assignee exercises the Company Option, then the assignee shall
pay to the Company the difference between the fair market value of the shares
repurchased and the aggregate repurchase price.
(c) If the Company does not elect to exercise the Company Option
conferred above by giving the requisite notice within sixty (60) days following
the Termination, the Company Option shall terminate.
3. Termination of Company Option.
-----------------------------
(a) The Company Option provided for in Section 1 of this Agreement
shall terminate upon the first date on which there are no longer any Unvested
Shares which are the subject of the Company Option;
(b) Notwithstanding the foregoing, the sixty (60) day period in which
the Company may exercise the Company Option will not be affected or shortened by
a termination of this Agreement pursuant to this Section.
4. Transferability of the Shares; Escrow.
-------------------------------------
(a) Purchaser hereby authorizes and directs the Secretary of the
Company, or such other person designated by the Company, to transfer the
Unvested Shares as to which the Company Option to purchase has been exercised
from Purchaser to the Company. Purchaser further authorizes the Company to
refuse, or to cause its transfer agent to refuse, to transfer any stock
attempted to be transferred in violation of this Agreement.
(b) Except as required to effectuate the exercise of the Company
Option, none of the Unvested Shares which are subject to the Company Option
under Section 1 may be sold, transferred, pledged, hypothecated or otherwise
disposed of by Purchaser. The certificate or certificates evidencing any of the
shares purchased hereunder shall be endorsed with a legend substantially as
follows (together with any other legend(s) restricting the transfer of the
Unvested Shares necessary or appropriate under applicable federal or state
securities laws):
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN
ACCORDANCE WITH THE TERMS OF AN OPTION AGREEMENT AND A RESTRICTED
STOCK PURCHASE AGREEMENT PURSUANT TO WHICH SUCH SHARES WERE PURCHASED,
COPIES OF WHICH ARE ON FILE WITH THE SECRETARY OF THE CORPORATION."
-2-
<PAGE>
(c) To ensure the availability for delivery of the Purchaser's
Unvested Shares upon repurchase by the Company pursuant to the Company Option
under Section 1, the Purchaser shall, upon execution of this Agreement, deliver
and deposit with the Secretary of the Company, or such other person designated
by the Company, the share certificates representing the Unvested Shares,
together with the stock power, duly endorsed in blank, attached hereto as
Exhibit A-1. The Unvested Shares and stock power shall be held by the Secretary
in escrow, until such time as the Company's rights of repurchase pursuant to the
Company Option no longer are in effect. As a further condition to the Company's
obligations under this Agreement, the spouse of Purchaser, if any, shall execute
and deliver to the Company the Consent of Spouse attached hereto as Exhibit A-2.
(d) The Company, or its designee, shall not be liable for any act it
may do or omit to do with respect to holding the Unvested Shares in escrow and
while acting in good faith and in the exercise of its judgment.
(e) Transfer or sale of said Unvested Shares is subject to
restrictions on transfer imposed by any applicable state and federal securities
laws. Any transferee shall hold such Unvested Shares subject to all the
provisions hereof and shall acknowledge the same by signing a copy of this
Agreement.
5. Ownership, Voting Rights, Duties. This Agreement shall not affect in
--------------------------------
any way the ownership, voting rights or other rights or duties of Purchaser,
except as specifically provided herein.
6. Adjustments of Unvested Shares. The Unvested Shares subject to this
------------------------------
Agreement shall be proportionately adjusted for any increase or decrease in the
number of issued shares of the Company, resulting from a subdivision or
consolidation of shares or the payment of a stock dividend or any other increase
or decrease in the number of said shares effected without receipt of
consideration by the Company.
7. Notices. Notices required hereunder shall be given in person or by
-------
first class mail to the address of Purchaser shown on the records of the
Company, and to the Company at its principal executive office.
8. Survival of Terms. This Agreement shall apply to and bind Purchaser
-----------------
and the Company and their respective permitted assignees and transferees, heirs,
legatees, executors, administrators and legal successors.
9. Tax Consequences. The Purchaser understands that upon the sale of
----------------
shares acquired upon exercise of an incentive stock option at least two years
after the grant of the option and at least one year after exercise of the
option, any gain will be taxed to the Purchaser as long-term capital gain, which
under current law is taxed at the same rates as ordinary income. If these
holding periods are not satisfied, the Purchaser will recognize ordinary income
on the date of disposition. Under proposed regulations issued by the Internal
Revenue Service, the amount of such ordinary income will be equal to the
difference between the exercise price and the lower of the sale price of the
stock or the fair market value of the stock at the "Applicable Measurement
Date". The Applicable Measure-
-3-
<PAGE>
ment Date is the date the Company's right to repurchase Unvested shares at cost
in the event of termination of employment lapse as to such shares.
10. Representations. The Purchaser has reviewed with his or her own tax
--------------- --------------------------------------------------
advisors the federal, state, local and foreign tax consequences of this
- -----------------------------------------------------------------------
investment and the transactions contemplated by this Agreement. The Purchaser
- ------------------------------------------------------------------------------
is relying solely on such advisors and not on any statements or representations
- -------------------------------------------------------------------------------
of the Company or any of is agents. The Purchaser understands that he or she
- ----------------------------------------------------------------------------
(and not the Company) shall be responsible for his or her own tax liability that
- --------------------------------------------------------------------------------
may arise as a result of this investment or the transactions contemplated by
- ----------------------------------------------------------------------------
this Agreement.
- --------------
11. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of California.
Purchaser represents that he or she has read this Agreement and is familiar
with its terms and provisions. Purchaser hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Board upon any
questions arising under this Agreement.
IN WITNESS WHEREOF, this Agreement is deemed made as of the date first set
forth above.
ECHELON CORPORATION,
a Delaware corporation
By:_________________________________
Title:______________________________
PURCHASER
____________________________________
(Signature)
____________________________________
(Typed or Printed Name)
-4-
<PAGE>
EXHIBIT A-1
-----------
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, hereby sell, assign and transfer unto
__________________ _____________________________ (__________) shares of the
Common Stock of Echelon Corporation standing in my name of the books of said
corporation represented by Certificate No. _________ herewith and do hereby
irrevocably constitute and appoint _______________________________ to transfer
said stock on the books of the within-named corporation with full power of
substitution in the premises.
Dated: _____________, 19___.
Signature:
_________________________________
This Assignment Separate from Certificate was executed in conjunction with
the terms of a Restricted Stock Purchase Agreement between the above assignor
and ___________________________________ dated _________________, 19__.
<PAGE>
EXHIBIT A-2
-----------
CONSENT OF SPOUSE
I, ___________________, spouse of ________________________, have read and
approved the foregoing Agreement. In consideration of granting of the right to
my spouse to purchase shares of Echelon Corporation as set forth in the
Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the
exercise of any rights under the Agreement and agree to be bound by the
provisions of the Agreement insofar as I may have any rights under such
Agreement or in any shares issued pursuant thereto under the community property
laws of the State of California or similar laws relating to marital property in
effect in the state of our residence as of the date of the signing of the
foregoing Agreement.
Dated:_______, 19____
__________________________________________
<PAGE>
EXHIBIT A-3
-----------
ELECTION UNDER SECTION 83(B)
----------------------------
OF THE INTERNAL REVENUE CODE OF 1986
------------------------------------
The undersigned taxpayer has acquired property pursuant to the exercise of a
stock option intended to qualify as an "incentive stock option" within the
meaning of Section 422 of the Code. The undersigned taxpayer hereby elects,
pursuant to the above-referenced Federal Tax Code, to include in the computation
of his or her alternative minimum taxable income for the current taxable year
the amount of any income includable pursuant to Section 56(b)(3) of the Code in
connection with his or her receipt of the property below:
1. The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:
Name : Taxpayer:
Spouse :
Address :
Identification No. : Taxpayer:
Spouse :
Taxable Year :
2. The property with respect to which the election is made is described as
follows:
___________ shares (the "Shares") of Common Stock of Echelon
Corporation, a Delaware corporation (the "Company").
3. The date on which the property was transferred is: _______________, 19___.
4. The property is subject to the following restrictions: Periodic lapsing
repurchase option at cost in favor of the Company upon termination of
taxpayer's employment.
5. The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never
lapse, of such property is:
6. The amount (if any) paid for such property:
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
The undersigned understands that the foregoing election may not be revoked
except with the consent of the Commissioner.
Dated: _________________, 19__ _______________________________
Taxpayer
The undersigned spouse of taxpayer joins in this election.
Dated: _________________, 19__ _______________________________
Spouse
<PAGE>
EXHIBIT B
---------
INVESTMENT REPRESENTATION STATEMENT
PURCHASER :
SELLER : ECHELON CORPORATION
COMPANY : ECHELON CORPORATION
SECURITY : COMMON STOCK
AMOUNT :
DATE :
In connection with the purchase of the above-listed Securities, I, the
Purchaser, represent to the Seller and to the Company the following:
(a) I am aware of the Company's business affairs and financial
condition, and have acquired sufficient information about the Company to reach
an informed and knowledgeable decision to acquire the Securities. I am
purchasing these Securities for my own account for investment purposes only and
not with a view to, or for the resale in connection with, any "distribution"
thereof for purposes of the Securities Act of 1933, as amended (the "Securities
Act")
(b) I understand that the Securities have not been registered under
the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of my
investment intent as expressed herein. In this connection, I understand that, in
the view of the Securities and Exchange Commission (the "SEC"), the statutory
basis for such exemption may be unavailable if my representation was predicated
solely upon a present intention to hold these Securities for the minimum capital
gains period specified under tax statutes, for a deferred sale, for or until an
increase or decrease in the market price of the Securities, or for a period of
one year or any other fixed period in the future.
(c) I further understand that the Securities must be held
indefinitely unless subsequently registered under the Securities Act or unless
an exemption from registration is otherwise available. Moreover, I understand
that the Company is under no obligation to register the Securities. In addition,
I understand that the certificate evidencing the Securities will be imprinted
with a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the opinion of counsel for
the Company.
<PAGE>
(d) I am familiar with the provisions of Rule 701 and Rule 144, each
promulgated under the Securities Act, which, in substance, permit limited public
resale of "restricted securities" acquired, directly or indirectly, from the
issuer thereof, in a non-public offering subject to the satisfaction of certain
conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at
the time of the grant of the option pursuant to which the Securities are issued,
such issuance will be exempt from registration under the Securities Act. In the
event the Company later becomes subject to the reporting requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter
the securities exempt under Rule 701 may be resold, subject to the satisfaction
of certain of the conditions specified by Rule 144, including among other
things: (1) the sale being made through a broker in an unsolicited "broker's
transaction" or in transactions directly with a market maker (as said term is
defined under the Securities Exchange Act of 1934); and, in the case of an
affiliate, (2) the availability of certain public information about the Company,
and the amount of securities being sold during any three month period not
exceeding the limitations specified in Rule 144(e), if applicable.
Notwithstanding this paragraph (d), I acknowledge and agree to the restrictions
set forth in paragraph (e) hereof.
In the event that the Company does not qualify under Rule 701 at the
time of the grant of the option pursuant to which the Securities are issued,
then the Securities may be resold in certain limited circumstances subject to
the provisions of Rule 144, which requires among other things: (1) the resale
occurring not less than two years after the later of the date the securities
were sold by the Company or the date they were sold by an affiliate of the
Company, within the meaning of Rule 144; and, in the case of an affiliate, or of
a non-affiliate who has held the securities less than three years, (2) the
availability of certain public information about the Company, (3) the sale being
made through a broker in an unsolicited "broker's transaction" or in
transactions directly with a market maker (as said term is defined under the
Securities Exchange Act of 1934), and (4) the amount of securities being sold
during any three month period not exceeding the specified limitations stated
therein, if applicable.
(e) I agree, in connection with the Company's initial underwritten
public offering of the Company's securities, (1) not to sell, make short sale
of, loan, grant any options for the purchase of, or otherwise dispose of any
shares of Common Stock of the Company held by me (other than those shares
included in the registration) without the prior written consent of the Company
or the underwriters managing such initial underwritten public offering of the
Company's securities for one hundred eighty (180) days from the effective date
of such registration, and (2) I further agree to execute any agreement
reflecting (1) above as may be requested by the underwriters at the time of the
public offering; provided however that the officers and directors of the Company
-------- -------
who own the stock of the Company also agree to such restrictions.
(f) I further understand that in the event all of the applicable
requirements of Rule 144 or Rule 701 are not satisfied, registration under the
Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rule 144 and
Rule 701 are not exclusive, the Staff of the SEC has expressed its opinion that
persons proposing to sell private placement securities other than in a
registered offering and otherwise than pursuant to Rule 144 or Rule 701 will
have a substantial burden of proof in establishing that an
-2-
<PAGE>
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk.
(g) I understand that the certificate evidencing the Securities will
be imprinted with a legend which prohibits the transfer of the Securities
without the consent of the Commissioner of Corporations of California. I have
read the applicable Commissioner's Rules with respect to such restriction, a
copy of which is attached.
Signature of Purchaser:
_________________________________
Date: ____________________, 19___
-3-
<PAGE>
STATE OF CALIFORNIA - CALIFORNIA ADMINISTRATIVE CODE
----------------------------------------------------
Title 10. Investment - Chapter 3. Commissioner of Corporations
260.141.11: Restriction on Transfer. (a) The issuer of any security upon
---------- -----------------------
which a restriction on transfer has been imposed pursuant to Sections 260.102.6,
260.141.10 or 260.534 shall cause a copy of this section to be delivered to each
issuee or transferee of such security at the time the certificate evidencing the
security is delivered to the issuee or transferee.
(b) It is unlawful for the holder of any such security to consummate a
sale or transfer of such security, or any interest therein, without the prior
written consent of the Commissioner (until this condition is removed pursuant to
Section 260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102 of
the Code or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants or spouse, or any
custodian or trustee for the account of the transferor or the transferor's
ancestors, descendants, or spouse; or to a transferee by a trustee or
custodian for the account of the transferee or the transferee's ancestors,
descendants or spouse;
(5) to holders of securities of the same class of the same issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either
acting as such or as a finder) to a resident of a foreign state, territory
or country who is neither domiciled in this state to the knowledge of the
broker-dealer, nor actually present in this state if the sale of such
securities is not in violation of any securities law of the foreign state,
territory or country concerned;
(8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting syndicate or
selling group;
(9) if the interest sold or transferred is a pledge or other lien
given by the purchaser to the seller upon a sale of the security for which
the Commissioner's written consent is obtained or under this rule not
required;
(10) by way of a sale qualified under Sections 25111, 25112, 25113 or
25121 of the Code, of the securities to be transferred, provided that no
order under Section 25140 or Subdivision (a) of Section 25143 is in effect
with respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such
corporation, or by a wholly owned subsidiary of a corporation to such
corporation;
(12) by way of an exchange qualified under Section 25111, 25112 or
25113 of the Code, provided that no order under Section 25140 or
Subdivision (a) of Section 25143 is in effect with respect to such
qualification;
(13) between residents of foreign states, territories or countries who
are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law or
to the administrator of the unclaimed property law of another state;
(15) by the State Controller pursuant to the Unclaimed Property Law or
by the administrator of the unclaimed property law of another state if, in
either such case, such person (i) discloses to potential purchasers at the
sale that transfer of the securities is restricted under this rule, (ii)
delivers to each purchaser a copy of this rule, and (iii) advises the
Commissioner of the name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does not
involve a change in the beneficial ownership of the securities; or
(17) by way of an offer and sale of outstanding securities in an
issuer transaction that is subject to the qualification requirement of
Section 25110 of the Code but exempt from that qualification requirement by
subdivision (f) of Section 25102;
provided that any such transfer is on the condition that any certificate
evidencing the security issued to such transferee shall contain the legend
required by this section.
(c) The certificates representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend, prominently stamped or printed
thereon in capital letters of not less than 10-point size, reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE
PRIOR WRITTEN CONSENT OF THE COMMISSIONER OR CORPORATIONS OF THE STATE OF
CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
-4-
<PAGE>
ECHELON CORPORATION
NONSTATUTORY STOCK OPTION AGREEMENT
Echelon Corporation, a Delaware corporation (the "Company"), has granted to
________ (the "Optionee"), an option (the "Option") to purchase a total of
__________ shares of Common Stock (the "Shares"), at the price determined as
provided herein, and in all respects subject to the terms, definitions and
provisions of the 1988 Stock Option Plan (the "Plan") adopted by the Company,
which is incorporated herein by reference. Unless otherwise defined herein, the
terms defined in the Plan shall have the same defined meanings .
1. Nature of the Option. This Option is intended by the Company and the
--------------------
Optionee to be a Nonstatutory Stock Option, and does not qualify for any special
tax benefits to the Optionee. This Option is not an Incentive Stock Option and
---
is not subject to Section 5(b) of the Plan.
---
2. Exercise Price. The exercise price is $ _____ for each share of Common
--------------
Stock.
3. Exercise of Option. This Option shall be exercisable during its term in
------------------
accordance with the provisions of Section 9 of the Plan as follows:
(i) Right to Exercise.
-----------------
(a) Subject to subsections 3(i)(b), (c) and (d) below, this Option
shall vest cumulatively, as follows:
<TABLE>
<CAPTION>
On or After Number of Shares
------------- ----------------
<S> <C> <C>
________ ________ Shares
________ an additional ________ Shares
________ an additional ________ Shares
________ an additional ________ Shares
</TABLE>
This Option may be exercised in whole or in part at any time, as to Shares
which have not yet vested under the above vesting schedule; provided, however,
that the Optionee shall execute as a condition to such exercise of this Option,
the Restricted Stock Purchase Agreement attached hereto as Exhibit A.
(b) This Option may not be exercised for a fraction of a share.
(c) In the event of Optionee's death, disability or other
termination of employment or consulting relationship, the exercisability of the
Option is governed by Sections 7, 8 and 9 below.
(d) In no event may this Option be exercised after the date of
expiration of the term of this Option as set forth in Section 11 below.
(ii) Method of Exercise. This Option shall be exercisable by written
------------------
notice which shall state the election to exercise the Option, the number of
Shares in respect of which the Option is being exercised, and such other
representations and agreements as to the holder's investment intent with respect
to such shares of Common Stock as may be required by the Company pursuant to the
provisions of the Plan. Such written notice shall be signed by the Optionee and
shall be delivered in person or by certified mail to the Secretary of the
Company. The written notice shall be accompanied
<PAGE>
by payment of the exercise price. This Option shall be deemed exercised upon
receipt by the Company of such written notice accompanied by the exercise price.
No Shares will be issued pursuant to the exercise of an Option unless such
issuance and such exercise shall comply with all relevant provisions of law and
the requirements of any stock exchange upon which the Shares may then be listed.
Assuming such compliance, for income tax purposes the Shares shall be considered
transferred to the Optionee on the date on which the Option is exercised with
respect to such Shares.
4. Optionee's Representations. In the event the Shares purchasable pursuant
--------------------------
to the exercise of this Option have not been registered under the Securities Act
of 1933, as amended, at the time this Option is exercised, Optionee shall,
concurrently with the exercise of all or any portion of this Option, deliver to
the Company his Investment Representation Statement in the form attached hereto
as Exhibit B, and shall read the applicable rules of the Commissioner of
Corporations attached to such Investment Representation Statement.
5. Method of Payment. Payment of the exercise price shall be by any of the
-----------------
following, or a combination thereof, at the election of the Board:
(i) cash;
(ii) check; or
(iii) surrender of other shares of Common Stock of the Company which (A)
either have been owned by the Optionee for more than six (6) months on the date
of surrender or were not acquired, directly or indirectly, from the Company and
(B) have a fair market value on the date of surrender equal to the exercise
price of the Shares as to which the Option is being exercised.
6. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the shareholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
promulgated by the Federal Reserve Board. As a condition to the exercise of this
Option, the Company may require Optionee to make any representation and warranty
to the Company as may be required by any applicable law or regulation.
7. Termination of Status as an Employee or Consultant. In the event of
--------------------------------------------------
termination of Optionee's Continuous Status as an Employee or Consultant, as the
case may be, he may, but only within thirty (30) days (or such other period of
time not exceeding six (6) months, as determined by the Board) after the date of
such termination (but in no event later than the date of expiration of the term
of this Option as set forth in Section 11 below), exercise this Option to the
extent that he was entitled to exercise it at the date of such termination. To
the extent that he was not entitled to exercise this Option at the date of such
termination, or if he does not exercise this Option within the time specified
herein, the Option shall terminate.
8. Disability of Optionee. Notwithstanding the provisions of Section 7
----------------------
above, in the event of termination of Optionee's Continuous Status as an
Employee or Consultant as a result of his total and permanent disability (as
defined in Section 22(e)(3) of the Code), he may, but only within twelve (12)
months from the date of such termination (but in no event later than the date of
expiration of the term of this Option as set forth in Section 11 below),
exercise his Option to the extent he was entitled to exercise it at the date of
such termination. To the extent that he was not entitled to
-2-
<PAGE>
exercise the Option at the date of termination, or if he does not exercise such
Option (which he was entitled to exercise) within the time specified herein, the
Option shall terminate.
9. Death of Optionee. In the event of the death of Optionee, the Option may
-----------------
be exercised, at any time within twelve (12) months following the date of death
(but in no event later than the date of expiration of the term of this Option as
set forth in Section 11 below), by Optionee's estate or by a person who acquired
the right to exercise the Option by bequest or inheritance, but only to the
extent of the right to exercise that had accrued at the date of death.
10. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by him. The terms of this
Option shall be binding upon the executors, administrators, heirs, successors
and assigns of the Optionee.
11. Term of Option. This Option may not be exercised more than five (5)
--------------
years from the date of grant of this Option, and may be exercised during such
term only in accordance with the Plan and the terms of this Option.
12. Withholding and Employment Taxes Upon Exercise of Option. Optionee
--------------------------------------------------------
understands that, upon exercise of this Option, he will recognize income for tax
purposes in an amount equal to the excess of the then fair market value of the
shares over the exercise price. If the Optionee is also an Employee of the
Company, the Company will be required to withhold tax from Optionee's current
compensation with respect to such income; to the extent that Optionee's current
compensation is insufficient to satisfy the withholding tax liability, the
Company may require the Optionee to make a cash payment to cover such liability
as a condition of exercise of this Option.
DATE OF GRANT: _______________
ECHELON CORPORATION,
a Delaware corporation
By:________________________________
Title: Vice President of Finance
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
SECTION 3 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN EMPLOYEE OR
CONSULTANT AS THE CASE MAY BE, AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT
OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER).
OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN
THE COMPANY'S STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL
CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR
CONSULTANCY SERVICES WITH THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH
HIS RIGHT OR THE COMPANY'S RIGHT TO TERMINATE HIS EMPLOYMENT OR CONSULTANCY AT
ANY TIME, WITH OR WITHOUT CAUSE.
-3-
<PAGE>
Optionee acknowledges receipt of a copy of the Plan and certain information
related thereto and represents that he is familiar with the terms and provisions
thereof, and hereby accepts this Option subject to all of the terms and
provisions thereof. Optionee has reviewed the Plan and this Option in their
entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Option and fully understands all provisions of the Option.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Board upon any questions arising under the Plan.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.
Dated: _________________
________________________________
_________, Optionee
Residence Address:
________________________________
________________________________
-4-
<PAGE>
EXHIBIT A
---------
ECHELON CORPORATION
RESTRICTED STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made between ____________________ (the "Purchaser") and
Echelon Corporation, a Delaware corporation (the "Company"), as of
_______________, 19__.
RECITALS
--------
(1) Pursuant to the exercise of a stock option granted to the Purchaser
under the Company's 1988 Stock Option Plan, and pursuant to the Nonstatutory
Stock Option Agreement (the "Option Agreement") dated ________, 19__ by and
between the Company and the Purchaser, the Purchaser has elected to purchase
_______ of those shares which have become vested under the vesting schedule set
forth in Section 3(i) of the Option Agreement ("Vested Shares") and _______
shares which have not yet vested under such schedule ("Unvested Shares"). (The
Vested Shares and the Unvested Shares are sometimes collectively referred to
herein as the "Shares").
