-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Bs7TpbRusqibto7uWoC+cUY+WthHDp51AxKHv4cldHKPUU14eRJb7CRPCjKoPklW kR6OBXRv/Qm2T5vkM0FijQ== 0000936392-98-001397.txt : 19981030 0000936392-98-001397.hdr.sgml : 19981030 ACCESSION NUMBER: 0000936392-98-001397 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19981029 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXWELL TECHNOLOGIES INC CENTRAL INDEX KEY: 0000319815 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 952390133 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-10964 FILM NUMBER: 98732979 BUSINESS ADDRESS: STREET 1: 9275 SKY PARK COURT CITY: SAN DIEGO STATE: CA ZIP: 92123 BUSINESS PHONE: 6192795100 MAIL ADDRESS: STREET 1: 8888 BALBOA AVE STREET 2: 8888 BALBOA AVE CITY: SAN DIEGO STATE: CA ZIP: 92123 FORMER COMPANY: FORMER CONFORMED NAME: MAXWELL LABORATORIES INC /DE/ DATE OF NAME CHANGE: 19920703 10-K405 1 FORM 10-K405 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________TO___________ COMMISSION FILE NUMBER 0-10964 MAXWELL TECHNOLOGIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-2390133 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 9275 SKY PARK COURT SAN DIEGO, CALIFORNIA 92123 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 279-5100 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK, PAR VALUE $.10 PER SHARE NAME OF EACH EXCHANGE ON WHICH REGISTERED: NASDAQ NATIONAL MARKET ("NASDAQ") SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the Common Stock of the Registrant held by non-affiliates of the Registrant on September 30, 1998, based on the closing price at which the Common Stock was sold on Nasdaq as of September 30, 1998, was $170,678,592. The number of shares of the Registrant's Common Stock outstanding as of September 30, 1998 was 8,456,096 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A (including the Appendix thereto) are incorporated by reference in Part III of this Report. ================================================================================ 2 MAXWELL TECHNOLOGIES, INC. INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JULY 31, 1998
PAGE ---- PART I Item 1. Business...................................................................................... 1 Item 2. Properties.................................................................................... 22 Item 3. Legal Proceedings............................................................................. 23 Item 4. Submission of Matters to a Vote of Security Holders........................................... 23 Item 4.1 Executive Officers of the Registrant ......................................................... 23 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 24 Item 6. Selected Financial Data....................................................................... 25 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 25 Item 8. Financial Statements and Supplementary Data................................................... 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 25 PART III Item 10. Directors and Executive Officers of the Registrant............................................ 25 Item 11. Executive Compensation........................................................................ 25 Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 25 Item 13. Certain Relationships and Related Transactions................................................ 25 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................. 26
3 PART I As used in this Annual Report on Form 10-K, ("Form 10-K"), unless the context indicates otherwise, the terms "Company" and "Maxwell" refer to Maxwell Technologies, Inc., a Delaware corporation, and its consolidated subsidiaries. The Company has five principal operating subsidiaries, I-Bus, Inc., Maxwell Technologies Systems Division Inc., Maxwell Energy Products, Inc,. PurePulse Technologies, Inc. and Phoenix Power Systems, Inc. Unless otherwise indicated, as used in this Form 10-K, the term fiscal year shall refer to the 12-month period ended or ending July 31 of a given year. Share or per share information in this Form 10-K for periods prior to December 17, 1996, is adjusted to reflect a 2 for 1 stock split. This Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in any forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors" herein. Discussions containing such forward-looking statements may be found in the material set forth under. "Item 1. Business--General", "--Competition", and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "--Liquidity and Capital Resources", as well as within this Form 10-K generally. ITEM 1. BUSINESS GENERAL Maxwell Technologies, Inc. ("Maxwell" or the "Company") is a worldwide leader in pulsed power technologies, the storage of electrical energy and delivery of power in brief controlled bursts. The Company has leveraged its technical expertise, gained from over 30 years of experience performing research and development primarily for the United States Department of Defense, to develop a portfolio of pulsed power based commercial products. These products address a range of markets and applications and include ultracapacitors for advanced electrical energy storage and power delivery, purification systems for water treatment and the sterilization of medical and pharmaceutical products and electromagnetic interference ("EMI") filter capacitors for implantable medical devices. In addition to pulsed power based products, the Company offers industrial computers and subsystems which are sold to OEMs and as standard catalogue products in the computer telephony, broadcasting, medical, manufacturing automation and other markets. Government