(2) As required by the Option Agreement in the event of the Purchaser's
election to exercise the option as to Unvested Shares, this Agreement gives the
Company the right to repurchase at cost the Unvested Shares in the event of a
termination of the Purchaser's employment with the Company prior to the date
upon which they would have vested under the Option Agreement.
1. Company's Option to Repurchase. If the Purchaser's employment or
------------------------------
consultancy with the Company is terminated for any reason (a "Termination"), the
Company (or its assignee under this Agreement) shall have the right and option
to purchase from the Purchaser, or the Purchaser's personal representative, as
the case may be (the "Company Option"), at the price paid by Purchaser for such
shares (the "Option Price"), up to that number of shares which would, if the
option had not been so exercised, have been Unvested as of the date of
Termination. The Option Agreement is hereby incorporated by reference and made
a part of this Agreement.
2. Procedure for Exercise of Company Option.
----------------------------------------
(a) Upon the occurrence of a Termination, the Company may exercise the
Company Option by delivering personally or by first class mail, to Purchaser (or
his or her transferee or legal representative, as the case may be), within 60
days of the Termination, a notice in writing indicating the Company's intention
to exercise the Company Option and setting forth a date for closing (the
"Closing") not later than thirty (30) days from the mailing of such notice. The
Closing shall take place at the Company's principal executive offices. At the
Closing, the holder of the certificates for the Unvested Shares being
transferred shall deliver the stock certificate or certificates evidencing the
Unvested Shares, and the Company shall deliver the purchase price therefor.
(b) Whenever the Company shall have the right to purchase the Unvested
Shares pursuant to this Agreement, the Company may, upon written notice to the
Purchaser, assign to one or more persons the right to exercise all or part of
the Company's purchase rights. Each such assignee shall have the right to
exercise such right in its own name and for its own account. If the Company
Option is assigned by the Company and the fair market value of the shares, as
determined by the Board of Directors of the Company, exceeds the repurchase
price, and such assignee exercises the Company Option, then the assignee shall
pay to the Company the difference between the fair market value of the shares
repurchased and the aggregate repurchase price.
<PAGE>
(c) If the Company does not elect to exercise the Company Option
conferred above by giving the requisite notice within sixty (60) days following
the Termination, the Company Option shall terminate.
3. Termination of Company Option.
-----------------------------
(a) The Company Option provided for in Section 1 of this Agreement
shall terminate upon the first date on which there are no longer any Unvested
Shares which are the subject of the Company Option;
(b) Notwithstanding the foregoing, the sixty (60) day period in which
the Company may exercise the Company Option will not be affected or shortened by
a termination of this Agreement pursuant to this Section.
4. Transferability of the Shares; Escrow.
-------------------------------------
(a) Purchaser hereby authorizes and directs the Secretary of the
Company, or such other person designated by the Company, to transfer the
Unvested Shares as to which the Company Option to purchase has been exercised
from Purchaser to the Company. Purchaser further authorizes the Company to
refuse, or to cause its transfer agent to refuse, to transfer any stock
attempted to be transferred in violation of this Agreement.
(b) Except as required to effectuate the exercise of the Company
Option, none of the Unvested Shares which are subject to the Company Option
under Section 1 may be sold, transferred, pledged, hypothecated or otherwise
disposed of by Purchaser. The certificate or certificates evidencing any of the
shares purchased hereunder shall be endorsed with a legend substantially as
follows (together with any other legend(s) restricting the transfer of the
Unvested Shares necessary or appropriate under applicable federal or state
securities laws):
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN
ACCORDANCE WITH THE TERMS OF AN OPTION AGREEMENT AND A RESTRICTED
STOCK PURCHASE AGREEMENT PURSUANT TO WHICH SUCH SHARES WERE PURCHASED,
COPIES OF WHICH ARE ON FILE WITH THE SECRETARY OF THE CORPORATION."
(c) To ensure the availability for delivery of the Purchaser's
Unvested Shares upon repurchase by the Company pursuant to the Company Option
under Section 1, the Purchaser shall, upon execution of this Agreement, deliver
and deposit with the Secretary of the Company, or such other person designated
by the Company, the share certificates representing the Unvested Shares,
together with the stock power, duly endorsed in blank, attached hereto as
Exhibit A-1. The Unvested Shares and stock power shall be held by the Secretary
in escrow until such time as the Company's rights of repurchase pursuant to the
Company Option no longer are in effect. As a further condition to the Company's
obligations under this Agreement, the spouse of Purchaser, if any, shall execute
and deliver to the Company the Consent of Spouse attached hereto as Exhibit A-2.
(d) The Company, or its designee, shall not be liable for any act it
may do or omit to do with respect to holding the Unvested Shares in escrow and
while acting in good faith and in the exercise of its judgment.
(e) Transfer or sale of said Unvested Shares is subject to
restrictions on transfer imposed by any applicable State and federal securities
laws. Any transferee shall hold such Unvested
-2-
<PAGE>
Shares subject to all the provisions hereof and shall acknowledge the same by
signing a copy of this Agreement.
5. Ownership, Voting Rights, Duties. This Agreement shall not affect in
--------------------------------
any way the ownership, voting rights or other rights or duties of Purchaser,
except as specifically provided herein.
6. Adjustments of Unvested Shares. The Unvested Shares subject to this
------------------------------
Agreement shall be proportionately adjusted for any increase or decrease in the
number of issued shares of the Company, resulting from a subdivision or
consolidation of shares or the payment of a stock dividend or any other increase
or decrease in the number of said shares effected without receipt of
consideration by the Company.
7. Notices. Notices required hereunder shall be given in person or by
-------
first class mail to the address of Purchaser shown on the records of the
Company, and to the Company at its principal executive office.
8. Survival of Terms. This Agreement shall apply to and bind Purchaser
-----------------
and the Company and their respective permitted assignees and transferees, heirs,
legatees, executors, administrators and legal successors.
9. Section 83(b) Election. The Purchaser understands that Section 83 of
----------------------
the Internal Revenue Code taxes as ordinary income the difference between the
amount paid for the Shares and the fair market value of the Shares as of the
date any restrictions on the Shares lapse. In this context, "restriction" means
the right of the Company to buy back the stock pursuant to the Company Option.
The Purchaser understands that he or she may elect to be taxed at the time the
Shares are purchased rather than when and as the Purchase Option expires by
filing with the Internal Revenue Code an election under Section 83(b) of the
Internal Revenue Code, within 30 days from the date of purchase. The form for
making this election is attached as Exhibit A-3 hereto.
THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE RESPONSIBILITY
AND NOT THE COMPANY'S TO TIMELY FILE THE ELECTION UNDER SECTION 83(B), EVEN IF
THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON
THE PURCHASER'S BEHALF.
10. Representations. The Purchaser has reviewed with his or her own tax
---------------
advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement. The Purchaser
is relying solely on such advisors and not on any statements or representations
of the Company or any of its agents. The Purchaser understands that he (and not
the Company) shall be responsible for his or her own tax liability that may
arise as a result of this investment or the transactions contemplated by this
Agreement.
11. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of California.
Purchaser represents that he or she has read this Agreement and is familiar
with its terms and provisions. Purchaser hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Board upon any
questions arising under this Agreement.
-3-
<PAGE>
IN WITNESS WHEREOF, this Agreement is deemed made as of the date first set
forth above.
ECHELON CORPORATION,
a Delaware corporation
By:________________________________
Title:_____________________________
PURCHASER
___________________________________
(Signature)
___________________________________
(Typed or Printed Name)
-4-
<PAGE>
EXHIBIT A-1
-----------
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, hereby sell, assign and transfer unto ______________
_____________________ (____________) shares of the Common Stock of Echelon
Corporation standing in my name of the books of said corporation represented by
Certificate No. _________ herewith and do hereby irrevocably constitute and
appoint _______________________________ to transfer said stock on the books of
the within-named corporation with full power of substitution in the premises.
Dated:______________________, 19____.
Signature:
__________________________________
This Assignment Separate from Certificate was executed in conjunction with
the terms of a Restricted Stock Purchase Agreement between the above assignor
and _____________________________ dated ________________________, 19____.
<PAGE>
EXHIBIT A-2
-----------
CONSENT OF SPOUSE
I, _______________________________, spouse of ____________________________
have read and approved the foregoing Agreement. In consideration of granting of
the right to my spouse to purchase shares of Echelon Corporation as set forth in
the Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to
the exercise of any rights under the Agreement and agree to be bound by the
provisions of the Agreement insofar as I may have any rights under such
Agreement or in any shares issued pursuant thereto under the community property
laws of the State of California or similar laws relating to marital property in
effect in the state of our residence as of the date of the signing of the
foregoing Agreement.
Dated:___________________, 19____
__________________________________
<PAGE>
EXHIBIT A-3
-----------
ELECTION UNDER SECTION 83(B)
OF THE INTERNAL REVENUE CODE OF 1986
The undersigned taxpayer hereby elects, pursuant to the above-referenced Federal
Tax Code, to include in his gross income for the current taxable year, the
amount of any compensation taxable to him in connection with his receipt of the
property described below:
1. The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:
NAME: TAXPAYER:_______________ SPOUSE:________________
ADDRESS: ________________________
________________________
IDENTIFICATION NO.: TAXPAYER:_______________ SPOUSE:________________
TAXABLE YEAR: Calendar Year 19____
2. The property with respect to which the election is made is described as
follows:
___________________ shares (the "Shares") of Common Stock of
Echelon Corporation, a Delaware corporation (the "Company").
3. The date on which the property was transferred is:______________, 19____.
4. The property is subject to the following restrictions:
Periodic lapsing repurchase option at cost in favor of the Company
upon termination of taxpayer's employment or services.
5. The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never
lapse, of such property is: $____________
6. The amount (if any) paid for such property: $____________
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
The undersigned understands that the foregoing election may not be revoked
except with the consent of the Commissioner.
Dated:_____________________ ________________________________________
Taxpayer
The undersigned spouse of taxpayer joins in this election.
Dated:_____________________ ________________________________________
Spouse of Taxpayer
<PAGE>
EXHIBIT B
---------
INVESTMENT REPRESENTATION STATEMENT
PURCHASER:
SELLER : ECHELON CORPORATION
COMPANY : ECHELON CORPORATION
SECURITY : COMMON STOCK
AMOUNT :
DATE :
In connection with the purchase of the above-listed Securities, I, the
Purchaser, represent to the Seller and to the Company the following:
(a) I am aware of the Company's business affairs and financial condition,
and have acquired sufficient information about the Company to reach an informed
and knowledgeable decision to acquire the Securities. I am purchasing these
Securities for my own account for investment purposes only and not with a view
to, or for the resale in connection with, any "distribution" thereof for
purposes of the Securities Act of 1933, as amended (the "Securities Act").
(b) I understand that the Securities have not been registered under the
Securities Act in reliance upon a specific exemption therefrom, which exemption
depends upon, among other things, the bona fide nature of my investment intent
as expressed herein. In this connection, I understand that, in the view of the
Securities and Exchange Commission (the "SEC"), the statutory basis for such
exemption may be unavailable if my representation was predicated solely upon a
present intention to hold these Securities for the minimum capital gains period
specified under tax statutes, for a deferred sale, for or until an increase or
decrease in the market price of the Securities, or for a period of one year or
any other fixed period in the future.
(c) I further understand that the Securities must be held indefinitely
unless subsequently registered under the Securities Act or unless an exemption
from registration is otherwise available. Moreover, I understand that the
Company is under no obligation to register the Securities. In addition, I
understand that the certificate evidencing the Securities will be imprinted with
a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the opinion of counsel for
the Company.
(d) I am familiar with the provisions of Rule 701 and Rule 144, each
promulgated under the Securities Act, which, in substance, permit limited public
resale of "restricted securities" acquired, directly or indirectly, from the
issuer thereof, in a non-public offering subject to the satisfaction of certain
conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the
time of the grant of the option pursuant to which the Securities are issued,
such issuance will be exempt from registration under the Securities Act. In the
event the Company later becomes subject to the reporting requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter
the securities exempt under Rule 701 may be resold, subject to the satisfaction
of certain of the conditions specified by Rule 144, including among other
things: (1) the sale being made through a broker in an unsolicited "broker's
transaction" or in transactions directly with a market maker (as said term is
defined under the Securities Exchange Act of 1934); and, in the case of an
<PAGE>
affiliate, (2) the availability of certain public information about the Company,
and the amount of securities being sold during any three month period not
exceeding the limitations specified in Rule 144(e), if applicable.
Notwithstanding this paragraph (d), I acknowledge and agree to the restrictions
set forth in paragraph (e) hereof.
In the event that the Company does not qualify under Rule 701 at the time
of the grant of the option pursuant to which the Securities are issued, then the
Securities may be resold in certain limited circumstances subject to the
provisions of Rule 144, which requires among other things: (1) the resale
occurring not less than two years after the later of the date the securities
were sold by the Company or the date they were sold by an affiliate of the
Company, within the meaning of Rule 144; and, in the case of an affiliate, or of
a non-affiliate who has held the securities less than three years, (2) the
availability of certain public information about the Company, (3) the sale being
made through a broker in an unsolicited "broker's transaction" or in
transactions directly with a market maker (as said term is defined under the
Securities Exchange Act of 1934), and (4) the amount of securities being sold
during any three month period not exceeding the specified limitations stated
therein, if applicable.
(e) I agree, in connection with the Company's initial underwritten public
offering of the Company's securities, (1) not to sell, make short sale of, loan,
grant any options for the purchase of, or otherwise dispose of any shares of
Common Stock of the Company held by me (other than those shares included in the
registration) without the prior written consent of the Company or the
underwriters managing such initial underwritten public offering of the Company's
securities for one hundred eighty (180) days from the effective date of such
registration, and (2) I further agree to execute any agreement reflecting (1)
above as may be requested by the underwriters at the time of the public
offering; provided however that the officers and directors of the Company who
-------- -------
own the stock of the Company also agree to such restrictions.
(f) I further understand that in the event all of the applicable
requirements of Rule 144 or Rule 701 are not satisfied, registration under the
Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rule 144 and
Rule 701 are not exclusive, the Staff of the SEC has expressed its opinion that
persons proposing to sell private placement securities other than in a
registered offering and otherwise than pursuant to Rule 144 or Rule 701 will
have a substantial burden of proof in establishing that an exemption from
registration is available for such offers or sales, and that such persons and
their respective brokers who participate in such transactions do so at their own
risk.
(g) I understand that the certificate evidencing the Securities will be
imprinted with a legend which prohibits the transfer of the Securities without
the consent of the Commissioner of Corporations of California. I have read the
applicable Commissioner's Rules with respect to such restriction, a copy of
which is attached.
Signature of Purchaser:
_________________________________
Date:____________________, 19____
-2-
<PAGE>
STATE OF CALIFORNIA - CALIFORNIA ADMINISTRATIVE CODE
----------------------------------------------------
Title 10. Investment - Chapter 3. Commissioner of Corporations
260.141.11: Restriction on Transfer. (a) The issuer of any security upon
---------- -----------------------
which a restriction on transfer has been imposed pursuant to Sections 260.102.6,
260.141.10 or 260.534 shall cause a copy of this section to be delivered to each
issuee or transferee of such security at the time the certificate evidencing the
security is delivered to the issuee or transferee.
(b) It is unlawful for the holder of any such security to consummate a sale
or transfer of such security, or any interest therein, without the prior written
consent of the Commissioner (until this condition is removed pursuant to Section
260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102 of the
Code or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants or spouse, or any custodian
or trustee for the account of the transferor or the transferor's ancestors,
descendants, or spouse; or to a transferee by a trustee or custodian for the
account of the transferee or the transferee's ancestors, descendants or
spouse;
(5) to holders of securities of the same class of the same issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either acting
as such or as a finder) to a resident of a foreign state, territory or
country who is neither domiciled in this state to the knowledge of the
broker-dealer, nor actually present in this state if the sale of such
securities is not in violation of any securities law of the foreign state,
territory or country concerned;
(8) to a broker-dealer licensed under the Code in a principal transaction,
or as an underwriter or member of an underwriting syndicate or selling group;
(9) if the interest sold or transferred is a pledge or other lien given by
the purchaser to the seller upon a sale of the security for which the
Commissioner's written consent is obtained or under this rule not required;
(10) by way of a sale qualified under Sections 25111, 25112, 25113 or
25121 of the Code, of the securities to be transferred, provided that no
order under Section 25140 or Subdivision (a) of Section 25143 is in effect
with respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such
corporation, or by a wholly owned subsidiary of a corporation to such
corporation;
(12) by way of an exchange qualified under Section 25111, 25112 or
25113 of the Code, provided that no order under Section 25140 or Subdivision
(a) of Section 25143 is in effect with respect to such qualification;
(13) between residents of foreign states, territories or countries who
are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law or
to the administrator of the unclaimed property law of another state;
(15) by the State Controller pursuant to the Unclaimed Property Law or
by the administrator of the unclaimed property law of another state if, in
either such case, such person (i) discloses to potential purchasers at the
sale that transfer of the securities is restricted under this rule, (ii)
delivers to each purchaser a copy of this rule, and (iii) advises the
Commissioner of the name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does not
involve a change in the beneficial ownership of the securities; or
(17) by way of an offer and sale of outstanding securities in an
issuer transaction that is subject to the qualification requirement of
Section 25110 of the Code but exempt from that qualification requirement by
subdivision (f) of Section 25102;
provided that any such transfer is on the condition that any certificate
evidencing the security issued to such transferee shall contain the legend
required by this section.
(c) The certificates representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend, prominently stamped or printed
thereon in capital letters of not less than 10-point size, reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE
PRIOR WRITTEN CONSENT OF THE COMMISSIONER OR CORPORATIONS OF THE STATE OF
CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
<PAGE>
INTERNATIONAL DISTRIBUTOR AGREEMENT
THIS AGREEMENT (the "Agreement") is entered into effective as of
___________, 199__, between Echelon Corporation ("Echelon"), a Delaware
corporation with principal offices at 4015 Miranda Avenue, Palo Alto, California
94304, and __________________________________ ("Distributor"), a corporation
organized under the laws of _____________________, with principal offices at
_______________________________________________________.
WHEREAS, Echelon has developed and distributes products for intelligent
distributed control systems.
WHEREAS, Echelon wishes to appoint Distributor to distribute Echelon's
products on a non-exclusive basis in the Territory (as hereinafter defined).
WHEREAS, Distributor is willing to accept such appointment.
NOW, THEREFORE, the parties hereto agree as follows:
1. DEFINITIONS
-----------
(a) "Products" shall mean those hardware and/or software products for
which Distributor will serve as a non-exclusive distributor hereunder, as
identified in Exhibit A hereto, as it may be amended from time to time pursuant
to Section 9 below.
(b) "Development Products" shall mean those Products identified in
Exhibit A as such.
(c) "OEM Products" shall mean those Products identified in Exhibit A
as such.
(d) "Software Products" shall mean those Products identified in
Exhibit A as such.
(e) "Territory" shall mean the territory set forth in Exhibit B.
(f) "Software" shall mean any Software Product that is listed in
Exhibit A and any software that is included in or with a Product that is listed
in Exhibit A. All references to the Products herein include reference to the
Software.
(g) "Software Copy" shall mean an object code copy of any of the
Software, together with a copy of any user manual or other documentation
customarily supplied with the Software Copy to end users by Echelon.
<PAGE>
(h) All references in this Agreement to the "sale" of or "selling"
Software or Software Copies shall mean the sale of a license to use such
-------
Software or Software Copies. All references in this Agreement to the "purchase"
of Software or Software Copies shall mean the purchase of a license to use such
-------
Software or Software Copy.
(i) "Registered Customer" shall mean a customer of Distributor that
has been registered by Distributor with Echelon pursuant to Echelon's standard
customer registration policies and procedures. Such registration policies and
procedures are set forth in Exhibit A. Echelon may amend the registration
policies and procedures set forth in Exhibit A from time to time in its sole
discretion, including eliminating the registration program. Any such change
shall be effective upon notice to Distributor.
2. DUTIES OF DISTRIBUTOR
---------------------
(a) Activities of Distributor. Subject to the terms and conditions
-------------------------
herein, Echelon hereby appoints and retains Distributor to solicit sales of and
distribute the Products in the Territory on a non-exclusive basis. As a
distributor of the Products, Distributor shall have the right to market and
distribute Products solely to end user customers and not to any party for
subdistribution.
(b) Direct Activities by Echelon. Nothing herein shall prevent
----------------------------
Echelon from marketing and distributing the Products directly to end user
customers, systems integrators or to other distributors in the Territory.
(c) Independent Contractors. The relationship of Distributor and
-----------------------
Echelon established by this Agreement is that of independent contractors, and
nothing contained in this Agreement shall be construed to (i) give either party
the power to direct and control the day-to-day activities of the other, (ii)
constitute the parties as partners, joint venturers, principal and agent,
employer and employee, co-owners, or otherwise as participants in a joint
undertaking, or (iii) allow Distributor to create or assume any obligation on
behalf of Echelon for any purpose whatsoever. All financial and other
obligations associated with Distributor's business are the sole responsibility
of Distributor. Distributor shall be solely responsible for, and shall
indemnify and hold Echelon free and harmless from, any and all claims, damages
or lawsuits (including Echelon's attorneys' fees) arising out of the acts of
Distributor, its employees or its agents.
3. REMUNERATION
------------
Distributor's sole remuneration with respect to the distribution of
Products hereunder shall be (i) the difference between Distributor's price from
Echelon and Distributor's price to its customers and (ii) any commissions or
sales credits payable pursuant to Sections 8(g) or 8(h) below.
-2-
<PAGE>
4. LICENSE AGREEMENTS
------------------
Distributor acknowledges and agrees that certain Products may only be
distributed pursuant to license agreements, as indicated by the Licensing
Requirements set forth in Exhibit A. Distributor shall only distribute such
Products to customers who have entered into all required license agreements with
Echelon.
5. FORECASTS AND ORDERS OF PRODUCTS
--------------------------------
(a) Forecasts. On a quarterly basis, Distributor shall provide
---------
Echelon with a one-year sales forecast setting forth its estimated monthly
requirements for shipment of Products by Echelon's model number for the upcoming
twelve (12) month period. The first such forecast shall be furnished to Echelon
upon execution of this Agreement, and each subsequent forecast shall be
furnished not later than the fifteenth day of the month preceding the end of
each calendar quarter. The forecasts are non-binding and will be used by
Echelon only for planning purposes. Upon thirty (30) days' advance written
notice to Distributor, Echelon shall have the right in its sole discretion to
require monthly updates to the forecasts.
(b) Orders and Acceptance. Distributor shall initiate purchases under
---------------------
this Agreement by submitting written or facsimile purchase orders to Echelon.
All purchase orders shall contain the following: (a) model numbers of Products,
(b) quantity of Products to be purchased, (c) shipping point (Echelon's
manufacturing facility or Echelon's European shipping point) and special
shipping instructions, if any, (d) requested delivery schedule, which shall be
within the next succeeding six (6) months, and which shall conform to the
minimum lead times for such Products as set forth in Exhibit A", (e)
destination, (f) billing address if different from address listed above and (g)
the net price for the Products, which shall conform to the minimum aggregate
invoice value set forth on Exhibit A. No purchase order shall be binding upon
Echelon until accepted by Echelon in writing. Echelon shall use reasonable
commercial efforts to notify Distributor of the acceptance or rejection of a
purchase order within fifteen (15) days of receipt of the purchase order.
Distributor shall be responsible for obtaining all import licenses for the
import of all Products in the Territory.
(c) Certain Software Products. In the event Distributor solicits the
-------------------------
sale of any Software Products identified with a Note 5 Licensing Requirement in
Exhibit A, Echelon shall invoice Distributor for such Software Products upon
receipt of Distributor's written purchase order and deliver such Software
Products to Distributor pursuant to Sections 5(b) above and 6 below; provided,
that (i) Distributor has provided Echelon with an original copy of Echelon's
Software License Agreement for each Software Product, signed by the customer,
(ii) the customer is a Registered Customer of Distributor, and (iii) Distributor
fulfills all obligations with respect to such order as set forth in Exhibit D
hereto.
-3-
<PAGE>
(d) Cancellation, Delay or Reduction of Orders. Distributor may not
------------------------------------------
cancel, delay or reduce the quantity of Product(s) on that portion of an order
with a scheduled delivery date in the period within and including sixty (60)
days of the then current date without Echelon's prior written approval granted
in each instance in Echelon's sole discretion, and subject to a fifteen percent
(15%) cancellation charge. Distributor will have no rights in partially
completed goods from canceled orders.
One time with respect to each order, Distributor may cancel, delay or
reduce the quantity of Product(s) on that portion of an order that has a
scheduled delivery date in the period beyond sixty (60) days of the then current
date subject to the following provisions: (i) the combined effect of such
cancellation or reduction shall not reduce the total quantity of each Product to
be delivered on all scheduled delivery dates in such period by more than forty
percent (40%); (ii) no scheduled delivery date may be delayed by more than three
(3) months; and (iii) the remaining orders shall continue to be subject to the
minimum aggregate invoice value set forth on Exhibit A.
If under this Section 5(d) Distributor is permitted a delay in delivery,
and if Echelon has, prior to Distributor's request therefor, notified
Distributor of Distributor Price changes that are effective at the time of the
new delivery date, then Echelon's price to Distributor on Products for which
delivery was delayed and any penalties due to Echelon hereunder shall be based
upon Echelon's new Distributor Price.
6. SHIPPING AND RETURN
-------------------
(a) Delivery. Echelon shall use reasonable commercial efforts to
--------
deliver Products on the specified delivery date. Products shall be packaged in
anti-static material, as appropriate.
(b) Shipping. All Products delivered pursuant to this Agreement shall
--------
be marked for shipment to Distributor's facility at the address set forth above
or specified in Distributor's written purchase order, and delivered to a carrier
or forwarding agent chosen by Distributor and approved by Echelon in its sole
discretion; provided, that Echelon may designate the carrier in the event
Distributor fails to designate a carrier or Echelon does not approve
Distributor's selection. Shipments shall be F.O.B. Echelon's manufacturing
facility (currently at the address set forth above), at which time risk of loss
and, except as provided in Section 7 below, title shall pass to Distributor.
All freight, insurance, duty and other shipping expenses, as well as any special
packing expenses, shall be borne by Distributor. Each Distributor shipment
shall have an individual packing list.
(c) Security Interest. Until the purchase price and all other charges
-----------------
payable to Echelon hereunder have been received in full, Echelon hereby retains
and Distributor hereby grants to Echelon a security interest in the Products
delivered to Distributor and any proceeds therefrom. Distributor agrees to
promptly execute all documents reasonably requested by Echelon
-4-
<PAGE>
to perfect and protect such security interest. In the event Distributor fails
promptly to execute such documents, Distributor hereby appoints Echelon its
attorney-in-fact for the sole purpose of executing such documents, which
appointment shall be a power coupled with an interest and shall be irrevocable.
(d) Return.
------
(i) With respect to Products shipped to Distributor (as
opposed to Products shipped directly to Distributor's customers), Distributor
shall inspect all such Products upon receipt thereof, and Distributor may reject
any item that fails substantially to conform to the then current Product
specifications. To reject a Product, Distributor shall within five (5) working
days of receipt of such Product notify Echelon in writing or by facsimile of its
rejection and request a Return Material Authorization ("RMA") number. Within ten
(10) working days of receipt of the RMA number, Distributor shall return the
rejected Product, freight prepaid and properly insured, in its original shipping
carton with the RMA number displayed on the outside of the carton.
(ii) If Echelon confirms the defect, Echelon shall, at
Echelon's option and expense, either repair or replace the Product. Echelon
shall reimburse Distributor for the shipping charges to return properly rejected
Products and shall pay the shipping charges for the delivery of such repaired or
replacement Products to Distributor; otherwise, Distributor shall be responsible
for all shipping charges.
(e) Stock Rotation. Distributor shall be entitled to rotate its stock
--------------
of OEM Products according to the policies and procedures set forth in Exhibit A.
Echelon may amend the stock rotation policies and procedures set forth in
Exhibit A from time to time in its sole discretion, including eliminating the
stock rotation program. Any such change shall be effective upon notice to
Distributor.
7. SOFTWARE
--------
(a) Notwithstanding anything to the contrary contained herein, title
to all Software shall remain with Echelon. Distributor shall have a
nonexclusive license to distribute Software Copies; provided, that such Software
Copies are delivered to customers in unopened packages in good condition and at
the same time as associated hardware Products, if any.
(b) Distributor shall have no right to copy the Software or to
reverse engineer, disassemble, decompile or otherwise attempt to derive the
source code from the Software. With respect to any Software Copies to be used
for demonstration purposes, in addition to the requirements set forth in
Sections 8(b) and 17(c) below, Distributor agrees to the terms of the (i)
Software License Agreement accompanying the Software Copies, for Software
identified with a Note 2, 3 or 4 Licensing Requirement in Exhibit A, and (ii)
the Software License Agreement set
-5-
<PAGE>
forth in Exhibit G hereto, for Software identified with a Note 5 Licensing
Requirement in Exhibit A. Distributor shall not remove, alter, cover or
obfuscate any copyright notices or other proprietary rights notices placed or
embedded by Echelon on or in the Software.
8. PRICING AND PAYMENT
-------------------
(a) Pricing. Echelon shall provide Distributor with Echelon's
-------
Suggested International List Prices for the Products, as such prices are updated
from time to time. The Distributor Prices for the Products are set forth in
Exhibit A and may only be revised as set forth in Subsections 8(c) and 8(d)
below. Distributor acknowledges that Echelon shall publish and distribute from
time to time its price lists to its customers.
(b) Demonstration Products. Distributor may purchase reasonable
----------------------
quantities of Development Products or OEM Products (other than those Products
identified in Exhibit A as "not available for demonstration"), to be used solely
for demonstration purposes, at a Thirty-Three Percent (33%) discount off the
Distributor Price set forth in Exhibit A. Upon request, Echelon may, in it sole
determination of Distributor's demonstration capabilities, provide Distributor
at no charge with one (1) copy of any Software Product (other than those
Software Products identified in Exhibit A as "not available for demonstration"),
to be used solely for demonstration purposes. Distributor certifies that
Products purchased or provided on this basis ("Demonstration Products") shall be
used exclusively for demonstration and/or troubleshooting purposes and shall in
no event be resold by Distributor. Distributor agrees to have available during
the term of this Agreement the Demonstration Products set forth on Exhibit E
hereto. Distributor shall have the right to use and lend Demonstration Products
pursuant to Section 17(c) below.
(c) Price Increase. Echelon has the right at any time to increase the
--------------
Distributor Price of any Product upon thirty (30) days advance written notice to
Distributor. Such increases shall apply to all purchase orders received after
the effective date of the increase. Distributor may order any quantity of
Products within such thirty-day period at the pre-revised price or discount;
provided that Distributor requests delivery to occur no later than fifteen (15)
days after the effective date of the price increase and pays for any invoices
associated with such order pursuant to the terms set forth in Section 8(f)
below.
(d) Price Decrease and Credit. In the event Echelon decreases the
-------------------------
Distributor Price of a Product, Echelon shall notify Distributor in writing of
such decrease, and such decrease shall apply to Distributor immediately on all
unshipped Products. In addition, Distributor shall be entitled to price
protection on its inventory of OEM Products according to Echelon's policies and
procedures set forth in Exhibit A. Echelon may amend the price protection
policies and procedures set forth in Exhibit A from time to time in its sole
discretion, including eliminating the price protection program. Any such change
shall be effective upon notice to Distributor.
-6-
<PAGE>
(e) Taxes. All prices described herein are exclusive of any excise,
-----
sales, use, value added (VAT), withholding and similar taxes. Distributor shall
be liable for and shall pay all applicable taxes associated with the Products.
When Echelon has the legal obligation to collect such taxes, the appropriate
amount shall be added to Distributor's invoice and paid by Distributor unless
Distributor provides Echelon with a valid tax exemption certificate authorized
by the appropriate taxing authority. In the event that Distributor is required
by law to make deductions or withholdings from payments to Echelon, then
Distributor shall pay such additional amounts to Echelon as may be necessary to
assure that the actual amount received by Echelon after deduction or withholding
(and after payment of any additional taxes due as a consequence of such
additional amount) shall equal the amount that would have been received if such
deduction or withholding were not required.
(f) Payment. Echelon shall issue to Distributor invoices for each
-------
shipment made hereunder. All payments shall be made in United States Dollars,
on the terms set forth in Exhibit C hereto.
(g) Commissions. In the event that a Registered Customer orders
-----------
Products from Echelon under a volume purchase agreement with Echelon,
Distributor shall be entitled to receive the sales commission, if any, set forth
in Exhibit A for each such order; provided that Distributor fulfills all of its
obligations with respect to such order as Echelon may specify. Sales
commissions shall be payable to Distributor not later than the last day of the
month following the month in which Echelon invoices the customer for such order.
Commissions shall be computed on the net selling price invoiced to the customer,
and no commission shall be paid with respect to charges for handling, freight,
taxes, duties, insurance, trade discounts, repairs, service and the like.
Echelon shall pay the commission in the currency in which payment was received
from the customer. Echelon, in its sole discretion, may apportion the net
selling price among distributors and other parties entitled to a commission on
any such order, and Distributor's commission shall be based on the portion of
the net selling price allocated to Distributor. In the event Echelon accepts
any returns from customers of orders on which a commission was paid, or in the
event Echelon writes off as bad debt any or all of the net selling price on
orders on which a commission was paid, Echelon shall charge back to
Distributor's account any amounts previously paid or credited to Distributor
with respect to such returns or bad debt.
(h) Sales Credits.
-------------
(i) General. The distributor price for Products hereunder is
-------
intended to provide Distributor with a net price at which Distributor can
profitably sell to end user customers generally within the Territory, and
therefore, there will not be any standard sales credit program.
(ii) Special Sales Credits. If business conditions require a
---------------------
special sales credit, then such credit shall be negotiated between the parties
and set forth in a mutually signed written document as set forth in Exhibit A
(the "Special Sales Credit Request Form"). The Special
-7-
<PAGE>
Sales Credit Request Form shall set forth at a minimum: the name of the end user
customer; the Echelon part number; the projected quantity of Products to be
sold; and the per unit special sales credit. Receipt of the foregoing special
sales credit is conditioned upon (i) verification by Distributor's POS Report
(as described in Section 13(d) below) of the type of Product(s) sold; (ii)
verification that the customer is a Registered Customer of Distributor; and
(iii) receipt of the Sales Credit Form set forth in Exhibit A. Distributor will
not be entitled to any special sales credit unless such procedures have been
fully complied with, and no credits will be provided to Distributor for
shipments made by Distributor prior to the date that Echelon executes the
applicable Special Sales Credit Form.
9. PRODUCT CHANGES
---------------
(a) Additional Products. Echelon may, from time to time, in its
-------------------
discretion, amend Exhibit A to add other products which shall be available to
Distributor under the terms of this Agreement.
(b) Deletion of Products. Echelon may delete any Product from Exhibit
--------------------
A effective thirty (30) days after written notice to Distributor of such
deletion. Distributor shall have the option to make a "last buy" of obsolete
OEM Products to meet customer requirements. Any OEM Product purchased as part
of this "last buy" is not eligible for return to Echelon on any basis except for
warranty purposes.
10. WARRANTY AND DISCLAIMER
-----------------------
(a) Express Warranties. Echelon hereby warrants to Distributor that
------------------
Products purchased hereunder shall be free from defects in materials and
workmanship for a period of one (1) year after the date of shipment by Echelon
to Distributor. Notwithstanding the foregoing, the sole warranty for the
Software is as set forth in Echelon's Software License Agreement. Pursuant to
Echelon's Software License Agreement, Echelon makes a limited warranty to the
end user regarding the diskette on which the Software Copy is contained.
Echelon's Software License Agreement specifically disclaims all other warranties
relating to the Software Copies, including all warranties with respect to the
performance of the Software.
(b) Exclusions. The express warranties set forth in Section 10(a)
----------
above specifically exclude and do not apply to defects to a Product: (a) caused
through no fault of Echelon during shipment to or from Distributor, (b) caused
by the use or operation of Products in an application or environment other than
that specified by Echelon, (c) caused by modifications or alterations made to
the Products by Distributor or any third party, (d) caused by maintenance
performed on the Products by Distributor or any third party, or (e) which are
the result of the Products being subjected to unusual physical or electrical
stress.
-8-
<PAGE>
(c) Disclaimer. EXCEPT FOR THE ABOVE EXPRESS LIMITED WARRANTIES,
----------
ECHELON MAKES AND DISTRIBUTOR RECEIVES NO WARRANTIES OR CONDITIONS ON THE
PRODUCTS, EXPRESS, IMPLIED, STATUTORY, OR IN ANY OTHER PROVISION OF THIS
AGREEMENT OR COMMUNICATION WITH DISTRIBUTOR, AND ECHELON SPECIFICALLY DISCLAIMS
ANY IMPLIED WARRANTY OR CONDITION OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE. THE FOREGOING LIMITED WARRANTY IS MADE BY ECHELON SOLELY TO DISTRIBUTOR
FOR DISTRIBUTOR'S SOLE BENEFIT. DISTRIBUTOR SHALL NOT MAKE OR PASS ON TO ANY
CUSTOMER OR OTHER PARTY ANY WARRANTY OR REPRESENTATION ON BEHALF OF ECHELON
OTHER THAN ANY EXPRESS WARRANTY CONTAINED IN (1) ECHELON'S SOFTWARE LICENSE
AGREEMENT, FOR ANY SOFTWARE PRODUCTS, OR (2) ECHELON'S TERMS AND CONDITIONS OF
SALE OR PRICE LISTS, FOR ALL OTHER PRODUCTS.
(d) Warranty Procedures. Distributor shall send Products with defects
-------------------
covered by the foregoing warranty to Echelon's address set forth above or such
other address provided by Echelon from time to time. Distributor shall request
in writing or by facsimile authorization from Echelon prior to the return of
each defective Product for repair or replacement by Echelon. All such requests
must be received by Echelon not later than thirty (30) days after the expiration
of the warranty period. Upon receipt of such request, Echelon shall provide
Distributor with a RMA number to be prominently displayed on the shipping
container for the defective Product. Once Echelon authorizes the return of any
defective Product, Distributor shall ship such Product to Echelon, freight
prepaid, pursuant to the shipping and other requirements specified by Echelon in
its RMA. Upon verification by Echelon that the returned Product is defective,
Echelon shall provide a credit to Distributor's account in an amount equal to
the actual, reasonable freight costs incurred by Distributor to return the
Product. In addition, Echelon shall, at its sole option and expense, repair or
replace such Product, employing at its option, new or used parts or Products to
make such repair or replacement, and shall ship the repaired or replaced Product
to Distributor, freight prepaid. The foregoing states the sole liability and
obligation of Echelon arising out of this warranty.
(e) Product Availability. Under no circumstances shall Echelon be
--------------------
responsible to Distributor or any other party for its failure to fill accepted
orders, or for its delay in filling accepted orders, when such failure or delay
is due to any cause beyond Echelon's reasonable control.
(f) Limitation of Liability. ECHELON'S LIABILITY UNDER THE ABOVE
-----------------------
WARRANTIES SHALL BE LIMITED TO A REFUND OF DISTRIBUTOR'S PURCHASE PRICE. IN NO
EVENT SHALL ECHELON BE LIABLE FOR THE COST OF PROCUREMENT OF SUBSTITUTE GOODS BY
DISTRIBUTOR OR THE CUSTOMER OR FOR ANY SPECIAL, CONSEQUENTIAL OR INCIDENTAL
DAMAGES FOR BREACH OF WARRANTY.
-9-
<PAGE>
11. OUT OF WARRANTY REPAIR AND SERVICE SUPPORT
------------------------------------------
(a) Out of Warranty Repair and Service Support. During the term of
------------------------------------------
this Agreement, any repair or reconditioning of any Product not covered by
warranty shall be subject to Echelon's then standard out of warranty prices,
terms and conditions.
(b) Freight Charges. Freight charges on Products returned to Echelon
---------------
for repair are to be prepaid by Distributor. Repaired Products not covered by
warranty shall be returned to Distributor, freight collect.
12. ADDITIONAL OBLIGATIONS OF ECHELON
---------------------------------
(a) Promotions. Echelon shall use all reasonable efforts to include
----------
Distributor in promotional events appropriate for Echelon's authorized
distributors. Echelon shall provide Distributor with reasonable quantities of
promotional literature which Echelon makes generally available to its authorized
distributors for use by Distributor's sales personnel. Echelon will bulk ship
such promotional literature at Echelon's cost on the most economical basis,
provided that Distributor may request expedited shipment at its sole expense.
Any such promotional program may be initiated, modified and withdrawn by Echelon
and the provisions of Section 8(c) and (d) shall not apply to any prices
associated with such promotional program.
(b) Leads and Cooperative Marketing. Echelon shall include
-------------------------------
Distributor in any lead referral or other cooperative marketing activities which
Echelon makes generally available to its authorized distributors. Any such
program shall be described in Exhibit A. Echelon may amend the cooperative
marketing policies and procedures set forth in Exhibit A from time to time in
its sole discretion, including eliminating the cooperative marketing program.
Any such change shall be effective upon notice to Distributor.
13. ADDITIONAL OBLIGATIONS OF DISTRIBUTOR
-------------------------------------
(a) Sales and Marketing Efforts. Distributor shall devote sufficient
---------------------------
facilities and technically qualified sales and service personnel to the Products
to fulfill its responsibilities under this Agreement and shall commit to the
marketing of the Products resources commensurate with the resources committed by
Distributor to introductions of other products which are expected to sell in
volumes similar to the Products. Distributor shall make use of promotional
material supplied by Echelon. Distributor shall actively promote and market the
Products, including, without limitation, selling and distributing the Products
through its own sales force and marketing the Products in Distributor's
catalogues, if any, as soon as possible. Without limiting the foregoing,
Distributor shall fulfill the additional marketing obligations set forth in
Exhibit E hereto.
-10-
<PAGE>
(b) Distribution Procedures. Distributor shall comply with all
-----------------------
reasonable procedures and restrictions adopted by Echelon from time to time for
distributing the Products. This is to include, but not be limited to, the
requirement to offer customers a full refund of their purchase price if the
customer cannot agree to the terms and conditions of the Software License
Agreement received with the Products, if any, provided that the customer returns
such Products unused within the number of days set forth on the license notice
set forth on such Products. In addition, Distributor will notify Echelon of any
known breaches of any Software License Agreement. Distributor shall assist and
cooperate with Echelon as requested by Echelon, at Echelon's expense, (except
for the salaries of Distributor's employees), in enforcing Echelon's rights in
the Software.
(c) Customer Listing. To ensure the capability to provide prompt
----------------
updates to customers for the Products, Distributor shall maintain an up-to-date
listing that is accessible by Echelon. Such listing shall comprise customers to
which Distributor has shipped Products and the Products purchased by such
customers.
(d) Point of Sales (POS) Report. Distributor shall submit to Echelon
---------------------------
a monthly POS report on Product sales for each calendar month no later than the
15th day of the following month. The following information shall be provided
for each sales transaction:
1. Echelon part number
2. Quantity sold
3. Unit sales price
4. Date product shipped (or scheduled to be shipped) to customer
5. Customer name
6. "Ship to" location
The accuracy of each POS report shall be certified by Distributor. Echelon
shall have the right to audit Distributor's books and records to verify the
accuracy of any POS report without notice at any time during Distributor's
normal business hours; provided, that any such audit shall not materially
interfere with Distributor's normal business operations.
(e) Government Use. Distributor agrees that, without the prior
--------------
written consent of Echelon, it shall not deliver the Software, any portion
thereof or any technical data relating to the Products to any branch or agency
of the U.S. Government or any other Government without a predetermination that
(i) the Software and accompanying documentation are deemed to be "commercial
computer software" and "commercial computer software documentation",
respectively, pursuant to DFAR Section 227.7202 and FAR Section 12.212(b), as
applicable, and (ii) any use, modification, reproduction, release, performance,
display or disclosure of the Software and accompanying documentation by the U.S.
Government or any other Government shall be governed solely by the terms of this
Agreement and shall be prohibited except to the extent expressly permitted by
the terms of this Agreement, and (iii) any technical data provided that is not
covered by the above
-11-
<PAGE>
provisions is deemed to be "technical data-commercial items" pursuant to DFAR
Section 227.7015(a).
(f) Standard of Business Practices. Distributor shall establish and
------------------------------
maintain, and cause its employees, consultants and agents to establish and
maintain, a high standard of ethical business practices in connection with its
distribution of Products in the Territory, including, without limitation, full
compliance with Section 20 hereof.
(g) Translations. Distributor, at its election, shall have the right
------------
to engage in the translation and production of any promotional literature for
which Distributor determines local language versions are required to effectively
sell Products. Distributor shall provide Echelon with a copy of all translated
materials and revisions thereto promptly following completion thereof. Echelon
shall retain ownership of all such translated versions. Distributor hereby
assigns to Echelon all right, title and interest, including all copyrights, in
and to any such translations. Echelon shall have the right to use, reproduce,
exploit and create derivative works of such translations for any purpose.
Distributor shall, and shall cause its translators to, execute such additional
documents and take such other actions as may be reasonably necessary to perfect
such assignment. In the event Distributor fails to take such action within a
reasonable period, Distributor hereby appoints Echelon its attorney-in-fact for
the purpose of executing such documents, which appointment shall be deemed a
power coupled with an interest and shall be irrevocable.
14. SUPPORT AND UPDATES
-------------------
(a) Support. Distributor shall train and furnish sufficient
-------
personnel to assist customers with basic technical support and answer basic
customer questions regarding the use and operation of the Products and
interpretation of accompanying documentation during normal business hours.
Customers requiring greater support will be directed by Distributor to contact
Echelon for in-depth support during the initial warranty period and to contact
Echelon with respect to entering into a support contract thereafter.
(b) Updates. In the event Echelon issues any upgrades, updates, new
-------
releases or other modifications to the Software (collectively, "Software
Updates"), Distributor shall only market and distribute such Software Updates to
customers otherwise licensed to use a preceding version of the Software, in
quantities equal to the number of copies of the Software that such customers
were already licensed to use.
15. TERM AND TERMINATION
--------------------
(a) Term. This Agreement shall continue in force until _____________
----
unless terminated earlier under the provisions of this Section 15. This
Agreement may be renewed for additional one (1) year terms upon the mutual
written agreement of the parties prior to the
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<PAGE>
expiration of each fixed term. In the event the parties continue to transact
business under this Agreement following any expiration or termination of this
Agreement, this Agreement shall be deemed to have been renewed on a day to day
basis, and following such renewal, either party may terminate this Agreement
upon one (1) day's written notice to the other party.
(b) Termination for Convenience. This Agreement may be terminated by
---------------------------
either party for any reason or no reason, whether or not extended beyond the
first year, by giving the other party written notice of the termination ninety
(90) days in advance. Both parties agree that neither shall be liable to the
other for damages of any kind by reason of the termination of this Agreement
under this Section 15(b). In the event this Agreement is terminated pursuant to
this Section 15(b), commissions payable pursuant to Section 8(g) above shall be
paid on all open orders previously secured by Distributor which have delivery
schedules within one (1) year after the date of termination as follows: full
rate for shipments made within ninety (90) days after date of termination; one-
half rate thereafter until one (1) year from the date of termination.
(c) Termination for Cause. If either party materially defaults in its
---------------------
performance or breaches any of the terms or conditions of this Agreement, then
the other party may give written notice to the breaching or defaulting party
that if the breach or default is not cured within thirty (30) days the Agreement
will be terminated. If such notice is given and the breach or default is not
cured during the thirty day period, then the Agreement shall automatically
terminate at the end of that period. If at any time Distributor has not, for
any reason, purchased from Echelon the minimum amounts of Products during the
applicable time period as set forth in Exhibit E attached hereto, such failure
shall be deemed a material default in the performance of this Agreement under
this Section 15(c). The parties hereto agree that the foregoing minimum amounts
are reasonable notwithstanding any change in market or economic conditions
within the Territory. Notwithstanding the foregoing, in the event that Echelon
determines that any POS Report furnished by Distributor pursuant to Section
13(d) above is intentionally and knowingly false or misleading, Echelon shall
have the right to terminate this Agreement for cause immediately upon written
notice to Distributor, without opportunity to cure.
(d) Termination for Insolvency. This Agreement shall terminate,
--------------------------
without notice, (i) upon the institution by or against Distributor of
insolvency, receivership or bankruptcy proceedings or any other proceedings for
the settlement of Distributor's debts, (ii) upon Distributor's making an
assignment for the benefit of creditors, or (iii) upon Distributor's
dissolution.
(e) Fulfillment of Orders upon Termination. Upon termination of this
--------------------------------------
Agreement, and subject to Echelon's right to require prepayment, Echelon may,
but shall not be obligated to, fulfill all orders accepted by Echelon prior to
the date of termination.
(f) Limitation on Liability. In the event of termination by either
-----------------------
party in accordance with any of the provisions of this Agreement, neither party
shall be liable to the other,
-13-
<PAGE>
because of such termination, for compensation, reimbursement or damages on
account of the loss of prospective profits or anticipated sales or on account of
expenditures, inventory, investments, leases or commitments in connection with
the business or goodwill of Echelon or Distributor. Termination shall not,
however, relieve either party of obligations incurred prior to the termination.
(g) Return of Materials. All Software, trademarks, trade names,
-------------------
patents, copyrights, designs, drawings, formulas or other data, photographs,
samples, demonstrators, literature, translations and sales aids of every kind
shall remain the property of Echelon. Within thirty (30) days after the
termination of this Agreement, Distributor shall prepare all such items in its
possession for shipment, as Echelon may direct, at Echelon's expense.
Distributor shall not make or retain any copies of any confidential items or
information that may have been entrusted to it. Effective upon the termination
or expiration of this Agreement, Distributor shall cease to use all trademarks,
marks, and trade names of Echelon.
(h) Survival of Certain Terms. The provisions of Sections 7, 8, 10,
-------------------------
15, 16, 17, 19 and 21 shall survive the termination or expiration of this
Agreement for any reason. All other rights and obligations of the parties shall
cease upon termination or expiration of this Agreement.
16. LIMITATION ON LIABILITY
-----------------------
ECHELON'S LIABILITY ARISING OUT OF THIS AGREEMENT AND/OR THE SALE OF
ANY PRODUCT SHALL NOT EXCEED THE PRICE PAID BY DISTRIBUTOR FOR THE PRODUCT. IN
NO EVENT SHALL ECHELON BE LIABLE FOR COSTS OF PROCUREMENT OF SUBSTITUTE GOODS BY
ANYONE. IN NO EVENT SHALL ECHELON BE LIABLE TO DISTRIBUTOR OR ANY OTHER ENTITY
FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL, OR INDIRECT DAMAGES OR LOST PROFITS,
HOWEVER CAUSED, WHETHER FOR BREACH OF CONTRACT, NEGLIGENCE OR OTHERWISE, AND
WHETHER OR NOT ECHELON HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. THESE
LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY
LIMITED REMEDY. THE ESSENTIAL PURPOSE OF THIS PROVISION IS TO LIMIT THE
POTENTIAL LIABILITY OF ECHELON ARISING OUT OF THIS AGREEMENT AND DISTRIBUTION OF
THE PRODUCTS.
17. CONFIDENTIALITY
---------------
(a) Property Rights. Distributor agrees that Echelon owns all right,
---------------
title, and interest in the Software and in all of Echelon's patents, trademarks,
trade names, inventions, copyrights, know-how, and trade secrets relating to the
design, manufacture, operation, service or maintenance of the Software. The use
by Distributor of any of these property rights is authorized
-14-
<PAGE>
only for the purposes herein set forth, and upon termination of this Agreement
for any reason such authorization shall cease.
(b) Confidentiality.
---------------
(i) Distributor agrees not to provide or otherwise make
available any Software Copies, in any form, to any person other than employees
of Distributor or Echelon or Distributor's customers in connection with the
distribution of the Software or its demonstration (in accordance with Subsection
17(c) below).
(ii) Distributor acknowledges that the Software constitutes
confidential and proprietary information of Echelon developed at substantial
expense to Echelon. Distributor agrees to use the Software only as authorized
herein, and to treat the Software with at least the degree of care and
protection as its treats its own most confidential information, and Distributor
represents and warrants that it takes reasonable measures to protect its own
confidential information. Distributor agrees that Distributor will take
appropriate action by instruction, agreement, or otherwise with Distributor's
employees to satisfy Distributor's obligations under this Agreement with respect
to use, copying, modification and protection and security of the Software.
Distributor shall remain obligated, both during the term of this Agreement and
thereafter, to hold in confidence its knowledge of the Software as a trade
secret for the benefit of Echelon.
(iii) Distributor acknowledges that by reason of its relationship
with Echelon hereunder it will have access to certain other information and
materials concerning the Products and Echelon's business, plans, customers and
technology that are confidential and of substantial value to Echelon, which
value would be impaired if such information were disclosed to third parties.
Distributor agrees that it shall not use in any way for its own account or the
account of any third party, nor disclose to any third party, any such
confidential information revealed to it by Echelon. Distributor shall take
every reasonable precaution to protect the confidentiality of such information,
including, at the request of Echelon, the entry by Distributor's agents and
employees into confidentiality agreements in a form approved by Echelon,
prohibiting any disclosure to third parties of confidential information provided
by Echelon. Distributor shall not publish any technical description of any
Software or Product or other confidential information of Echelon beyond the
description published by Echelon. In the event of termination or expiration of
this Agreement, there shall be no use or disclosure by Distributor, its agents,
or employees of any confidential information of Echelon, and Distributor shall
not manufacture or have manufactured any products utilizing any of Echelon's
confidential information. Distributor shall deliver to Echelon all copies
within its possession or within its control of customer lists, catalogues,
specifications, proposals, quotations, price lists, contracts and all other
documents and data relating to the Products or the conduct of Echelon's
business.
-15-
<PAGE>
(c) Demonstration Products.
----------------------
(i) Right to Use and Lend. Distributor shall have the right to
---------------------
use any Demonstration Products acquired from Echelon pursuant to Section 8(b)
above for (1) demonstrations at Distributor's facility and (2) trouble shooting
of customer systems. Distributor shall also have the right to loan such
Demonstration Products to prospective customers for evaluation purposes;
provided, that Distributor furnishes Echelon with an original copy of Echelon's
Evaluation Agreement signed by the prospective customer. The Evaluation
Agreement shall be either (a) in substantially the form attached hereto as
Exhibit F (with a ten (10) business day evaluation period) or (b) in
substantially the form as furnished by Echelon (if Echelon in its sole
discretion elects to approve any request for a different evaluation period).
Distributor shall (x) use best efforts to ensure that the prospective customer
performs its obligation at the end of the evaluation period to return the
Product, any accompanying documentation and any materials developed by such
customer relating to the Product, (y) notify Echelon of any known breach of such
Evaluation Agreement and (z) provide Echelon with reasonable assistance in
connection with the enforcement of such Evaluation Agreement, including, without
limitation, granting Echelon full authority to proceed on Distributor's behalf.
Echelon shall reimburse Distributor for its documented, pre-approved, out-of-
pocket expenses incurred in connection with such assistance.
(ii) Protection of Software. Distributor will be responsible to
----------------------
Echelon for the protection of Software used in any such Demonstration Products
during the installation and removal thereof from the prospective customer's
site. Such protection shall include the deletion of Software previously stored
on any customer media and the removal of all copies of the Software and
documentation from the customer's premises at the conclusion of such
demonstration. Distributor shall assign a fully trained employee to supervise
the installation and removal of the Software included in the Demonstration
Product at each prospective customer's site. In no event shall Distributor use
less care in the protection of Software during installation and removal from a
prospective customer's site than Distributor uses for the protection of its own
software products of like value.
18. TRADEMARKS AND TRADE NAMES
--------------------------
(a) Use. During the term of this Agreement, Distributor shall have
---
the right within the Territory to indicate to the public that it is an
authorized distributor of the Products and to advertise such items under the
trademarks, service marks, and trade names that Echelon may adopt from time to
time ("Echelon's Trademarks"). Distributor shall not alter or remove any of
Echelon's Trademarks applied to the Products. Nothing herein shall grant to
Distributor any right, title or interest in Echelon's Trademarks. All uses of
Echelon's Trademarks by Distributor shall inure to the benefit of Echelon. At no
time during the term of this Agreement shall Distributor challenge or assist
others to challenge Echelon's Trademarks or the registration thereof or attempt
to register any trademarks, service marks or trade names confusingly similar to
those of Echelon.
-16-
<PAGE>
(b) Approval of Representations. All representations of Echelon's
---------------------------
Trademarks that Distributor intends to use shall first be submitted to Echelon
for approval (which shall not be unreasonably withheld) of design, color, and
other details or shall be exact copies of those used by Echelon. If any of
Echelon's Trademarks are to be used in conjunction with another trademark on or
in relation to the Products, then Echelon's Trademark shall be presented equally
legibly, equally prominently, and of greater size than the other but
nevertheless separated from the other so that each appears to be a mark in its
own right, distinct from the other mark.
19. COPYRIGHT AND TRADEMARK INDEMNITY
---------------------------------
(a) Indemnification. Distributor agrees that Echelon has the right to
---------------
defend, or at its option to settle, and Echelon agrees, at its own expense, to
defend or at its option to settle, any claim, suit or proceeding brought against
Distributor or its customer on the issue of infringement of any third party
copyright or trademark by the Products distributed hereunder or the use thereof,
subject to the limitations hereinafter set forth. Echelon shall have sole
control of any such action or settlement negotiations, and Echelon agrees to
pay, subject to the limitations hereinafter set forth, any final judgment
entered against Distributor or its customer on such issue in any such suit or
proceeding defended by Echelon. Distributor agrees that Echelon at its sole
option shall be relieved of the foregoing obligations unless Distributor or its
customer notifies Echelon promptly in writing of such claim, suit or proceeding
and gives Echelon authority to proceed as contemplated herein, and, at Echelon's
expense, gives Echelon proper and full information and assistance to settle
and/or defend any such claim, suit or proceeding. If the Products, or any part
thereof, are, or in the opinion of Echelon may become, the subject of any claim,
suit or proceeding for infringement of any copyright or trademark, or if it is
adjudicatively determined that the Products, or any part thereof, infringe any
copyright or trademark, or if the distribution or use of the Products, or any
part thereof, is, as a result, enjoined, then Echelon may, at its option and
expense: (i) procure for Distributor and its customers the right under such
copyright or trademark to distribute or use, as appropriate, the Products or
such part thereof; or (ii) replace the Products, or part thereof, with other
suitable Products or parts; or (iii) suitably modify the Products, or part
thereof; or (iv) if the use of the Products, or part thereof, is prevented by
injunction or if the foregoing alternatives cannot be accomplished on a
commercially reasonable basis, remove the Products, or part thereof, and refund
the aggregate payments paid therefor by Distributor, less a reasonable sum for
use and damage. Echelon shall not be liable for any costs or expenses incurred
without its prior written authorization.
(b) Limitation. Notwithstanding the provisions of Subsection 19(a)
----------
above, Echelon assumes no liability for (i) any infringement claims with respect
to any product in or with which any of the Products may be used but not covering
the Products standing alone; (ii) any trademark infringements involving any
marking or branding not applied by Echelon or involving any marking or branding
applied at the request of Distributor; or (iii) the modification of the
Products, or any part thereof, unless such modification was made by Echelon.
-17-
<PAGE>
(c) Entire Liability. THE FOREGOING PROVISIONS OF THIS SECTION 19
----------------
STATE THE ENTIRE LIABILITY AND OBLIGATION OF ECHELON AND THE EXCLUSIVE REMEDY OF
DISTRIBUTOR AND ITS CUSTOMERS WITH RESPECT TO ANY ALLEGED INFRINGEMENT OF
COPYRIGHTS, TRADEMARKS OR OTHER INTELLECTUAL PROPERTY RIGHTS BY THE PRODUCTS.
20. COMPLIANCE WITH LAWS
--------------------
(a) Export Controls.
---------------
(i) Distributor 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, software, documentation or any media in which any of the
foregoing is contained, as well as any technical assistance, shall be subject in
all respects to Echelon's compliance with 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, Bureau of Export Administration.
(ii) Without in any way limiting the provisions of this
Agreement, Distributor agrees that unless prior written authorization is
obtained from the Bureau of Export Administration or the Export Administration
Regulations, it will not export, reexport, or transship, directly or indirectly,
any of the technical data or Software (i) into (or to a national resident of)
Cuba, Iraq, Libya, Yugoslavia, North Korea, Iran, Sudan, Syria or any other
country to which the U.S. has embargoed goods; or (ii) to anyone on the U.S.
Treasury Department's list of Specially Designated Nationals or the U.S.
Commerce Department's Table of Deny Orders.
(b) Governmental Approval. Distributor represents and warrants that
---------------------
no consent, approval or authorization of or designation, declaration or filing
with any governmental authority in the Territory is required in connection with
the valid execution and delivery of this Agreement.
(c) Noncompliance as Material Default. Noncompliance by Distributor
---------------------------------
or its consultants, employees or agents with this Section 20 shall be deemed to
constitute a material default under this Agreement, justifying termination for
material default pursuant to Section 15(c) hereof.
-18-
<PAGE>
21. GENERAL PROVISIONS
------------------
(a) Governing Law. This Agreement shall not be governed by the 1980
-------------
U.N. Convention on Contracts for the International Sale of Goods; rather, this
Agreement shall be governed by and construed under the laws of the State of
California, without reference to conflict of laws principles.
(b) Language. This Agreement shall be made in the English language,
--------
which language shall be controlling in all respects, and all versions hereof in
any other language shall not be binding on the parties hereto. All
communications and notices to be made or given pursuant to this Agreement shall
be in the English language.
(c) Arbitration. Any dispute or claim arising out of or in connection
-----------
with this Agreement shall be finally settled by binding arbitration in San
Francisco, California under the Rules of Arbitration of the American Arbitration
Association by one arbitrator appointed in accordance with said rules. The
parties and the appointed arbitrator shall establish procedures to ensure that a
decision is rendered within one hundred twenty (120) days after appointment of
the arbitrator. Judgment on the award rendered by the arbitrator may be entered
in any court having jurisdiction thereof. Notwithstanding the foregoing, in the
event of any breach by Distributor of Section 7, 17 or 18 above, Echelon shall
have the right to injunctive relief in any court having jurisdiction hereof
without breach of this Section 21(c).
(d) Force Majeure. Neither party shall be liable to the other for its
-------------
failure to perform any of its obligations hereunder during any period in which
such performance is delayed by circumstances beyond its reasonable control
including, but not limited to, fire, flood, earthquake, war, embargo, strike,
riot, inability to secure materials and transportation facilities, or the
intervention of any governmental authority. If such delaying cause shall
continue for more than sixty (60) days, the party injured by the inability of
the other to perform shall have the right upon written notice to terminate this
Agreement pursuant to Section 15(c).
(e) Assignment. Neither party may assign or delegate this Agreement
----------
or any of its licenses, rights or duties under this Agreement without the prior
written consent of the other; provided, that either party may assign this
Agreement to a person or entity which acquires or succeeds to all or
substantially all of its business and assets, and which has assumed in writing
its obligations under this Agreement.
(f) Authority. Each party represents that all corporate action
---------
necessary for the authorization, execution and delivery of this Agreement by
such party and the performance of its obligations hereunder has been taken.
(g) Partial Invalidity. If any section, paragraph, provision, or
------------------
clause in this Agreement shall be found or be held to be invalid or
unenforceable in any jurisdiction in which
-19-
<PAGE>
this 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.
(h) Counterparts. This Agreement may be executed in counterparts,
------------
which, taken together, shall be regarded as one and the same instrument.
(i) Modification. No alteration, amendment, waiver, cancellation or
------------
any other change in any term or condition of this Agreement shall be valid or
binding on either party unless the same shall have been mutually assented to in
writing by both parties.
(j) Waiver. The failure of either party to enforce at any time the
------
provisions of this Agreement, or the failure to require at any time performance
by the other party of any of the provisions of this Agreement, shall in no way
be constituted to be a present or future waiver of such provisions, nor in any
way affect the validity of either party to enforce each and every such provision
thereafter. The express waiver by either party of any provision, condition or
requirement of this Agreement shall not constitute a waiver of any future
obligation to comply with such provision, condition or requirement.
(k) Entire Agreement. The terms and conditions herein contained
----------------
constitute the entire agreement between the parties and supersede and terminate
all previous agreements and understandings, whether oral or written, between the
parties hereto with respect to the subject matter hereof, including, without
limitation, any distribution and related agreements in effect as of the date
hereof.
(l) Section Headings. The section headings contained in this
----------------
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
(m) Notices. Any notice required or permitted by this Agreement shall
-------
be in writing and shall be deemed given if sent by prepaid registered or
certified airmail, return receipt requested (if available), or sent by telex,
facsimile or similar communication, and confirmed by such airmail, postage
prepaid, addressed to the other party at the address shown at the beginning of
this Agreement or at such other address for which such party gives notice
hereunder.
(n) Severability. IT IS UNDERSTOOD AND AGREED THAT EACH AND EVERY
------------
PROVISION OF THIS AGREEMENT WHICH PROVIDES FOR A LIMITATION OF LIABILITY,
DISCLAIMER OF WARRANTIES OR EXCLUSION OF DAMAGES IS INTENDED BY THE PARTIES TO
BE SEVERABLE AND INDEPENDENT OF ANY OTHER SUCH PROVISION AND TO BE ENFORCED AS
SUCH. FURTHER, IT IS EXPRESSLY UNDERSTOOD AND AGREED THAT IN THE EVENT ANY
REMEDY HEREUNDER IS DETERMINED TO HAVE FAILED OF ITS ESSENTIAL PURPOSE. ALL
LIMITATIONS OF
-20-
<PAGE>
LIABILITY AND EXCLUSIONS OF DAMAGES SET FORTH HEREIN SHALL REMAIN IN EFFECT.
(o) Legal Expenses. The prevailing party in any legal action brought
--------------
by one party against the other and arising out of this Agreement shall be
entitled, in addition to any other rights and remedies it may have, to
reimbursement for its expenses, including court costs and reasonable attorneys'
fees.
IN WITNESS WHEREOF the parties hereto have executed this Agreement as of
the day and year first above written.
ECHELON CORPORATION ________________________________
(Echelon) (Distributor)
By: ___________________________ By: ____________________________
_______________________________ ________________________________
(Print Name) (Print Name)
Title: ________________________ Title: _________________________
-21-
<PAGE>
EXHIBIT A
PRODUCTS AND PRICES
<TABLE>
<CAPTION>
========================================================================
DEVELOPMENT DISTRIBUTOR SALES CREDIT LICENSING
PRODUCTS PRICE OR COMMISSION REQUIREMENT
------ ----- ------ ------
- ------------------------------------------------------------------------
<S> <C> <C> <C>
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
========================================================================
</TABLE>
<TABLE>
<CAPTION>
========================================================================
OEM DISTRIBUTOR SALES CREDIT LICENSING
PRODUCTS PRICE OR COMMISSION REQUIREMENT
------ ----- ------- -------
- ------------------------------------------------------------------------
<S> <C> <C> <C>
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
========================================================================
</TABLE>
<TABLE>
<CAPTION>
========================================================================
SOFTWARE DISTRIBUTOR SALES CREDIT LICENSING
PRODUCTS PRICE OR COMMISSION REQUIREMENT
------ ----- -------- -------
- ------------------------------------------------------------------------
<S> <C> <C> <C>
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
========================================================================
</TABLE>
A-1
<PAGE>
EXHIBIT B
TERRITORY
B-1
<PAGE>
EXHIBIT C
PAYMENT TERMS
C-1
<PAGE>
EXHIBIT D
SOFTWARE MARKETING OBLIGATIONS
1. Pre-Sales Support. Distributor shall use its best efforts to solicit
sales for the Software Products. Distributor shall provide limited pre-sales
support, including distributing Echelon's promotional materials, answering
technical questions and expediting customer's completion of the applicable
Software License Agreement.
2. Delivery. Promptly upon receipt of the Software Products from Echelon,
Distributor shall deliver the same to the customer unopened in the original
packaging and will obtain from the customer a signed copy of Echelon's
Acknowledgment of Receipt. Distributor shall immediately forward such
Acknowledgment to Echelon via facsimile transmission to the attention of Order
Processing.
3. Post-Sales Support. Distributor shall provide limited post-sales
support. Customers requiring greater support will be directed by Distributor to
contact Echelon for in-depth support during the initial warranty period and to
contact Echelon with respect to entering into a support contract thereafter.
D-1
<PAGE>
EXHIBIT E
ADDITIONAL MARKETING OBLIGATIONS
[Insert terms of minimum purchases]
E-1
<PAGE>
EXHIBIT F
EVALUATION AGREEMENT
F-1
<PAGE>
EXHIBIT G
SOFTWARE LICENSE AGREEMENT
G-1
<PAGE>
EXHIBIT 10.6
Agreement # H_______________
To be assigned by Echelon
LONWORKS(R)
OEM LICENSE AGREEMENT
This Agreement is entered into between ECHELON CORPORATION ("Echelon") and
_________________________________ ("Licensee") on the following terms and
conditions:
1. DEFINITIONS
(a) "LonTalk(R) Protocol" means Echelon's protocol for control networks
known as the LonTalk Protocol, as such protocol may be modified or
improved by Echelon from time to time.
(b) "Neuron(R) Chips" means semiconductor devices that are (i) generally
sold under the name Neuron Chips, (ii) designed by Echelon or
a supplier licensed by Echelon to design such devices, (iii)
implement, or are designed to be used to implement, all or part of the
LonTalk Protocol, and (iv) manufactured by Echelon or by a supplier
licensed by Echelon to manufacture 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. 5,297,143, U.S. Patent No. 5,319,641, U.S.
Patent No. 5,420,572, U.S. Patent No. 5,500,852, U.S. Patent No.
5,513,324, U.S. Patent No. 5,519,878, 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. If Licensee desires to
implement the LonTalk Protocol for use with semiconductor devices
other than the Neuron Chip, then Licensee should request a copy of
Echelon's LonTalk Protocol License Agreement.
(b) 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. As used herein "OEM License" means 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 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).
(c) 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.
(d) 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.
(e) 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 in its product
name. No license is granted, express or implied, under any Echelon
trademarks, trade names or service marks.
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.
5. 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.
LonWorks OEM License Agreement Page 1 of 2
<PAGE>
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. 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.
(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) The Neuron Chip Firmware is deemed to be "commercial computer
software" pursuant to DFAR Section 227.7202. Any use, modification,
reproduction, distribution or disclosure of the Neuron Chip Firmware
by the U.S. Government shall be governed solely by the terms of this
Agreement and shall be prohibited except to the extent expressly
permitted by the terms of this Agreement.
(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:_______________________________
Lon, Neuron, LONWORKS and LonTalk are U.S. v.12.16.96
registered trademarks of Echelon Corporation. P/N 120-0005-01L
LonWorks OEM License Agreement Page 2 of 2
<PAGE>
EXHIBIT 10.7
AGREEMENT NUMBER C______________
SOFTWARE LICENSE AGREEMENT
BETWEEN
ECHELON CORPORATION
4015 MIRANDA AVENUE
PALO ALTO, CALIFORNIA 94304
AND
DEVELOPER
_______________________
_______________________
_______________________
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: _________________________ By:_____________________________
_____________________________ ________________________________
(Print Name) (Print Name)
Title: ______________________ Title: _________________________
Date: ______________________ Date: _________________________
1
<PAGE>
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 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
2
<PAGE>
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.
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 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.
3
<PAGE>
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 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.
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.
4
<PAGE>
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 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 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.
5
<PAGE>
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) 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.
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
6
<PAGE>
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.
(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
(S)(S)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 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.
7
<PAGE>
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).
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.
8
<PAGE>
AGREEMENT NUMBER C13-___________
EXHIBIT A-2
LONBUILDER(R) MICROPROCESSOR INTERFACE DEVELOPER'S KIT
EXECUTABLE FILES, DEVELOPMENT PURPOSE AND DEVELOPER'S PRODUCT
-------------------------------------------------------------
A. The Object Code is the LonBuilder Microprocessor Interface Program
Libraries.
B. "Executable Files" means custom ROM images in Motorola S-record or Intel
Hex format created from the Object Code using the export facility of the
LonBuilder Developer's Workbench.
C. "Support files" means no files contained herein.
D. "Developer's Product" means a hardware product that includes a memory
device attached to the memory bus of a Neuron(R) 3150(R) Chip into which the
Executable Files are programmed, or that includes a Neuron Chip in which the
Executable Files have been programmed into EEPROM memory, and in both cases,
that is included in equipment which enables communication from an attached
computer onto a network otherwise comprised of LonWorks(R) Applications (as
defined in Echelon's OEM License Agreement with Developer). Developer's
Product also includes computer programs, solely in executable form, that execute
on the attached computer and which may incorporate one or more Support Files.
Notwithstanding that a portion of Developer's Product is a computer program,
Developer's Product is deemed to be a hardware product.
E. "Development Purpose" means the purpose of configuring custom parameters,
such as transceiver parameters, to create Executable Files, and using such
Executable Files solely for developing Developer's Product.
F. Additional software that is not considered Object Code, Support Files or
Utilities will be provided in the Examples directory. Developer shall have the
right to use, modify, reproduce and distribute such software for any purpose.
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 LonBuilder Microprocessor Interface Developer's
Kit, Section 5 is replaced in its entirety with the following:
5 SUPPORT.
-------
5.1 Definition "Support" means:
----------
(i) Responses to technical questions regarding the use of the Licensed
Software when such inquiries are submitted via either telephone, electronic
mail, or facsimile.
(ii) Updates to the Licensed Software that Echelon provides generally to
its customers under support agreements for no additional fee other than the
support contract fee.
(iii) Support for MIP/DPS covers the Network Interface API for non-Windows
hosts only. It does not include support for network management applications.
Echelon reserves the right to decline to respond to technical questions
involving:
a) Product developments that duplicate the functions of Echelon's
products.
b) Third-party products.
c) Debugging of Developer's software code
1
<PAGE>
AGREEMENT NUMBER C13-________
EXHIBIT A-2 (continued)
LONBUILDER(R) MICROPROCESSOR INTERFACE DEVELOPER'S KIT
EXECUTABLE FILES, DEVELOPMENT PURPOSE AND DEVELOPER'S PRODUCT
-------------------------------------------------------------
5.2 Support Hours Echelon's support hours are Monday through Friday,
-------------
8:00 A.M. to 4 :30 P.M., Pacific time in the US, 0900 to 1700 Greenwich Mean
Time in Europe, and 0900 to 1700 in Japan. Service is not available on Echelon's
local regularly scheduled holidays at each of these locations. When Echelon
does not respond immediately to a Support inquiry, Echelon will use reasonable
efforts to respond within eight (8) business hours. Developer may designate up
to three individuals who may place support calls with Echelon.
5.3 Term and Renewal For a period of one (1) year after the date that
----------------
Exhibit A-2 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 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.
5.4 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 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:_________________________
(Company Name)
Signature:____________________ Signature:_________________________
______________________________ ___________________________________
(Print Name) (Print Name)
Title:________________________ Title:_____________________________
Date:_________________________ Date:_____________________________
2
<PAGE>
AGREEMENT NUMBER C13-__________________
EXHIBIT B-2
LONBUILDER(R) MICROPROCESSOR INTERFACE DEVELOPER'S KIT
MIP LICENSE FEES
----------------
<TABLE>
<CAPTION>
Licensed
Software
Echelon License
Model No. Description Quantity Fee
-------------------- -------------------------------- ------------ ------------
<S> <C> <C> <C>
23201 LonBuilder(R) Microprocessor
Interface Developer's Kit
</TABLE>
A. 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.
ECHELON CORPORATION DEVELOPER:________________________
(Company Name)
Signature:____________________ Signature:________________________
______________________________ __________________________________
(Print Name) (Print Name)
Title:________________________ Title:____________________________
Date:_________________________ Date:_____________________________
3
<PAGE>
AGREEMENT NUMBER C13-_________
EXHIBIT C-2
LONBUILDER(R) MICROPROCESSOR INTERFACE DEVELOPER'S KIT
MIP ROYALTIES
-------------
<TABLE>
<CAPTION>
A. Royalties.
----------
Royalty Annual Unit Volume
Level Commitment Level Royalty
------- -------------------------- -------
<S> <C> <C>
Level 1 Less than 2,500 $5.00
Level 2 2,500 to 4,999 inclusive $4.00
Level 3 5,000 to 9,999 inclusive $3.00
Level 4 10,000 to 24,999 inclusive $2.50
Level 5 25,000 to 49,999 inclusive $2.00
Level 6 50,000 and more $1.50
</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.
D. Royalties for the first 100 copies are included with the license fee
set forth on Exhibit B-2.
ECHELON CORPORATION DEVELOPER:_______________________
(Company Name)
Signature:______________________ Signature:_______________________
________________________________ _________________________________
(Print Name) (Print Name)
Title:__________________________ Title:___________________________
Date:___________________________ Date:____________________________
4
<PAGE>
AGREEMENT NUMBER C13-_____________
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 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) Intentionally left blank.
(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) The software and accompanying documentation are deemed to be
"commercial computer software" and "commercial computer software documentation",
respectively, pursuant to DFAR Section 227.7202 and FAR Section 12.212(b), as
applicable. Any use, modification, reproduction, release, performing,
displaying or disclosing of the software and accompanying documentation by the
U.S. Government shall be governed solely by the terms of this agreement and
shall be prohibited except to the extent expressly permitted by the terms of
this agreement;
(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; and
(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.
5
<PAGE>
AGREEMENT NUMBER C13-____________
EXHIBIT A-14
LNS DEVELOPER'S KIT 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 directories.
B. "Executable Files" means those files set forth in the EXECUTE.TXT file in
the product LICENSE directories.
C. "Support Files" means those files listed in the file SUPPORT.TXT in the
product LICENSE directories.
D. "Developer's Product" means Developer's computer program(s), solely in
executable form, that make calls to the LNS Developer's Kit for Windows
Executable File. Developer's Product is a computer program.
E. "Development Purpose" means the purpose of incorporating calls to the LNS
Developer's Kit for Windows Executable Files.
F. Additional software that is not designated as Object Code, Executable
Files, Support Files, or Source Files will be provided in the EXA or EXAMPLES
directories and their subdirectories, and in the files contained within the
LONWORKS\DRIVERS directory that are also listed in the SOURCE.TXT file in the
product LICENSE directories. 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, add the following
sentences to the end of Section 4.2(a): "Echelon may provide Developer with
successor versions of Exhibit C-14. If Developer does not execute Exhibit C-14
as of the date Developer executes this Exhibit A-14, then Echelon will only
accept the then current version of Exhibit C-14 at such time as Developer
executes an Exhibit C-14. The terms and conditions with respect to royalties
set forth in an executed copy of Exhibit C-14 shall be fixed for the period set
forth in Exhibit C-14 (the "Exhibit Term"). After expiration of the Exhibit
Term, if Echelon has provided Developer with successor versions of Exhibit C-14,
Developer must execute the then current successor version of Exhibit C-14 within
thirty (30) days after the end of the Exhibit Term. After expiration of the
Exhibit Term, if Echelon has not provided Developer with successor versions of
Exhibit C-14, the last version of Exhibit C-14 executed by Developer shall
remain in effect until thirty (30) days after Echelon has provided a successor
version of Exhibit C-14 to Developer, during which thirty (30) day period
Developer must execute such successor version. If Developer does not execute
any successor version of Exhibit C-14 during the applicable thirty (30) day
period as required above, Developer's right to distribute Executable Files shall
terminate until such time as Developer executes the then current successor
version of Exhibit C-14."
H. 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 technical questions regarding the use of the Licensed
Software when such inquiries are submitted via either telephone, electronic
mail, or facsimile.
(ii) Updates to the Licensed Software that Echelon provides generally to
its customers under support agreements for no additional fee other than the
support contract fee.
(iii) Support for LNS for Windows only covers the LCA Object Server ActiveX
Control, the LCA Data Server API, the Network Services API, and the Field
Compiler API. It does not include support for the Network Interface API or
lower level API's. Echelon reserves the right to decline to respond to
technical questions involving:
a) Product developments that duplicate the functions of Echelon's
products.
b) Third-party products.
c) Debugging of Developer's software code
1
<PAGE>
AGREEMENT NUMBER C13-____________
EXHIBIT A-14 (CONTINUED)
LNS DEVELOPER'S KIT FOR WINDOWS/(R)/
EXECUTABLE FILES, DEVELOPMENT PURPOSE AND DEVELOPER'S PRODUCT
-------------------------------------------------------------
5.2 Support Hours
-------------
Echelon's support hours are Monday through Friday, 8:00 A.M. to 4 :30
P.M., Pacific time in the US, 0900 to 1700 Greenwich Mean Time in Europe, and
0900 to 1700 in Japan. Service is not available on Echelon's local regularly
scheduled holidays at each of these locations. When Echelon does not respond
immediately to a Support inquiry, Echelon will use reasonable efforts to respond
within eight (8) business hours. Developer may designate up to three
individuals who may place support calls with Echelon.
5.3 Term and Renewal For a period of one (1) year after the date that
----------------
Exhibit A-14 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 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.
5.4 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 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:__________________
(Company Name)
Signature:_________________ Signature:__________________
___________________________ ____________________________
(Print Name) (Print Name)
Title:______________________ Title:______________________
Date: ______________________ Date:_______________________
Windows is a registered trademark of Microsoft Corporation.
2
<PAGE>
AGREEMENT NUMBER C13-_____________
EXHIBIT B-14
LNS DEVELOPER'S KIT FOR WINDOWS/(R)/
LICENSE FEES
------------
<TABLE>
<CAPTION>
Licensed Software
Echelon Model No. Description Quantity License Fee
- ------------------------- -------------------------------------------- ------------- --------------
<S> <C> <C> <C>
34303 LNS Developer's Kit for Windows 1
</TABLE>
A. 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.
ECHELON CORPORATION DEVELOPER:________________________
(Company Name)
Signature:_______________________ Signature:________________________
_________________________________ __________________________________
(Print Name) (Print Name)
Title:___________________________ Title:____________________________
Date:____________________________ Date:_____________________________
3
<PAGE>
AGREEMENT NUMBER C13-___________
EXHIBIT C-14
LNS DEVELOPER'S KIT FOR WINDOWS/(R)/
ROYALTIES
---------
A. Royalties.
---------
As used herein, "Node" means a device that implements layers 1 through 6
of the LonTalk Protocol; "Installed Node" means a Node that has a valid LonTalk
Domain, Subnet, and Node address as defined in the Neuron(R) Chip Databook;
"Commissioned Node" means an Installed Node with an entry in the LNS database
available for use by the Executable File. Developer's royalty payment for each
copy of an LNS Developer's Kit for Windows Executable File or an LNS Host API
Executable File that is distributed by or for Developer shall be $195 plus an
additional charge for each increase in the total capacity of Commissioned Nodes.
There shall be no additional charge for the first 64 Commissioned Nodes added by
an Executable File. The additional royalties payable for such increases after
the first 64 Commissioned Nodes shall be $1.50 per additional Commissioned Node.
An Executable File shall be deemed to have increased the Commissioned Node
capacity by 32,768 Commissioned Nodes per LNS database unless Developer
explicitly restricts the capacity of the Executable File either by implementing
source code that prevents the Executable File from increasing the number of
Commissioned Nodes by more than the reported number of Commissioned Nodes or by
implementing any other method for achieving such limitation as described in the
Documentation. With respect to certain Monitoring and Control and Plug-In
applications, an alternate royalty structure applies as set forth in paragraphs
B and C.
B. Monitoring and Control Royalties.
--------------------------------
Developer's royalty payment for each copy of an Executable File that does
not include any of the following shall be $195: (a) code that increases the
total capacity of Commissioned Nodes; (b) an Access Key as defined in the
Documentation; (c) the LCAENG.DLL file as described in the EXECUTE.TXT file in
the ObjectServer\License directory; (d) the NSSENG.EXE file as described in the
EXECUTE.TXT file in the NetworkServices\License directory; and (e) the database
files identified in the EXECUTE.TXT file in the ObjectServer\License directory.
The list of file names may be changed by Echelon in the EXECUTE.TXT files in the
License directories.
C. Device Plug-In Royalties.
------------------------
A royalty payment is not required for an Executable File that accesses a
single device type and conforms to the device plug-in specifications described
in the Documentation as long as the Executable File does not include any of the
following: (a) code that increases the total capacity of Commissioned Nodes; (b)
an Access Key as defined in the Documentation; (c) the LCAENG.DLL file as
described in the EXECUTE.TXT file in the ObjectServer\License directory; (d) the
NSSENG.EXE file as described in the EXECUTE.TXT file in the
NetworkServices\License directory; and (e) the database files identified in the
EXECUTE.TXT file in the ObjectServer\License directory. The list of file names
may be changed by Echelon in the EXECUTE.TXT files in the License directories.
D. For the purposes of the LNS Developer's Kit for Windows, add the following
to the end of Section 4.2(c):
"If such Developer's Product is distributed generally to third party
customers or to internal users who are existing licensees as an error correction
but also incorporates new features and functions, then the royalty due for such
distributions shall be 15% of the royalty due by Developer according to the
applicable rate set forth in Exhibit C-14. The foregoing provisions of this
subsections (c) only apply if such Developer's Product does not increase the
total capacity of the Commissioned Nodes. Notwithstanding the foregoing, the
standard royalty shall be due for such Developer's Product distributed
internally or to third party customers that are not existing licensees of the
Executable Files."
4
<PAGE>
AGREEMENT NUMBER C13-__________
EXHIBIT C-14 (continued)
LNS DEVELOPER'S KIT FOR WINDOWS/(R)/
ROYALTIES
---------
E. 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 four 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 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 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 applicable rate set forth in Exhibit C-14. The
foregoing provisions of this subsection (e) only apply if the Replacement
Software does not increase the total capacity of the Commissioned Nodes.
Notwithstanding the foregoing, 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."
G. Exhibit Term
------------
The Exhibit Term for this Exhibit C-14 shall be two (2) years from the date this
Exhibit is executed.
ECHELON CORPORATION DEVELOPER:_______________________
(Company Name)
Signature:_____________________ Signature:_______________________
_______________________________ _________________________________
(Print Name) (Print Name)
Title:_________________________ Title:___________________________
Date:___________________________ Date:____________________________
5
<PAGE>
Agreement Number C13-__________
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 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) Intentionally left blank.
(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) The software and accompanying documentation are deemed to be
"commercial computer software" and "commercial computer software documentation",
respectively, pursuant to DFAR Section 227.7202 and FAR Section 12.212(b), as
applicable. Any use, modification, reproduction, release, performing,
displaying or disclosing of the software and accompanying documentation by the
U.S. Government shall be governed solely by the terms of this agreement and
shall be prohibited except to the extent expressly permitted by the terms of
this agreement;
(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; and
(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.
6
<PAGE>
EXHIBIT 10.8
INTERNATIONAL DISTRIBUTOR AGREEMENT
between
ECHELON CORPORATION
and
EBV ELEKTRONIK GMBH
AS OF DECEMBER 1, 1997
-i-
<PAGE>
INTERNATIONAL DISTRIBUTOR AGREEMENT
-----------------------------------
THIS AGREEMENT (the "Agreement") is entered into effective as of December
1, 1997 (the "Effective Date"), between Echelon Corporation ("Echelon"), a
Delaware corporation with principal offices at 4015 Miranda Avenue, Palo Alto,
California 94304, and EBV Elektronik GmbH ("Distributor"), a corporation
organized under the laws of Germany, with principal offices at Ammerthalstr. 28,
D-85551 Kirchheim, Germany.
WHEREAS, Echelon has developed and distributes products for intelligent
distributed control systems;
WHEREAS, Echelon wishes to appoint Distributor to distribute Echelon's
products on a non-exclusive basis in the Territory (as hereinafter defined); and
WHEREAS, Distributor is willing to accept such appointment.
NOW, THEREFORE, the parties hereto agree as follows:
1. DEFINITIONS
-----------
(a) "Products" shall mean those hardware and/or software products and
services for which Distributor will serve as a non-exclusive
distributor or sales representative, as applicable, hereunder, which
are identified in Exhibit A hereto, as it may be amended from time to
time pursuant to Section 9 below.
(b) "Development Products" shall mean those Products identified in Exhibit
A as such.
(c) "OEM Products" shall mean those Products identified in Exhibit A as
such.
(d) "Software Products" shall mean those Products identified in Exhibit A
as such.
(e) "Territory" shall mean the territory set forth in Exhibit B.
(f) "Development License Agreement" shall mean Echelon's standard
LonWorks(R) Development License Agreement and "OEM License Agreement"
shall mean Echelon's standard LonWorks OEM License Agreement.
(g) "Software" shall mean any Software Product that is listed in Exhibit A
and any software that is included in or with a Product that is listed
in Exhibit A. All references to the Products herein include reference
to the Software.
(h) "Software Copy" shall mean an object code copy of any of the Software,
together with a copy of any user manual or other documentation
customarily supplied with the Software Copy to end users by Echelon.
<PAGE>
(i) Registered Customer" shall mean a customer of Distributor that has
been registered by Distributor with Echelon pursuant to Echelon's
standard customer registration policies and procedures. Such
registration policies and procedures (and a list of customers not
currently eligible for registration) are set forth in Exhibit A.
Echelon may amend the registration policies and procedures set forth
in Exhibit A from time to time in its sole discretion, including
eliminating the registration program. Any such change shall be
effective upon notice to Distributor.
(j) "Regular Product(s)" shall mean those products identified as such in
Exhibit H, as such list of products is amended by Echelon from time to
time in its sole discretion.
(k) "Target Inventory Level" shall mean the quantity set forth in Exhibit
H for each Regular Product, as such exhibit is amended by the parties
from time to time.
(l) "Volume Product(s)" shall mean those products identified as such in
Exhibit H, as such list of products is amended by Echelon from time to
time in its sole discretion.
(m) All references in this Agreement to the "sale" of or "selling"
Software or Software Copies shall mean the sale of a license to use
-------
such Software or Software Copies. All references in this Agreement to
the "purchase" of Software or Software Copies shall mean the purchase
of a license to use such Software or Software Copy.
-------
2. DUTIES OF DISTRIBUTOR
---------------------
(a) Activities of Distributor. Subject to the terms and conditions
-------------------------
herein, Echelon hereby appoints and retains Distributor to solicit
sales of and distribute the Products identified with a "Distributor
Price" on Exhibit A hereto in the Territory on a non-exclusive basis.
As a distributor of the Products, Distributor shall have the right to
market and distribute Products solely to end user customers and not to
any party for subdistribution. Echelon further appoints Distributor as
a non-exclusive sales representative for the Products identified with
a "Sales Representative Commission" on Exhibit A hereto in the
Territory. As a sales representative of the Products, Distributor
shall have the non-exclusive right to solicit orders from end user
customers for sale and shipment by Echelon subject to the procedures
set forth in Exhibit A.
(b) Direct Activities by Echelon. Nothing herein shall prevent Echelon
----------------------------
from marketing and distributing the Products directly to end user
customers or to other distributors in the Territory.
(c) Independent Contractors. The relationship of Distributor and Echelon
-----------------------
established by this Agreement is that of independent contractors, and
nothing contained in this Agreement shall be construed to (i) give
either party the
<PAGE>
power to direct and control the day-to-day activities of the other,
(ii) constitute the parties as partners, joint venturers, principal
and agent, employer and employee, co-owners, franchisor and franchisee
or otherwise as participants in a joint undertaking, or (iii) allow
Distributor to create or assume any obligation on behalf of Echelon
for any purpose whatsoever. All financial and other obligations
associated with Distributor's business are the sole responsibility of
Distributor. Distributor shall be solely responsible for, and shall
indemnify and hold Echelon free and harmless from, any and all claims,
damages or lawsuits (including Echelon's attorneys' fees) arising out
of the acts of Distributor, its employees or its agents.
3. REMUNERATION.
------------
Distributor's sole remuneration with respect to the distribution of
Products hereunder shall be (i) the difference between Distributor's price
from Echelon and Distributor's price to its customers and (ii) any
commissions, sales credits, or bonus payable pursuant to Sections 8 (g), 8
(h), or 8(i), below.
4. LICENSE AGREEMENTS
------------------
Distributor acknowledges and agrees that certain Products may only be
distributed pursuant to signed license agreements, as indicated by the
Licensing Requirements set forth in Exhibit A. Distributor shall only
distribute such Products to customers who have entered into all required
license agreements with Echelon.
5. FORECASTS AND ORDERS OF PRODUCTS
--------------------------------
(a) Forecasts. On a quarterly basis, Distributor shall provide Echelon
---------
with a one-year sales forecast setting forth its estimated monthly
requirements for shipment of Products by Echelon's model number for
the upcoming twelve (12) month period. The first such forecast shall
be furnished to Echelon upon execution of this Agreement in the form
of the Initial Order as defined in Section 5 (b) (ii), below, and each
subsequent forecast shall be furnished not later than the fifteenth
day of the month preceding the end of each calendar quarter. The
forecasts are non-binding and will be used by Echelon only for
planning purposes. Upon thirty (30) days' advance written notice to
Distributor, Echelon shall have the right in its sole discretion to
require monthly updates to the forecasts.
(b) Orders and Acceptance.
---------------------
i) Distributor shall initiate purchases under this Agreement by
submitting written or facsimile purchase orders to Echelon. All
purchase orders shall contain the following: (a) model numbers of
Products, (b) quantity of Products to be purchased, (c) shipping
point (Echelon's manufacturing facility or Echelon's European
shipping point) and special shipping instructions, if any, (d)
requested delivery schedule, which shall be within the next
succeeding six (6) months, and which
<PAGE>
shall conform to the minimum lead times for such Products as set
forth in Exhibit A", (e) destination, (f) billing address if
different from address listed above and (g) the net price for the
Products, which shall conform to the minimum aggregate invoice
value set forth on Exhibit A. No purchase order shall be binding
upon Echelon until accepted by Echelon in writing. Echelon shall
use reasonable commercial efforts to notify Distributor of the
acceptance or rejection of a purchase order within fifteen (15)
days of receipt of the purchase order.
ii) As a material inducement for Echelon to enter into this
Agreement, Distributor has agreed to provide Echelon with the
initial order attached to this Agreement as Exhibit I (the
"Initial Order"). Echelon's acknowledgment thereof is attached to
this Agreement as Exhibit J. Echelon agrees that, notwithstanding
the requirements of Section 5 (b) (i), above, such Initial Order
sets forth delivery dates within the next succeeding twelve (12)
months. For each Regular Product the requested scheduled delivery
dates are December 15, 1997; March 15, 1998; June 15, 1998;
September 15, 1998 and November 15, 1998. Such dates will be
adjusted as set forth in Section 5 (b) (iii), below. For each
Volume Product there is one (1) requested scheduled delivery date
per month.
iii) With respect to each Regular Product, Distributor shall place one
order per calendar month by the tenth (10th) working day thereof
with a requested delivery date within such month. The quantity of
each Regular Product set forth on such order shall be determined
by subtracting Distributor's ending inventory for such Regular
Product as of the last day of the preceding month (including any
Products in transit from Echelon to Distributor) from the then
current Target Inventory Level for such Regular Product. During
the first twelve (12) months of this Agreement, or, if earlier,
until delivery of all units of such Regular Product scheduled for
delivery under the Initial Order, Distributor shall effect such
order by requesting a delivery date in the current month for a
portion of the Regular Product ordered on the Initial Order and
scheduled for delivery in a subsequent month. Thereafter,
Distributor shall place a new order each month for the quantity
of Regular Product determined hereunder. The parties will meet
once each calendar quarter to negotiate the following provisions
of Exhibit H, establishing the Target Inventory Levels for
Regular Products added to Exhibit A pursuant to Section 9 (a),
adjusting Target Inventory Levels for Regular Products deleted
from Exhibit A pursuant to Section 9 (b), or increasing or
decreasing the Target Inventory Level for any Regular Product
based upon current sales levels for such Regular Product.
iv) With respect to the Initial Order for each Volume Product,
Distributor may follow the procedure set forth in Section 5 (c)
to request modification of any scheduled delivery date.
Commencing in June
<PAGE>
1998, Distributor shall place one order per month for that
quantity of each Volume Product requested for delivery six (6)
months thereafter, thereby maintaining an order backlog of six
(6) months for each Volume Product.
(c) Cancellation, Delay or Reduction of Orders.
------------------------------------------
i) Distributor may not cancel, delay or reduce the quantity of Product(s)
on that portion of an order with a scheduled delivery date in the
period within and including sixty (60) days of the then current date
without Echelon's prior written approval granted in each instance in
Echelon's sole discretion, and subject to a fifteen percent (15%)
cancellation charge. Distributor will have no rights in partially
completed goods from canceled orders.
ii) One time with respect to each order, Distributor may cancel, delay or
reduce the quantity of Product(s) on that portion of an order that has
a scheduled delivery date in the period beyond sixty (60) days of the
then current date subject to the following provisions: (i) the
combined effect of such cancellation or reduction shall not reduce the
total quantity of each Product to be delivered on all scheduled
delivery dates in such period by more than forty percent (40%); (ii)
no scheduled delivery date may be delayed by more than three (3)
months; (iii) no scheduled delivery date with respect to the Initial
Order maybe delayed beyond November 30, 1998; (iv) with respect to
cancellation under the Initial Order, Distributor must order other
Products for delivery prior to November 30, 1998 to ensure that the
total dollar value of all shipments thereunder is no less than the
amount set forth on Schedule I; and (v) the remaining orders shall
continue to be subject to the minimum aggregate invoice value set
forth on Exhibit A. For purposes of this Section 5 (c), each scheduled
delivery under the Initial Order shall be deemed to be an individual
order. Notwithstanding the provisions of this Section 5 (c),
Distributor may not cancel, delay or reduce the quantity of any order
if the effect would be for Distributor's inventory level to fall below
the Target Inventory Level for any Regular Product.
iii) If under this Section 5 (c) Distributor is permitted a delay in
delivery, and if Echelon has, prior to Distributor's request therefor,
notified Distributor of Distributor Price changes that are effective
at the time of the new delivery date, then Echelon's price to
Distributor on Products for which delivery was delayed and any
penalties due to Echelon hereunder shall be based upon Echelon's new
Distributor Price.
<PAGE>
6. SHIPPING AND RETURN
-------------------
(a) Delivery. Echelon shall use reasonable commercial efforts to deliver
--------
Products on the specified delivery date. Products shall be packaged in
anti-static material, as appropriate.
(b) Shipping. All Products delivered pursuant to this Agreement shall be
--------
marked for shipment to Distributor's facility at the address set forth
above or specified in Distributor's written purchase order, and
delivered to a carrier or forwarding agent chosen by Distributor and
approved by Echelon in its sole discretion; provided, that Echelon may
designate the carrier in the event Distributor fails to designate a
carrier or Echelon does not approve Distributor's selection; provided,
further, that if Distributor requests delivery from Echelon's European
shipping point, then Distributor agrees that Echelon shall have the
sole right to select the freight carrier and method of transportation.
Shipments shall be F.O.B. Echelon's manufacturing facility (currently
at the address set forth above), or Echelon's European shipping point,
as requested by Distributor, at which time risk of loss and, except as
provided in Section 7 below, title shall pass to Distributor. All
freight, insurance, duty and other shipping expenses, as well as any
special packing expenses, shall be borne by Distributor. Each
Distributor shipment shall have an individual packing list.
(c) Security Interest. Until the purchase price and all other charges
-----------------
payable to Echelon hereunder have been received in full, Echelon
hereby retains and Distributor hereby grants to Echelon a security
interest in the Products delivered to Distributor and any proceeds
therefrom. Distributor agrees to promptly execute all documents
reasonably requested by Echelon to perfect and protect such security
interest. In the event Distributor fails promptly to execute such
documents, Distributor hereby appoints Echelon its attorney-in-fact
for the sole purpose of executing such documents, which appointment
shall be a power coupled with an interest and shall be irrevocable.
(d) Return.
------
i) With respect to Products shipped to Distributor (as opposed to
Products shipped directly to Distributor's customers),
Distributor shall inspect all such Products for visable defects
upon receipt thereof, and Distributor may reject any item that
fails substantially to conform to the then current Product
specifications. To reject a Product, Distributor shall within
five (5) working days of receipt of such Product notify Echelon
in writing or by facsimile of its rejection and request a Return
Material Authorization ("RMA") number. Within ten (10) working
days of receipt of the RMA number, Distributor shall return the
rejected Product, freight prepaid and properly insured, in its
original shipping carton with the RMA number displayed on the
outside of the carton.
<PAGE>
ii) If Echelon confirms the defect, Echelon shall, at Echelon's
option and expense, either repair or replace the Product. Echelon
shall reimburse Distributor for the shipping charges to return
properly rejected Products and shall pay the shipping charges for
the delivery of such repaired or replacement Products to
Distributor; otherwise, Distributor shall be responsible for all
shipping charges.
(e) Stock Rotation. Distributor shall be entitled to rotate its stock of
--------------
OEM Products according to the policies and procedures set forth in
Exhibit A. Echelon may amend the stock rotation policies and
procedures set forth in Exhibit A from time to time in its sole
discretion, including eliminating the stock rotation program. Any such
change shall be effective upon notice to Distributor.
7. SOFTWARE
--------
(a) Notwithstanding anything to the contrary contained herein, title to
all Software shall remain with Echelon. Distributor shall have a
nonexclusive license to distribute Software Copies; provided, that
such Software Copies are delivered to customers in unopened packages
in good condition and at the same time as associated hardware
Products, if any.
(b) Distributor shall have no right to copy the Software or to reverse
engineer, disassemble, decompile or otherwise attempt to derive the
source code from the Software, except to the extent that such
activities may not be prohibited under local law. With respect to any
Software Copies to be used for demonstration purposes, in addition to
the requirements set forth in Sections 8 (b) and 17 (b) below,
Distributor agrees to the terms of the (i) Software License Agreement
accompanying the Software Copies, for Software identified with a Note
2, 3 or 4 Licensing Requirement in Exhibit A, and (ii) the Software
License Agreement set forth in Exhibit G hereto, for Software
identified with a Note 5 Licensing Requirement in Exhibit A.
Distributor shall not remove, alter, cover or obfuscate any copyright
notices or other proprietary rights notices placed or embedded by
Echelon on or in the Software.
8. PRICING AND PAYMENT
-------------------
(a) Pricing. Echelon shall provide Distributor with Echelon's Suggested
-------
International List Prices for the Products, as such prices are updated
from time to time. The Distributor Prices for the Products are set
forth in Exhibit A and may only be revised as set forth in SECTIONS 8
(C) AND 8 (D) BELOW. DISTRIBUTOR ACKNOWLEDGES THAT ECHELON SHALL
PUBLISH AND DISTRIBUTE FROM TIME TO TIME ITS PRICE LISTS TO ITS
CUSTOMERS.
(b) Demonstration Products. Distributor may purchase reasonable
----------------------
quantities of Development Products or OEM Products (other than those
Products identified in Exhibit A as "not available for
demonstration"), to be used solely for demonstration purposes, at the
demonstration products discount set forth in
<PAGE>
Exhibit A off the Distributor Price set forth in Exhibit A. Upon
request, Echelon may, in it sole determination of Distributor's
demonstration capabilities, provide Distributor at no charge with one
(1) copy of any Software Product (other than those Software Products
identified in Exhibit A as "not available for demonstration"), to be
used solely for demonstration purposes. Distributor certifies that
Products purchased or provided on this basis ("Demonstration
Products") shall be used exclusively for demonstration and/or
troubleshooting purposes and shall in no event be resold by
Distributor. Distributor shall have the right to use and lend
Demonstration Products pursuant to Section 17 (b) below.
(c) Price Increase. Echelon has the right at any time to increase the
--------------
Distributor Price of any Product upon thirty (30) days advance written
notice to Distributor. Such increases shall apply to all purchase
orders received after the effective date of the increase. Distributor
may order any quantity of Products within such thirty-day period at
the pre-revised price or discount; provided that Distributor requests
delivery to occur no later than fifteen (15) days after the effective
date of the price increase and pays for any invoices associated with
such order pursuant to the terms set forth in Section 8 (f) below.
(d) Price Decrease and Credit. In the event Echelon decreases the
-------------------------
Distributor Price of a Product, Echelon shall notify Distributor in
writing of such decrease, and such decrease shall apply to Distributor
immediately on all unshipped Products. In addition, Distributor shall
be entitled to price protection on its inventory of OEM Products
according to Echelon's policies and procedures set forth in Exhibit A.
Echelon may amend the price protection policies and procedures set
forth in Exhibit A from time to time in its sole discretion, including
eliminating the price protection program. Any such change shall be
effective upon notice to Distributor.
(e) Taxes. All prices described herein are exclusive of any excise, sales,
-----
use, value added (VAT), withholding and similar taxes. Distributor
shall be liable for and shall pay all applicable taxes associated with
the Products. When Echelon has the legal obligation to collect such
taxes, the appropriate amount shall be added to Distributor's invoice
and paid by Distributor unless Distributor provides Echelon with a
valid tax exemption certificate authorized by the appropriate taxing
authority. In the event that Distributor is required by law to make
deductions or withholdings from payments to Echelon, then Distributor
shall pay such additional amounts to Echelon as may be necessary to
assure that the actual amount received by Echelon after deduction or
withholding (and after payment of any additional taxes due as a
consequence of such additional amount) shall equal the amount that
would have been received if such deduction or withholding were not
required.
(f) Payment. Echelon shall issue to Distributor invoices for each
-------
shipment made hereunder. All payments shall be made in United States
Dollars, on the terms set forth in Exhibit C hereto.
<PAGE>
(g) Commissions. In the event Distributor solicits orders from end user
-----------
customers on behalf of Echelon for the sale of any Software Products
identified with a Note 5 Licensing Requirement in Exhibit A or for any
other Products identified with a "Sales Representative Commission" on
Exhibit A, Echelon shall credit Distributor with a sales commission as
set forth in Exhibit A; provided, that (i) Distributor has provided
Echelon with an original copy of Echelon's Software License Agreement
for each such Software Product, signed by the end user customer, and
(ii) Distributor fulfills all obligations with respect to such order
as set forth in Exhibit D hereto. Commissions shall be computed on the
net selling price invoiced to the customer, and no commission shall be
paid with respect to charges for handling, freight, taxes, duties,
insurance, repairs, service and the like. Echelon shall pay the
commission in the currency in which payment is payable from the
customer. Sales commissions shall be in the form of a credit only and
shall be creditable to Distributor no later than the last day of the
month following the month in which Echelon invoices the customer for
such order. Echelon, in its sole discretion, may apportion the sales
commission among other parties entitled to a commission on any such
order. In the event Echelon accepts any returns from customers of
orders on which a commission was paid, or in the event Echelon writes
off as bad debt any or all of the net selling price on orders on which
a commission was paid, Echelon shall charge back to Distributor's
account any amounts previously credited to Distributor with respect to
such returns or bad debt.
(h) Sales Credits.
-------------
i) General. The distributor price for Products hereunder, net of
-------
set forth in Section 8 (i), below, is intended to provide
Distributor with a net price at which Distributor can profitably
sell to end user customers generally within the Territory, and
therefore, there will not be any standard sales credit program.
ii) Special Sales Credits. If business conditions require a
---------------------
special sales credit, then such credit shall be negotiated
between the parties and set forth in a mutually signed written
document as set forth in Exhibit A (the "Special Sales Credit
Request Form"). The Special Sales Credit Request Form shall set
forth at a minimum: the name of the end user customer; the
Echelon part number; the projected quantity of Products to be
sold; and the per unit special sales credit. Receipt of the
foregoing special sales credit is conditioned upon (i)
verification by Distributor's POS Report (as described in Section
13 (d) below) of the type of Product(s) sold, (ii) verification
that the customer is a Registered Customer of Distributor; and
(iii) receipt of the Sales Credit Form set forth in Exhibit A.
Distributor will not be entitled to any special sales credit
unless such procedures have been fully complied with, and no
credits will be provided to Distributor for shipments made by
Distributor prior to the date that Echelon executes the
applicable Special Sales Credit Form.
<PAGE>
(i) Bonus. During the initial term of this Agreement, Distributor shall
-----
be entitled to a bonus of five percent (5%) of Distributor's net
purchases of Products under this Agreement during such initial term,
provided that such net purchases exceed seven million three hundred
sixty eighty thousand dollars ($7,368,000). Net purchases means the
dollar amount of all shipments invoiced hereunder to Distributor less
any credits provided to Distributor under this Section 8 (other than
this Section 8 (i)). Any such bonus shall be in the form of a credit
only and shall be credited to Distributor by December 31, 1998. With
respect to any renewal terms hereunder, there shall be no such bonus
unless the parties agree to the terms thereof in writing as part of
the renewal of this Agreement pursuant to Section 15 (a).
9. PRODUCT CHANGES
---------------
(a) Additional Products. Echelon may, from time to time, in its
-------------------
discretion, amend Exhibit A to add other products which shall be
available to Distributor under the terms of this Agreement.
(b) Deletion of Products. Echelon may delete any Product from Exhibit A
--------------------
effective thirty (30) days after written notice to Distributor of such
deletion. Distributor shall have the option to make a "last buy" of
obsolete OEM Products to meet customer requirements. Any OEM Product
purchased as part of this "last buy" is not eligible for return to
Echelon on any basis except for warranty purposes.
10. WARRANTY AND DISCLAIMER
-----------------------
(a) Express Warranties. Echelon hereby warrants to Distributor that
------------------
Products purchased hereunder shall be free from defects in materials
and workmanship for a period of one (1) year after the date of
shipment by Echelon to Distributor. Notwithstanding the foregoing, the
sole warranty for the Software is as set forth in Echelon's Software
License Agreement. Pursuant to Echelon's Software License Agreement,
Echelon makes a limited warranty to the end user regarding the
diskette on which the Software Copy is contained. Echelon's Software
License Agreement specifically disclaims all other warranties relating
to the Software Copies, including all warranties with respect to the
performance of the Software.
(b) Exclusions. The express warranties set forth in Section 10 (a) above
----------
specifically exclude and do not apply to defects to a Product: (a)
caused through no fault of Echelon during shipment to or from
Distributor, (b) caused by the use or operation of Products in an
application or environment other than that specified by Echelon, (c)
caused by modifications or alterations made to the Products by
Distributor or any third party, (d) caused by maintenance performed on
the Products by Distributor or any third party, or (e) which are the
result of the Products being subjected to unusual physical or
electrical stress.
<PAGE>
(c) Disclaimer. EXCEPT FOR THE ABOVE EXPRESS LIMITED WARRANTIES, ECHELON
----------
MAKES AND DISTRIBUTOR RECEIVES NO WARRANTIES OR CONDITIONS ON THE
PRODUCTS, EXPRESS, IMPLIED, STATUTORY, OR IN ANY OTHER PROVISION OF
THIS AGREEMENT OR COMMUNICATION WITH DISTRIBUTOR, AND ECHELON
SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTY OR CONDITION OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. THE FOREGOING
LIMITED WARRANTY IS MADE BY ECHELON SOLELY TO DISTRIBUTOR FOR
DISTRIBUTOR'S SOLE BENEFIT. DISTRIBUTOR SHALL NOT MAKE OR PASS ON TO
ANY CUSTOMER OR OTHER PARTY ANY WARRANTY OR REPRESENTATION ON BEHALF
OF ECHELON OTHER THAN ANY EXPRESS WARRANTY CONTAINED IN (1) ECHELON'S
SOFTWARE LICENSE AGREEMENT, FOR ANY SOFTWARE PRODUCTS, OR (2)
ECHELON'S TERMS AND CONDITIONS OF SALE OR PRICE LISTS, FOR ALL OTHER
PRODUCTS.
(d) Warranty Procedures. Distributor shall send Products with defects
-------------------
by the foregoing warranty to Echelon's address set forth above or such
other address provided by Echelon from time to time. Distributor shall
request in writing or by facsimile authorization from Echelon prior to
the return of each defective Product for repair or replacement by
Echelon. All such requests must be received by Echelon not later than
thirty (30) days after the expiration of the warranty period. Upon
receipt of such request, Echelon shall provide Distributor with a RMA
number to be prominently displayed on the shipping container for the
defective Product. Once Echelon authorizes the return of any defective
Product, Distributor shall ship such Product to Echelon, freight
prepaid, pursuant to the shipping and other requirements specified by
Echelon in its RMA. Upon verification by Echelon that the returned
Product is defective, Echelon shall provide a credit to Distributor's
account in an amount equal to the actual, reasonable freight costs
incurred by Distributor to return the Product. In addition, Echelon
shall, at its sole option and expense, repair or replace such Product,
employing at its option, new or used parts or Products to make such
repair or replacement, and shall ship the repaired or replaced Product
to Distributor, freight prepaid. The foregoing states the sole
liability and obligation of Echelon arising out of this warranty.
(e) Product Availability. Under no circumstances shall Echelon be
--------------------
responsible to Distributor or any other party for its failure to fill
accepted orders, or for its delay in filling accepted orders, when
such failure or delay is due to any cause beyond Echelon's reasonable
control.
(f) Limitation of Liability. ECHELON'S LIABILITY UNDER THE ABOVE
-----------------------
WARRANTIES SHALL BE LIMITED TO A REFUND OF DISTRIBUTOR'S PURCHASE
PRICE. IN NO EVENT SHALL ECHELON BE LIABLE FOR THE COST OF PROCUREMENT
OF SUBSTITUTE GOODS BY DISTRIBUTOR OR THE CUSTOMER OR FOR ANY
<PAGE>
SPECIAL, CONSEQUENTIAL OR INCIDENTAL DAMAGES FOR BREACH OF WARRANTY.
11. OUT OF WARRANTY REPAIR AND SERVICE SUPPORT
------------------------------------------
(a) Out of Warranty Repair and Service Support. During the term of this
------------------------------------------
Agreement, any repair or reconditioning of any Product not covered by
warranty shall be subject to Echelon's then standard out of warranty
prices, terms and conditions.
(b) Freight Charges. Freight charges on Products returned to Echelon for
---------------
repair are to be prepaid by Distributor. Repaired Products not covered
by warranty shall be returned to Distributor, freight collect.
12. ADDITIONAL OBLIGATIONS OF ECHELON
---------------------------------
(a) Promotions. Echelon shall use all reasonable efforts to include
----------
Distributor in promotional events appropriate for Echelon's authorized
distributors. Echelon shall provide Distributor with reasonable
quantities of promotional literature which Echelon makes generally
available to its authorized distributors for use by Distributor's
sales personnel. Echelon will bulk ship such promotional literature at
Echelon's cost on the most economical basis, provided that Distributor
may request expedited shipment at its sole expense. Any such
promotional program may be initiated, modified and withdrawn by
Echelon and the provisions of Section 8 (c) and (d) shall not apply to
any prices associated with such promotional program.
(b) Leads and Cooperative Marketing. Echelon shall include Distributor in
-------------------------------
any lead referral or other cooperative marketing activities which
Echelon makes generally available to its authorized distributors. Any
such program shall be described in Exhibit A. Echelon may amend the
cooperative marketing policies and procedures set forth in Exhibit A
from time to time in its sole discretion, including eliminating the
cooperative marketing program. Any such change shall be effective upon
notice to Distributor.
(c) Appointment of Additional Distributors. Echelon agrees to promptly
--------------------------------------
provide Distributor with prior written notice of appointment of any
additional distributor for Volume Products in the Territory. Provided
that Distributor has accepted and continues to accept shipments as set
forth in the Initial Order, then such appointment and notice shall not
be made prior to May 31, 1998.
13. ADDITIONAL OBLIGATIONS OF DISTRIBUTOR
-------------------------------------
(a) Sales and Marketing Efforts. Distributor shall use its best efforts to
---------------------------
maximize sales of Products in the Territory. Distributor shall devote
sufficient facilities and technically qualified sales and service
personnel to the Products to fulfill its responsibilities under this
Agreement. Distributor shall make use of promotional material supplied
by Echelon. Distributor shall actively promote
<PAGE>
and market the Products, including, without limitation, selling and
distributing the Products through its own sales force and marketing
the Products in Distributor's catalogues, if any, as soon as possible.
Without limiting the foregoing, Distributor shall fulfill the
additional marketing obligations set forth in Exhibit E hereto.
(b) Distribution Procedures. Distributor shall comply with all reasonable
-----------------------
procedures and restrictions adopted by Echelon from time to time for
distributing the Products. This is to include, but not be limited to,
the requirement to offer customers a full refund of their purchase
price if the customer cannot agree to the terms and conditions of the
Software License Agreement received with the Products, if any,
provided that the customer returns such Products unused within the
number of days set forth on the license notice set forth on such
Products. In addition, Distributor will notify Echelon of any known
breaches of any Software License Agreement. Distributor shall assist
and cooperate with Echelon as requested by Echelon, at Echelon's
expense, (except for the salaries of Distributor's employees), in
enforcing Echelon's rights in the Software.
(c) Customer Listing. To ensure the capability to provide prompt updates
----------------
to customers for the Products, Distributor shall maintain an up-to-
date listing that is accessible by Echelon. Such listing shall
comprise customers to which Distributor has shipped Products and the
Products purchased by such customers.
(d) Point of Sales (POS) Report. Distributor shall submit to Echelon a
---------------------------
monthly POS report on Product sales for each calendar month no later
than the 15th day of the following month. The following information
shall be provided for each sales transaction: Echelon part number;
Quantity sold; Unit sales price; Date product shipped (or scheduled to
be shipped) to customer; Customer name; and "Ship to" location. The
accuracy of each POS report shall be certified by Distributor. Echelon
shall have the right to audit Distributor's books and records to
verify the accuracy of any POS report without notice at any time
during Distributor's normal business hours; provided, that any such
audit shall not materially interfere with Distributor's normal
business operations.
(e) Translations. Distributor, at its election, shall have the right to
------------
engage in the translation and production of any promotional literature
for which Distributor determines local language versions are required
to effectively sell Products. Distributor shall provide Echelon with a
copy of all translated materials and revisions thereto promptly
following completion thereof. Echelon shall retain ownership of all
such translated versions. Distributor hereby assigns to Echelon all
right, title and interest, including all copyrights, in and to any
such translations. Echelon shall have the right to use, reproduce,
exploit and create derivative works of such translations for any
purpose. Distributor shall, and shall cause its translators to,
execute such additional documents and take such other actions as may
be reasonably necessary to perfect such assignment, including waiver
of moral rights. In the event Distributor fails to take such
<PAGE>
action within a reasonable period, Distributor hereby appoints Echelon
its attorney-in-fact for the purpose of executing such documents,
which appointment shall be deemed a power coupled with an interest and
shall be irrevocable.
14. SUPPORT AND UPDATES
-------------------
(a) Support. Distributor shall train and furnish sufficient personnel to
-------
assist customers with basic technical support and answer basic
customer questions regarding the use and operation of the Products and
interpretation of accompanying documentation during normal business
hours. Customers requiring greater support will be directed by
Distributor to contact Echelon for in-depth support during the initial
warranty period and to contact Echelon with respect to entering into a
support contract thereafter.
(b) Updates. In the event Echelon issues any upgrades, updates, new
-------
releases or other modifications to the Software (collectively,
"Software Updates"), Distributor shall only market and distribute such
Software Updates to customers otherwise licensed to use a preceding
version of the Software, in quantities equal to the number of copies
of the Software that such customers were already licensed to use.
15. TERM AND TERMINATION
--------------------
(a) Term. This Agreement shall continue in force until November 30, 1998.
----
This Agreement may be renewed for additional one (1) year terms upon
the mutual written agreement of the parties prior to the expiration of
each fixed term, each party acting in its sole discretion.
(b) Termination for Convenience. This Agreement may be terminated by
---------------------------
either party for any reason or no reason, whether or not extended
beyond the first year, by giving the other party written notice of the
termination ninety (90) days in advance. In the event this Agreement
is terminated pursuant to this Section 15 (b), commissions creditable
pursuant to Section 8 (g) above shall be credited on all open orders
previously secured by Distributor which have delivery schedules within
one (1) year after the date of termination as follows: full rate for
shipments made within ninety (90) days after date of termination; one-
half rate thereafter until one (1) year from the date of termination.
(c) Termination for Cause. If either party materially defaults in its
---------------------
performance or breaches any of the terms or conditions of this
Agreement, then the other party may give written notice to the
breaching or defaulting party that if the breach or default is not
cured within thirty (30) days the Agreement will be terminated. If
such notice is given and the breach or default is not cured during the
thirty day period, then the Agreement shall automatically terminate at
the end of that period. Notwithstanding the foregoing, in the event
that Echelon determines that any POS Report furnished by Distributor
pursuant to Section 13 (d) above is intentionally and knowingly false
or misleading,
<PAGE>
Echelon shall have the right to terminate this Agreement for cause
immediately upon written notice to Distributor, without opportunity to
cure.
(d) Termination for Insolvency. This Agreement shall terminate, without
--------------------------
notice, (i) upon the institution by or against Distributor of
insolvency, receivership or bankruptcy proceedings or any other
proceedings for the settlement of Distributor's debts, (ii) upon
Distributor's making an assignment for the benefit of creditors, or
(iii) upon Distributor's dissolution.
(e) Other Termination. This Agreement shall also terminate, upon notice
-----------------
by Echelon:
i) in the event that any current legislation or exchange controls
under applicable law preclude Distributor from making payments to
Echelon in United States currency for a period of sixty (60)
days; provided, however, that termination under this Section
shall not relieve Distributor of its payment obligations under
this Agreement; or
ii) upon the enactment of any law, decree, or regulation by the
government of the Territory which would impair or restrict (A)
the right of Echelon to terminate or elect not to renew this
Agreement as herein provided, (B) Echelon's right, title or
interest in the Products or the intellectual property rights
therein, or (C) Echelon's rights to receive the payments under
this Agreement.
(f) Distributor agrees to give Echelon prompt written notice of any law,
decree or regulation covered by this Section 15 (e).
(g) Fulfillment of Orders upon Termination.
--------------------------------------
i) Upon termination of this Agreement, and subject to Echelon's
right to require prepayment, Echelon may, but shall not be
obligated to, fulfill all orders accepted by Echelon prior to the
date of termination.
ii) If Echelon appoints an additional distributor for Volume Products
in the Territory, and provided that Distributor then terminates
the Agreement pursuant to Section 15 (b), Distributor shall have
the right to cancel any scheduled deliveries of Products under
the Initial Order that have scheduled delivery dates that are
later than the date of Distributor's notice of termination.
(h) Limitation on Liability. In the event of termination by either party
-----------------------
in accordance with any of the provisions of this Agreement, neither
party shall be liable to the other, because of such termination, for
compensation, reimbursement or damages on account of the loss of
prospective profits or anticipated sales or on account of
expenditures, inventory, investments, leases or commitments in
connection with the business or goodwill of Echelon or
<PAGE>
Distributor. Termination shall not, however, relieve either party of
obligations incurred prior to the termination.
(i) Return of Materials. All Software, Product literature, translations
-------------------
and sales aids of every kind shall remain the property of Echelon.
Within thirty (30) days after the termination of this Agreement,
Distributor shall prepare all such items in its possession for
shipment, as Echelon may direct, at Echelon's expense. Distributor
shall not make or retain any copies of any confidential items or
information that may have been entrusted to it. Effective upon the
termination or expiration of this Agreement, Distributor shall cease
to use all trademarks, marks, and trade names of Echelon.
(j) Survival of Certain Terms. The provisions of Sections 7, 10, 15, 16,
-------------------------
17, 19 and 21 shall survive the termination or expiration of this
Agreement for any reason. All other rights and obligations of the
parties shall cease upon termination or expiration of this Agreement.
16. LIMITATION ON LIABILITY.
-----------------------
ECHELON'S LIABILITY ARISING OUT OF THIS AGREEMENT AND/OR THE SALE OF ANY
PRODUCT SHALL NOT EXCEED THE PRICE PAID BY DISTRIBUTOR FOR THE PRODUCT. IN
NO EVENT SHALL ECHELON BE LIABLE FOR COSTS OF PROCUREMENT OF SUBSTITUTE
GOODS BY ANYONE. IN NO EVENT SHALL ECHELON BE LIABLE TO DISTRIBUTOR OR ANY
OTHER ENTITY FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL, OR INDIRECT
DAMAGES OR LOST PROFITS, HOWEVER CAUSED, WHETHER FOR BREACH OF CONTRACT,
NEGLIGENCE OR OTHERWISE, AND WHETHER OR NOT ECHELON HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGE. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING
ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. THE ESSENTIAL
PURPOSE OF THIS PROVISION IS TO LIMIT THE POTENTIAL LIABILITY OF ECHELON
ARISING OUT OF THIS AGREEMENT AND DISTRIBUTION OF THE PRODUCTS.
17. CONFIDENTIALITY
---------------
(a) Confidentiality.
---------------
i) Distributor agrees not to provide or otherwise make available any
Software Copies, in any form, to any person other than employees
of Distributor or Echelon or Distributor's customers in
connection with the distribution of the Software or its
demonstration (in accordance with Subsection 17 (b) below).
<PAGE>
ii) Distributor acknowledges that the Software constitutes
confidential and proprietary information of Echelon developed at
substantial expense to Echelon. Distributor agrees to use the
Software only as authorized herein, and to treat the Software
with at least the degree of care and protection as its treats its
own most confidential information, and Distributor represents and
warrants that it takes reasonable measures to protect its own
confidential information. Distributor agrees that Distributor
will take appropriate action by instruction, agreement, or
otherwise with Distributor's employees to satisfy Distributor's
obligations under this Agreement with respect to use, copying,
modification and protection and security of the Software.
Distributor shall remain obligated, both during the term of this
Agreement and thereafter, to hold in confidence its knowledge of
the Software as a trade secret for the benefit of Echelon.
iii) Distributor acknowledges that by reason of its relationship with
Echelon hereunder it will have access to certain other
information and materials concerning the Products and Echelon's
business, plans, customers and technology that are confidential
and of substantial value to Echelon, which value would be
impaired if such information were disclosed to third parties.
Distributor agrees that it shall not use in any way for its own
account or the account of any third party, nor disclose to any
third party, any such confidential information revealed to it by
Echelon. Distributor shall take every reasonable precaution to
protect the confidentiality of such information, including, at
the request of Echelon, the entry by Distributor's agents and
employees into confidentiality agreements in a form approved by
Echelon, prohibiting any disclosure to third parties of
confidential information provided by Echelon. Distributor shall
not publish any technical description of any Software or Product
or other confidential information of Echelon beyond the
description published by Echelon. In the event of termination or
expiration of this Agreement, there shall be no use or disclosure
by Distributor, its agents, or employees of any confidential
information of Echelon, and Distributor shall not manufacture or
have manufactured any products utilizing any of Echelon's
confidential information. Distributor shall deliver to Echelon
all copies within its possession or within its control of
customer lists, catalogues, specifications, proposals,
quotations, price lists, contracts and all other documents and
data relating to the Products or the conduct of Echelon's
business.
(b) Demonstration Products.
----------------------
i) Right to Use and Lend. Distributor shall have the right to use
---------------------
any Demonstration Products acquired from Echelon pursuant to
Section 8 (b) above for (i) demonstrations at Distributor's
facility and (ii) trouble shooting of customer systems.
Distributor shall also have the right to loan such Demonstration
Products to prospective customers for
<PAGE>
evaluation purposes; provided, that Distributor furnishes Echelon
with an original copy of Echelon's Evaluation Agreement signed by
the prospective customer. The Evaluation Agreement shall be
either (i) in substantially the form attached hereto as Exhibit F
(with a ten (10) business day evaluation period) or (ii) in
substantially the form as furnished by Echelon (if Echelon in its
sole discretion elects to approve any request for a different
evaluation period). Distributor shall (i) use best efforts to
ensure that the prospective customer performs its obligation at
the end of the evaluation period to return the Product, any
accompanying documentation and any materials developed by such
customer relating to the Product, (ii) notify Echelon of any
known breach of such Evaluation Agreement and (iii) provide
Echelon with reasonable assistance in connection with the
enforcement of such Evaluation Agreement, including, without
limitation, granting Echelon full authority to proceed on
Distributor's behalf. Echelon shall reimburse Distributor for its
documented, pre-approved, out-of-pocket expenses incurred in
connection with such assistance. Subject to the prior approval of
Echelon, Distributor shall have the right to translate the
Evaluation Agreement. Any such approval granted by Echelon shall
be subject to the terms of Section 13 (e) above.
ii) Protection of Software. Distributor will be responsible to
----------------------
Echelon for the protection of Software used in any such
Demonstration Products during the installation and removal
thereof from the prospective customer's site. Such protection
shall include the deletion of Software previously stored on any
customer media and the removal of all copies of the Software and
documentation from the customer's premises at the conclusion of
such demonstration. Distributor shall assign a fully trained
employee to supervise the installation and removal of the
Software included in the Demonstration Product at each
prospective customer's site. In no event shall Distributor use
less care in the protection of Software during installation and
removal from a prospective customer's site than Distributor uses
for the protection of its own software products of like value.
18. TRADEMARKS AND TRADE NAMES
--------------------------
(a) Use. During the term of this Agreement, Distributor shall have the
---
right within the Territory to indicate to the public that it is an
authorized distributor of the Products and to advertise such items
under the trademarks, service marks, and trade names that Echelon may
adopt from time to time ("Echelon's Trademarks"). Distributor shall
not alter or remove any of Echelon's Trademarks applied to the
Products. Nothing herein shall grant to Distributor any right, title
or interest in Echelon's Trademarks. All uses of Echelon's Trademarks
by Distributor shall inure to the benefit of Echelon. At no time
during the term of this Agreement shall Distributor challenge or
assist others to challenge Echelon's Trademarks or the registration
thereof or attempt to
<PAGE>
register any trademarks, service marks or trade names confusingly
similar to those of Echelon.
(b) Approval of Representations. All representations of Echelon's
---------------------------
Trademarks that Distributor intends to use shall first be submitted to
Echelon for approval (which shall not be unreasonably withheld) of
design, color, and other details or shall be exact copies of those
used by Echelon. If any of Echelon's Trademarks are to be used in
conjunction with another trademark on or in relation to the Products,
then Echelon's Trademark shall be presented equally legibly, equally
prominently, and of greater size than the other but nevertheless
separated from the other so that each appears to be a mark in its own
right, distinct from the other mark.
19. COPYRIGHT AND TRADEMARK INDEMNITY
---------------------------------
(a) Indemnification. Distributor agrees that Echelon has the right to
---------------
defend, or at its option to settle, and Echelon agrees, at its own
expense, to defend or at its option to settle, any claim, suit or
proceeding brought against Distributor or its customer on the issue of
infringement of any third party copyright or trademark by the Products
distributed hereunder or the use thereof, subject to the limitations
hereinafter set forth. Echelon shall have sole control of any such
action or settlement negotiations, and Echelon agrees to pay, subject
to the limitations hereinafter set forth, any final judgment entered
against Distributor or its customer on such issue in any such suit or
proceeding defended by Echelon. Distributor agrees that Echelon at its
sole option shall be relieved of the foregoing obligations unless
Distributor or its customer notifies Echelon promptly in writing of
such claim, suit or proceeding and gives Echelon authority to proceed
as contemplated herein, and, at Echelon's expense, gives Echelon
proper and full information and assistance to settle and/or defend any
such claim, suit or proceeding. If the Products, or any part thereof,
are, or in the opinion of Echelon may become, the subject of any
claim, suit or proceeding for infringement of any copyright or
trademark, or if it is adjudicatively determined that the Products, or
any part thereof, infringe any copyright or trademark, or if the
distribution or use of the Products, or any part thereof, is, as a
result, enjoined, then Echelon may, at its option and expense: (i)
procure for Distributor and its customers the right under such
copyright or trademark to distribute or use, as appropriate, the
Products or such part thereof; or (ii) replace the Products, or part
thereof, with other suitable Products or parts; or (iii) suitably
modify the Products, or part thereof; or (iv) if the use of the
Products, or part thereof, is prevented by injunction or if the
foregoing alternatives cannot be accomplished on a commercially
reasonable basis, remove the Products, or part thereof, and refund the
aggregate payments paid therefor by Distributor, less a reasonable sum
for use and damage. Echelon shall not be liable for any costs or
expenses incurred without its prior written authorization.
(b) Limitation. Notwithstanding the provisions of Section 19(a) above,
----------
Echelon assumes no liability for (i) any infringement claims with
respect to any product
<PAGE>
in or with which any of the Products may be used but not covering the
Products standing alone; (ii) any trademark infringements involving
any marking or branding not applied by Echelon or involving any
marking or branding applied at the request of Distributor; or (iii)
the modification of the Products, or any part thereof, unless such
modification was made by Echelon.
(c) Entire Liability. THE FOREGOING PROVISIONS OF THIS SECTION 19 STATE
----------------
THE ENTIRE LIABILITY AND OBLIGATION OF ECHELON AND THE EXCLUSIVE
REMEDY OF DISTRIBUTOR AND ITS CUSTOMERS WITH RESPECT TO ANY ALLEGED
INFRINGEMENT OF PATENTS, COPYRIGHTS, TRADEMARKS OR OTHER INTELLECTUAL
PROPERTY RIGHTS BY THE PRODUCTS.
20. COMPLIANCE WITH LAWS
--------------------
(a) Export Controls.
---------------
i) United States Export Controls. Distributor 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, software, documentation or any media
in which any of the foregoing is contained, as well as any
technical assistance, shall be subject in all respects to
Echelon's compliance with 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, Bureau of Export Administration.
Without limiting the foregoing, Distributor agrees that unless
prior written authorization is obtained from the Bureau of Export
Administration, or the Export Administration Regulations
explicitly permit 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 Cuba, Libya and North Korea) any of the
technical data or software disclosed or provided to Distributor
or the direct product of such technical data or software (if the
direct products are commodities, software, or technical data
described on the Control List with a letter "A" following its
Export Control Number).
(b) Governmental Approval. Distributor represents and warrants that no
---------------------
consent, approval or authorization of or designation, declaration or
filing with any governmental authority in the Territory is required in
connection with the valid execution and delivery of this Agreement.
<PAGE>
(c) Foreign Corrupt Practices Act. In conformity with the United States
-----------------------------
Foreign Corrupt Practices Act and with Echelon's established corporate
policies regarding foreign business practices, Distributor and its
employees and agents shall not directly or indirectly make and offer,
payment, promise to pay, or authorize payment, or offer a gift,
promise to give, or authorize the giving of anything of value for the
purpose of influencing an act or decision of an official of any
government within the Territory or the United States Government
(including a decision not to act) or inducing such a person to use his
influence to affect any such governmental act or decision in order to
assist Echelon in obtaining, retaining or directing any such business.
(d) Currency Control. Distributor represents and warrants that no
----------------
currency control laws applicable in the Territory prevent the payment
to Echelon of any sums due under this Agreement. In the event that any
such laws come into effect and the local government of the Territory
does not permit that payment be made in United States Dollars,
Distributor will notify Echelon immediately, and if so instructed by
Echelon, deposit all monies due Echelon to the account of Echelon in a
local bank of Echelon's choice in the Territory.
21. GENERAL PROVISIONS
------------------
(a) Governing Law. This Agreement shall not be governed by the 1980 U.N.
-------------
Convention on Contracts for the International Sale of Goods; rather,
this Agreement shall be governed by and construed under the laws of
the State of California, without reference to conflict of laws
principles.
(b) Language.
--------
i) This Agreement shall be made in the English language, which
language shall be controlling in all respects, and all versions
hereof in any other language shall not be binding on the parties
hereto. All communications and notices to be made or given
pursuant to this Agreement shall be in the English language.
ii) The parties hereto confirm that it is their wish that this
Agreement, as well as other documents relating hereto, including
Notices, have been and shall be written in the English language
only.
(c) Arbitration.
-----------
i) Arbitration. Either party may institute a suit for injunctive
-----------
relief to prevent a breach of this Agreement (plus an award of
costs), in any court of competent jurisdiction. 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.
ii) Initiation of Arbitration. Either party may commence an
-------------------------
arbitration proceeding hereunder by delivering a written demand
to the other party
<PAGE>
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.
iii) Selection of Arbitrators. If the parties are unable to agree on
------------------------
three (3) arbitrators 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 fifteen (15) names of proposed arbitrators; each
party shall be entitled to strike up to nine (9) names from the
other party's list; and the unstricken names shall be submitted
to the President of the American Arbitration Association and the
arbitrators shall be selected by him or his designee from among
the names submitted. In the event of any failure in the process,
the arbitrators shall in any event be selected by the President
of the American Arbitration Association or his designee.
iv) Limitation on Powers of Arbitrators. The arbitrators shall apply
-----------------------------------
California law (without reference to rules of conflicts of law)
to the merits of the dispute but the arbitrators 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.
v) Arbitration Hearing. The arbitration hearing shall be conducted
-------------------
at a place (and at times) designated by the arbitrators in San
Francisco, 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 (S)(S) 1282 and 1283, and such
other rules of procedure as the parties may agree upon. The
arbitral proceedings and all pleadings and written evidence shall
be in the English language. Any written evidence originally in a
language other than English shall be submitted in English
translation accompanied by the original or a true copy thereof.
vi) Decision; Costs. The arbitrators shall render a decision within
---------------
thirty (30) days after conclusion of the arbitration hearing.
Judgment on the award rendered by the arbitrators may be entered
in any court having jurisdiction thereof. The joint costs of
arbitration (such as court reporting costs and the arbitrators'
fees) shall be borne equally by the parties except that the
arbitrators, in their discretion, may award such costs to be paid
by the losing party to the prevailing party.
<PAGE>
(d) Force Majeure. Neither party shall be liable to the other for its
-------------
failure to perform any of its obligations hereunder during any period
in which such performance is delayed by circumstances beyond its
reasonable control including, but not limited to, fire, flood,
earthquake, war, embargo, strike, riot, inability to secure materials
and transportation facilities, or the intervention of any governmental
authority. If such delaying cause shall continue for more than sixty
(60) days, the party injured by the inability of the other to perform
shall have the right upon written notice to terminate this Agreement
pursuant to Section 15 (c).
(e) Assignment. Neither party may assign or delegate this Agreement or
----------
any of its licenses, rights or duties under this Agreement without the
prior written consent of the other; provided, that either party may
assign this Agreement to a person or entity which acquires or succeeds
to all or substantially all of its business and assets, and which has
assumed in writing its obligations under this Agreement.
(f) Authority. Each party represents that all corporate action necessary
---------
for the authorization, execution and delivery of this Agreement by
such party and the performance of its obligations hereunder has been
taken.
(g) Partial Invalidity. If any section, paragraph, provision, or clause
------------------
in this Agreement shall be found or be held to be invalid or
unenforceable in any jurisdiction in which this 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.
(h) Counterparts. This Agreement may be executed in counterparts, which,
------------
taken together, shall be regarded as one and the same instrument.
(i) Modification. No alteration, amendment, waiver, cancellation or any
------------
other change in any term or condition of this Agreement shall be valid
or binding on either party unless the same shall have been mutually
assented to in writing by both parties.
(j) Waiver. The failure of either party to enforce at any time the
------
provisions of this Agreement, or the failure to require at any time
performance by the other party of any of the provisions of this
Agreement, shall in no way be constituted to be a present or future
waiver of such provisions, nor in any way affect the validity of
either party to enforce each and every such provision thereafter. The
express waiver by either party of any provision, condition or
requirement of this Agreement shall not constitute a waiver of any
future obligation to comply with such provision, condition or
requirement.
(k) Entire Agreement. The terms and conditions herein contained constitute
----------------
the entire agreement between the parties and supersede and terminate
all previous agreements and understandings, whether oral or written,
between the parties
<PAGE>
hereto with respect to the subject matter hereof, including, without
limitation, any distribution and related agreements in effect as of
the date hereof.
(l) Section Headings. The section headings contained in this Agreement are
----------------
for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
(m) Notices. Any notice required or permitted by this Agreement shall be
-------
in writing and shall be deemed given if sent by prepaid registered or
certified airmail, return receipt requested (if available), or sent by
telex, facsimile or similar communication, and confirmed by such
airmail, postage prepaid, addressed to the other party at the address
shown at the beginning of this Agreement or at such other address for
which such party gives notice hereunder.
(n) Severability. IT IS UNDERSTOOD AND AGREED THAT EACH AND EVERY
------------
PROVISION OF THE AGREEMENT WHICH PROVIDES FOR A LIMITATION OF
LIABILITY, DISCLAIMER OF WARRANTIES OR EXCLUSION OF DAMAGES IS
INTENDED BY THE PARTIES TO BE SEVERABLE AND INDEPENDENT FOR ANY OTHER
SUCH PROVISION AND TO BE ENFORCED AS SUCH. FURTHER, IT IS EXPRESSLY
UNDERSTOOD AND AGREED THAT IN THE EVENT ANY REMEDY HEREUNDER IS
DETERMINED TO HAVE FAILED OF ITS ESSENTIAL PURPOSE, ALL LIMITATIONS OF
LIABILITY AND EXCLUSIONS OF DAMAGES SET FORTH HEREIN SHALL REMAIN IN
EFFECT.
(o) Legal Expenses. The prevailing party in any legal action brought by
--------------
one party against the other and arising out of this Agreement shall be
entitled, in addition to any other rights and remedies it may have, to
reimbursement for its expenses, including court costs and reasonable
attorneys' fees.
IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the
day and year first above written.
ECHELON CORPORATION
(Echelon) (Distributor)
By: /s/ Oliver R Stanfield By: /s/ Franz Wiedehann
Oliver R Stanfield Franz Wiedehann
(Print Name) (Print Name)
Title: VP & CFO Title: SALES MNGR.
<PAGE>
Exhibit B
TERRITORY
European Economic Community, Switzerland, Norway, Poland, Czech Republic, Slovak
Republic, Hungary, Romania, Bulgaria, the countries comprising the geographic
area that was formerly the country of Yugoslavia, Russia, Belarus, Ukraine,
Lithuania, Estonia, Latvia and Turkey.
<PAGE>
Exhibit C
PAYMENT TERMS
Net thirty (30) days from date of the invoice
<PAGE>
Exhibit D
SALES REPRESENTATIVE OBLIGATIONS
1. Pre-Sales Support. Distributor shall provide limited pre-sales support,
including distributing Echelon's promotional materials, answering technical
questions and expediting customer's completion of the applicable Software
License Agreement.
2. Post-Sales Support. Distributor shall provide limited post-sales
support. Customers requiring greater support will be directed by Distributor to
contact Echelon for in-depth support during the initial warranty period and to
contact Echelon with respect to entering into a support contract thereafter.
3. Transmittal Sheet. In order to receive a commission pursuant to Section
8 (g), the end user customer's order for the applicable Product(s) must be
received by Echelon with the Transmittal Sheet attached hereto.
<PAGE>
Transmittal Sheet
Customer's Name and Address
Distributor's Name and Address
D-2
<PAGE>
Exhibit E
ADDITIONAL MARKETING OBLIGATIONS
Distributor shall employ a minimum of eight (8) full time employees fully
trained to sell the products in the Territory and exclusively employed therefor,
including one (1) person each in Switzerland, the United Kingdom, a Nordic
country, Denmark, France, and Benelux, and two (2) persons in Germany.
<PAGE>
Exhibit F
EVALUATION AGREEMENT
Upon receipt by Distributor as identified below (the "Distributor") of this
Agreement, signed and completed by the party identified below (the "Recipient"),
Distributor shall provide Recipient with a copy of the Echelon product(s) listed
below (the "Product(s)"). The Product(s) shall be furnished to Recipient solely
for Recipient's internal use and evaluation for a period of ten (10) business
days (the "Evaluation Period").
PRODUCT(S) NAME: __________________________________________________
The Recipient agrees that it is receiving a copy of the Product(s) for use only
on a single computer. The Recipient may make up to one (1) additional copy only
for back-up purposes. The Recipient agrees that all copies of the Product(s)
and all intellectual property rights in and to the Product(s) are owned by
Echelon Corporation ("Echelon") or its suppliers, that all copies will display
Echelon's copyright notice, and that all copies will be strictly safeguarded
against disclosure or use by persons not authorized by Echelon to use the
Product(s). The Recipient agrees that unauthorized copying will cause great
damage to Echelon or to any third party holding any right, title, or interest in
the Product(s). The Recipient agrees that it will not distribute to any third
party the Product(s), any portion thereof, or any program derived from the
Product(s) without the prior written consent of Echelon. Recipient agrees that
it will not modify, translate, reverse engineer, decompile, or disassemble the
Product(s). THE PRODUCT(S) IS PROVIDED "AS IS" WITHOUT WARRANTY OR CONDITION OF
ANY KIND, EXPRESS, IMPLIED OR STATUTORY, INCLUDING WITHOUT LIMITATION WARRANTIES
OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE. THE RECIPIENT AGREES
THAT NEITHER ECHELON, ITS SUBSIDIARIES, NOR ANYONE ELSE INVOLVED IN CREATING,
PRODUCING, OR DELIVERING THE PRODUCT(S) SHALL BE LIABLE FOR ANY DIRECT,
INDIRECT, CONSEQUENTIAL, OR INCIDENTAL DAMAGES RELATING TO THE PRODUCT(S),
HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY. By the end of the Evaluation
Period, Recipient shall either sign and return to Distributor the appropriate
Product license agreement or deliver to Distributor all full or partial copies
of the Product(s), accompanying documentation, and all other materials provided
by Distributor or developed by Recipient relating to the Product(s). The
parties acknowledge that Echelon and its subsidiaries are third party
beneficiaries of this Agreement. This Agreement will be governed by California
law (without reference to rules of conflicts of law). All disputes arising out
of or in connection with this Agreement will be settled by binding arbitration
in San Francisco, California under the rules of arbitration of the American
Arbitration Association. Judgment on the arbitrator's award may be entered in
any court having jurisdiction thereof. Notwithstanding the foregoing
arbitration provision, Echelon may apply to any court of competent jurisdiction
for injunctive relief. This Agreement may not be assigned without Echelon's or
its subsidiary's consent. This Agreement is the entire agreement with respect
to the subject matter hereof and may only be modified in writing. The Recipient
agrees not to export or re-export , or cause to be exported or re-exported, the
Product(s), or the direct product of such Product(s), to any country which,
under the laws of the United States, Recipient is or might be prohibited from
exporting its technology or the direct product thereof.
Distributor Recipient
- ---------------------------------- ----------------------------------
Signature Signature
- ---------------------------------- ----------------------------------
Name (Please Print) Name (Please Print)
- ---------------------------------- ----------------------------------
Company Company
<PAGE>
- ---------------------------------- ----------------------------------
Address Address
- ---------------------------------- ----------------------------------
City, State, Zip City, State, Zip
- ---------------------------------- ----------------------------------
Phone Number Phone Number
- ---------------------------------- ----------------------------------
Date Date
Revised 07/15/96
F-1
<PAGE>
Exhibit G
SOFTWARE LICENSE AGREEMENT
This Agreement is entered into between Echelon Corporation ("Echelon") and
Distributor ("Licensee") on the following terms and conditions.
Echelon Corporation ("Echelon") grants to Licensee a non-exclusive, non-
transferable license to use the copy of the applicable software delivered
pursuant to the Agreement and any updates or upgrades thereto provided by
Echelon according to the terms set forth below. If Echelon provides any
software to Licensee as an update or upgrade to software which Licensee has
previously licensed, then Licensee agrees to destroy all copies of the prior
release of this software within thirty (30) days after opening the software
package; provided, however, that Licensee may retain one copy of the prior
release for backup, archival, and support purposes.
LICENSE
LICENSEE MAY:
a. install and use the software on only one computer or network node,
b. use the software only for demonstrating applications using Echelon's
LonWorks(R) tools and components,
c. make one (1) copy of the software in machine readable form solely for backup
purposes, provided that Licensee reproduces all proprietary notices on the
copy, and
d. physically transfer the software from one computer or network node to
another, provided that the software is removed from the computer or network
node on which it was installed and is used on only one computer or network
node at a time.
LICENSEE MAY NOT:
a. use the software on more than one computer or network node at a time or in a
multi-user system,
b. modify, translate, reverse engineer, decompile, or disassemble the software
(except to the extent that such acts may not be prohibited under applicable
law),
c. copy the software (except for the backup copy ) 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, except as set forth in Section 17 of the Agreement.
This license is not a sale. Title and copyrights to the software, accompanying
documentation, and any copy made by Licensee 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.
LIMITED WARRANTY AND DISCLAIMER
ECHELON DISCLAIMS ALL WARRANTIES OR 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 AND THEIR EQUIVALENTS. does not warrant that the operation of
the software will be uninterrupted or error free or that the software will meet
Licensee's 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
<PAGE>
AND ON ANY THEORY OF LIABILITY. THIS LIMITATION WILL APPLY EVEN IF ECHELON HAS
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. LICENSEE ACKNOWLEDGES THAT THE
AMOUNTS PAID BY LICENSEE FOR THE SOFTWARE REFLECT THIS ALLOCATION OF RISK.
GENERAL
This Agreement shall be governed by the laws of the State of California, U.S.A.
This Agreement is the entire agreement between us and supersedes any other
communications or advertising with respect to the subject matter hereof. This
Agreement may only be amended in writing signed by an officer of each party.
The failure of Echelon to enforce any provision of this Agreement does not
constitute a waiver of such provision. If any provision of this Agreement is
held invalid, the remainder of this Agreement shall continue in full force and
effect. Use, duplication , or disclosure by the U. S. Government is subject to
restrictions set forth in subdivision (c)(1) (ii) of the rights in Technical
Data and Computer Software clause at DFARS 252.227-7013. [Suzanne, please
check]
Echelon and LonWorks are U.S. registered trademarks of Echelon Corporation.
v. 071596
G-1
<PAGE>
Exhibit H
REGULAR PRODUCTS, TARGET INVENTORY LEVELS AND VOLUME PRODUCTS
<TABLE>
<CAPTION>
Regular Target
or Volume Inventory
Model Product Product Level
- --------- ------- ------- -----
-----------
<S> <C> <C> <C>
50051 FTT-10A Volume N/A
50040-01 LPT-10 Volume N/A
50090-02 PLT-21 Volume N/A
50100-01 PLT-30 Volume N/A
61000-100 RTR-10 Volume N/A
- --------------------------------------------------------------------
50010-10 TPT/XP-78 Regular 1,800
50020-10 TPT/XF-1250 Regular 1,800
50080-02 PLT-10A Regular 20
53001-01 PLA-21 Amplifier Regular 20
55010-00 TP/XF-78 Module Regular 400
- --------------------------------------------------------------------
55010-10 TP/XF-78F Module Regular 20
55020-01 TP/FT-10 Module Regular 350
55020-10 TP/FT-10F Module Regular 1,000
55030-10 TP/XP-1250 Module Regular 40
56210-01 LPI-10 Module Regular 60
- --------------------------------------------------------------------
58020-01 LPI-10 Dev Kit Regular -
57010 PLCA-10 Comm Anal. Regular -
58021-2 PLCA-21 Comm Anal. Regular 1
57010-032 PLCA-30 Comm Anal. Regular 1
65100-100 LTM-10 Module Regular 500
- --------------------------------------------------------------------
65120 LTM-10 Mother Board Regular 5
65150-LxP LTM-10 Node T. Pair Regular 5
77010 TPM/XF-78 Regular 150
77030 TPM/XF-1250 Regular 60
77040 FTM-10 Regular 300
- --------------------------------------------------------------------
77050 TPM-RS485 Regular 100
77090 PLM-10 Regular 5
77161 PLM-21 Regular 30
77180 PLM-30 Regular 10
78200-110 PL-10 L/E, 120VAC Regular -
- --------------------------------------------------------------------
78200-120 PL-10 L/E, 240VAC Regular -
78200-121 PL-10 L/N, 240VAC Regular -
78200-211 PL-20 L/E, 120VAC Regular -
78200-220 PL-20 L/E, 240VAC Regular 5
78200-221 PL-20 L/N, 240VAC Regular 30
- --------------------------------------------------------------------
78200-321 PL-30 L/N, 240VAC Regular 5
58030-01 Connectivity Starter Kit Regular 50
71000-11 Loa Works Roster (any) Regular 150
65200-100 LTS-10 SLTA Module Regular 125
65200-200 PSG-10 Regular 25
- --------------------------------------------------------------------
73000-3 PSG/2 Regular -
73000-1 SLTA/2 Regular -
73551 SLTA-10/FT-10 Regular 300
73353 SLTA-10/TP-1250 Regular 20
73100-11 PCLTA Single Channel Regular 10
- --------------------------------------------------------------------
73100-12 PCLTA Dual Channel Regular 5
73401 PCLTA-10/FT-10 Regular 200
73403 PCLTA-10/TP-1250 Regular 20
73200 PCC-10 PC Card Regular 75
78300 2-Conductor/XL Cable Regular 15
- --------------------------------------------------------------------
78301 15-Conductor Cable Regular 20
78302 2-Conductor Cable Regular 75
33100-00 15A Conductor Analyser Regular 3
33100-10 PCC-10 Conductor Analyser Regular 10
34000-100 NSS-10 Module Regular 5
- --------------------------------------------------------------------
35000-100 NSI-10 Module Regular 5
34100 PCNSS PC Interface Card Regular 20
35100 PCNSI PC Interface Card Regular 60
-----------
</TABLE>
__________________________________________
Distributor Date
Page 1
- ------------------------------------------
Echelon Date
<PAGE>
EXHIBIT 10.9
ECHELON CORPORATION
1998 DIRECTOR OPTION PLAN
1. Purposes of the Plan. The purposes of this 1998 Director Option Plan
--------------------
are to attract and retain the best available personnel for service as Outside
Directors (as defined herein) of the Company, to provide additional incentive to
the Outside Directors of the Company to serve as Directors, and to encourage
their continued service on the Board.
All options granted hereunder shall be nonstatutory stock options.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Board" means the Board of Directors of the Company.
-----
(b) "Code" means the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" means the common stock of the Company.
------------
(d) "Company" means Echelon Corporation, a Delaware corporation.
-------
(e) "Director" means a member of the Board.
--------
(f) "Disability" means total and permanent disability as defined in
----------
section 22(e)(3) of the Code.
(g) "Employee" means any person, including officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a Director's fee by the Company shall not be sufficient in and of itself to
constitute "employment" by the Company.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(i) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
<PAGE>
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock for the last market trading day prior to the time of
determination, as reported in The Wall Street Journal or such other source as
the Board deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board.
Notwithstanding the foregoing, with respect to any Options granted upon the
effective date of the IPO, as set forth in Section 4 below, the Fair Market
Value shall be the price as it appears in the final prospectus relating to the
IPO.
(j) "Inside Director" means a Director who is an Employee.
---------------
(k) "Option" means a stock option granted pursuant to the Plan.
------
(l) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(m) "Optionee" means a Director who holds an Option.
--------
(n) "Outside Director" means a Director who is not an Employee.
----------------
(o) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(p) "Plan" means this 1998 Director Option Plan.
----
(q) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 10 of the Plan.
(r) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of
1986.
3. Stock Subject to the Plan. Subject to the provisions of Section 10 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 300,000 Shares, plus an annual increase to be added on the
first day of the Company's fiscal year (beginning in 1999) equal to the lesser
of (i) 100,000 shares or (ii) a lesser amount determined by the Board (the
"Pool"). The Shares may be authorized, but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been exercised
in full, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated). Shares that have actually been issued under the Plan shall not be
returned to the Plan and shall not become available for future distribution
under the Plan.
-2-
<PAGE>
4. Administration and Grants of Options under the Plan.
---------------------------------------------------
(a) Procedure for Grants. Option grants to Outside Directors under
--------------------
this Plan shall be made as follows:
(i) Each Outside Director shall be automatically granted an
Option to purchase 25,000 Shares (the "First Option") on the date on which such
person first becomes an Outside Director (provided such date is after May 29,
1998), whether through election by the stockholders of the Company or
appointment by the Board to fill a vacancy; provided, however, that an Inside
Director who ceases to be an Inside Director but who remains a Director shall
not receive a First Option.
(ii) Each Outside Director shall be automatically granted an
Option to purchase 10,000 Shares (a "Subsequent Option") on both (A) the
effective date of this Plan, as deter mined in accordance with Section 6 hereof,
and on (B) on the date each year that he or she is re-elected to the Board by
- ---
the stockholders of the Company; provided, however, that on such date, he or she
shall have served on the Board for at least the preceding six (6) months.
(iii) Notwithstanding the provisions of subsections (i) and (ii)
hereof, any exercise of an Option granted before the Company has obtained
stockholder approval of the Plan in accordance with Section 16 hereof shall be
conditioned upon obtaining such stockholder approval of the Plan in accordance
with Section 16 hereof.
(iv) The terms of a First Option granted hereunder shall be as
follows:
(A) the term of the First Option shall be ten (10) years.
(B) the First Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set forth in
Sections 8 and 10 hereof.
(C) the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the First Option.
(D) subject to Sections 8 and 10 hereof, the First Option
shall become exercisable as to 25% percent of the Shares subject to the First
Option on each anniversary of its date of grant, provided that the Optionee
continues to serve as a Director on such dates.
(v) The terms of a Subsequent Option granted hereunder shall be
as follows:
(A) the term of the Subsequent Option shall be ten (10)
years.
(B) the Subsequent Option shall be exercisable only while
the Outside Director remains a Director of the Company, except as set forth in
Sections 8 and 10 hereof.
-3-
<PAGE>
(C) the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the Subsequent Option.
(D) subject to Sections 8 and 10 hereof, the Subsequent
Option shall become exercisable as to 25% percent of the Shares subject to the
Subsequent Option on each anniversary of its date of grant, provided that the
Optionee continues to serve as a Director on such dates.
(vi) In the event that any Option granted under the Plan would
cause the number of Shares subject to outstanding Options plus the number of
Shares previously purchased under Options to exceed the Pool, then the remaining
Shares available for Option grant shall be granted under Options to the Outside
Directors on a pro rata basis. No further grants shall be made until such time,
if any, as additional Shares become available for grant under the Plan through
action of the Board or the stockholders to increase the number of Shares which
may be issued under the Plan or through cancellation or expiration of Options
previously granted hereunder.
5. Eligibility. Options may be granted only to Outside Directors in
-----------
accordance with the terms set forth in Section 4 hereof. The Plan shall not
confer upon any Optionee any right with respect to continuation of service as a
Director or nomination to serve as a Director, nor shall it interfere in any way
with any rights which the Director or the Company may have to terminate the
Director's relationship with the Company at any time.
6. Term of Plan. The Plan shall become effective upon the effective date
of the IPO. It shall continue in effect for a term of ten (10) years unless
sooner terminated under Section 11 of the Plan.
7. Form of Consideration. The consideration to be paid for the Shares to
---------------------
be issued upon exercise of an Option, including the method of payment, shall
consist of (i) cash, (ii) check, (iii) other shares which (x) in the case of
Shares acquired upon exercise of an option, have been owned by the Optionee for
more than six (6) months on the date of surrender, and (y) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, (iv) consideration received
by the Company under a cashless exercise program implemented by the Company in
connection with the Plan, or (v) any combination of the foregoing methods of
payment.
8. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times as are set forth in Section
4 hereof; provided, however, that no Options shall be exercisable until
stockholder approval of the Plan in accordance with Section 16 hereof has been
obtained.
-4-
<PAGE>
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 7 of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
A share certificate for the number of Shares so acquired shall be issued to the
Optionee as soon as practicable after exercise of the Option. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date the stock certificate is issued, except as provided in Section 10 of
the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Continuous Status as a Director. Subject to
----------------------------------------------
Sections 8(e) and 10 hereof, in the event an Optionee's status as a Director
terminates (other than upon the Optionee's death or Disability), the Optionee
may exercise his or her Option, but only within three (3) months following the
date of such termination, and only to the extent that the Optionee was entitled
to exercise it on the date of such termination (but in no event later than the
expiration of its ten (10) year term). To the extent that the Optionee was not
entitled to exercise an Option on the date of such termination, and to the
extent that the Optionee does not exercise such Option (to the extent otherwise
so entitled) within the time specified herein, the Option shall terminate.
(c) Disability of Optionee. Subject to Sections 8(e) and 10 hereof,
----------------------
in the event Optionee's status as a Director terminates as a result of
Disability, the Optionee may exercise his or her Option, but only within twelve
(12) months following the date of such termination, and only to the extent that
the Optionee was entitled to exercise it on the date of such termination (but in
no event later than the expiration of its ten (10) year term). To the extent
that the Optionee was not entitled to exercise an Option on the date of
termination, or if he or she does not exercise such Option (to the extent
otherwise so entitled) within the time specified herein, the Option shall
terminate.
(d) Death of Optionee. Subject to Sections 8(e) and 10 hereof, in the
-----------------
event of an Optionee's death, the Optionee's estate or a person who acquired the
right to exercise the Option by bequest or inheritance may exercise the Option,
but only within twelve (12) months following the date of death, and only to the
extent that the Optionee was entitled to exercise it on the date of death (but
in no event later than the expiration of its ten (10) year term). To the extent
that the Optionee was not entitled to exercise an Option on the date of death,
and to the extent that the Optionee's
-5-
<PAGE>
estate or a person who acquired the right to exercise such Option does not
exercise such Option (to the extent otherwise so entitled) within the time
specified herein, the Option shall terminate.
(e) Accelerated Vesting; Extended Option Term for Certain Directors.
---------------------------------------------------------------
In the event an Optionee's status as a Director terminates (including upon the
Optionee's death or Disability), and if on the date of such termination the
Optionee has served as a Director for at least five (5) years, (A) the Option
shall become fully exercisable, including as to Shares for which it would not
otherwise be exercisable, and (B) such Option shall remain so exercisable until
the end of its term as set forth in Section 4.
9. Non-Transferability of Options. The Option may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
10. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
------------------------------------------------------------------
Asset Sale.
----------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of Shares covered by each outstanding
Option, the number of Shares which have been authorized for issuance under the
Plan (but as to which no Options have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an Option) and the price
per Share covered by each such outstanding Option shall be proportionately
adjusted for any increase or decrease in the number of issued Shares resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued Shares effected without receipt of consideration by the
Company; provided, however, that the number of Shares to be subject to First and
Subsequent Options granted pursuant to the automatic grant provisions of Section
4 hereof shall not be proportionately adjusted as described above; provided,
further, that conversion of any convertible securities of the Company shall not
be deemed to have been "effected without receipt of consideration." Except as
expressly provided herein, no issuance by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number or price of Shares subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, to the extent that an Option has not
been previously exercised, it shall terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation or the sale of substantially all of the assets
of the Company, outstanding Options may be assumed or equivalent options may be
substituted by the successor corporation or a Parent or Subsidiary thereof (the
"Successor Corporation"). If an Option is assumed or substituted for, the Option
or equivalent option shall continue to be exercisable as provided in Section 4
hereof for so long as the Optionee serves as a Director or a director of the
Successor Corporation. Following such assumption or substitution, if the
Optionee's status as a Director or director of the Successor Corporation, as
applicable, terminates other than upon a voluntary resignation by the Optionee,
the
-6-
<PAGE>
Option or option shall become fully exercisable, including as to Shares for
which it would not otherwise be exercisable. Thereafter, the Option or option
shall remain exercisable in accordance with Sections 8(b) through (e) above.
If the Successor Corporation does not assume an outstanding Option or
substitute for it an equivalent option, the Option shall become fully vested and
exercisable, including as to Shares for which it would not otherwise be
exercisable. In such event the Board shall notify the Optionee that the Option
shall be fully exercisable for a period of thirty (30) days from the date of
such notice, and upon the expiration of such period the Option shall terminate.
For the purposes of this Section 10(c), an Option shall be considered
assumed if, following the merger or sale of assets, the Option confers the right
to purchase or receive, for each Share of Optioned Stock subject to the Option
immediately prior to the merger or sale of assets, the consideration (whether
stock, cash, or other securities or property) received in the merger or sale of
assets by holders of Common Stock for each Share held on the effective date of
the transaction (and if holders were offered a choice of consideration, the type
of consideration chosen by the holders of a majority of the outstanding Shares).
If such consideration received in the merger or sale of assets is not solely
common stock of the successor corporation or its Parent, the Administrator may,
with the consent of the successor corporation, provide for the consideration to
be received upon the exercise of the Option, for each Share of Optioned Stock
subject to the Option, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
11. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend, or discontinue the Plan, but no amendment, alteration,
suspension, or discontinuation shall be made which would impair the rights of
any Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with any applicable
law, regulation or stock exchange rule, the Company shall obtain stockholder
approval of any Plan amendment in such a manner and to such a degree as
required.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated.
12. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date determined in accordance with Section 4 hereof.
13. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon
-7-
<PAGE>
which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares, if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
14. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
15. Option Agreement. Options shall be evidenced by written option
----------------
agreements in such form as the Board shall approve.
16. Stockholder Approval. The Plan shall be subject to approval by the
--------------------
stockholders of the Company within twelve (12) months after the date the Plan is
adopted. Such stockholder approval shall be obtained in the degree and manner
required under applicable state and federal law and any stock exchange rules.
-8-
<PAGE>
EXHIBIT 21.1
EXHIBIT 21.1
------------
Echelon Corporation
Echelon BV
Echelon Europe Ltd.
Echelon France
Echelon GmbH
Echelon Italia
Echelon Asia-Pacific
Echelon Japan K.K.
Echelon Korea
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ECHELON
CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 DEC-31-1997
<CASH> 5,165 7,853
<SECURITIES> 0 0
<RECEIVABLES> 5,343 4,372
<ALLOWANCES> (857) (562)
<INVENTORY> 3,176 2,444
<CURRENT-ASSETS> 1,382 1,196
<PP&E> 8,695 8,687
<DEPRECIATION> (7,209) (7,174)
<TOTAL-ASSETS> 15,695 16,816
<CURRENT-LIABILITIES> 6,833 6,420
<BONDS> 0 0
0 0
79 79
<COMMON> 192 188
<OTHER-SE> 7,211 8,533
<TOTAL-LIABILITY-AND-EQUITY> 15,695 16,816
<SALES> 7,188 24,665
<TOTAL-REVENUES> 7,959 28,302
<CGS> 3,249 11,761
<TOTAL-COSTS> 3,792 13,571
<OTHER-EXPENSES> 5,924 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (75) (497)
<INCOME-PRETAX> (1,682) (8,025)
<INCOME-TAX> 55 189
<INCOME-CONTINUING> (1,737) (8,214)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,737) (8,214)
<EPS-PRIMARY> (0.09) (0.44)
<EPS-DILUTED> (0.09) (0.44)
</TABLE>