funded research and development projects continue to be an important element of the Company's business, serving as an incubator for technological innovations and a resource of scientific and engineering expertise. As part of its shift to a commercially-oriented business, in 1996 the Company completed a restructuring that organized like and synergistic businesses into subsidiaries, creating focused centers of expertise for product development, manufacturing, marketing and sales. In addition, the Company added a new senior management team to drive the commercialization of Maxwell's portfolio of core technologies and market penetration of the resulting products. PRODUCTS Ultracapacitors Advances in pulsed power technology have enabled the development of ultracapacitors for providing bursts of power when an accelerated injection of energy is required for an application. Ultracapacitors combine certain characteristics of batteries and traditional capacitors. Like batteries, ultracapacitors store significant energy per unit volume and discharge that energy at low voltages. Like traditional capacitors, ultracapacitors store and discharge that electrical energy rapidly, provide large bursts of power, do not degrade with repeated use and can be quickly recharged. In contrast to traditional capacitors, ultracapacitors have significantly greater energy storage capability and longer discharge times, making them suitable for many applications that fall outside the performance parameters of traditional capacitors. 1 4 Maxwell's PowerCache(TM) ultracapacitor represents a significant improvement in ultracapacitors. The Company's ultracapacitors are distinguished by the large amount of energy they can store in a given physical volume. The Company's ultracapacitor is scalable in that it can be manufactured in a broad range of shapes and sizes. Currently, the Company is producing ultracapacitors from sub-matchbook size to cells measuring 2" x 2" x 6", while maintaining the same high energy storage per unit volume. The Company's ultracapacitors can be linked to supply higher power for applications such as automotive and power quality systems. The Company is initially targeting the consumer electronics, power quality and automotive markets for its ultracapacitors. In fiscal 1998 the Company entered into a broad-based agreement with Siemens Matsushita Components GmbH, which is a joint venture of Siemens AG and Matsushita Electrical Industries in the field of passive electrical components. The agreement provides for the transfer of Maxwell's ultracapacitor technology, sharing of ongoing product development by both parties and the non-exclusive licensing right for Siemens Matsushita to manufacture products based on Maxwell's ultracapacitor technology and to sell such products in all countries of the world except the United States, Canada and Mexico. Siemens Matsushita will target the full range of applications for the Company's ultracapacitor. The Company will receive initial license fees and on-going royalties under the agreement. Also during fiscal 1998, the Company acquired Tekna Seal, Inc., a manufacturer of glass-to-metal and glass-to- ceramic seals. Tekna Seal's current product line consists of custom designed and highly engineered seals, primarily for industrial and military applications. The PowerCache ultracapacitor product requires an effective glass-to-metal seal to insulate the terminal from the case, and the technology and engineering skills of Tekna Seal are being applied to satisfy this requirement. Consumer Electronics. The Company has identified a wide range of applications in consumer electronics for its PowerCache ultracapacitor, including wireless communication devices such as two-way pagers, modems, global satellite telephones and locator beacons and other devices such as power tools, toys, buoys, laptop computers, emergency lights, PDA's and scanners. In wireless communication devices, PowerCache ultracapacitors increase signal strength and significantly extend battery life for devices that transmit in sequences of bursts. The Company's ultracapacitors are being designed into next generation portable devices dependent on battery power including two-way pagers, wireless modems and emergency locator beacons. The Company has developed, under a strategic partnership with a telecommunications OEM, a matchbook size ultracapacitor that has been designed into the OEM's next generation wireless modems and two-way pagers. During fiscal 1998, the Company significantly expanded its manufacturing facility for volume production to meet anticipated demands in these markets and is in the process of automating such facility. Power Quality. The Company's ultracapacitors can function as a standby reserve of power to be supplied in the event of an electrical interruption or voltage fluctuation in an external power source. Maintaining power quality is important to a variety of end users, such as manufacturers using automated production equipment, for whom power interruptions can cause substantial product losses and restart delays, and computer-intensive businesses to which data losses can cause substantial expense. Maxwell's strategic partner in the power quality market is PacifiCorp, a leading utility company. PacifiCorp has provided substantial development funding and will be assisting in the marketing of ultracapacitor systems to its own and other industrial customers for whom power quality is an important concern. Maxwell has sold PacifiCorp a 56-volt, 300,000 joule bank of ultracapacitors for demonstration purposes consisting of 56 cells connected in series and parallel, with each cell 2" x 2" x 6" and having 2,700 farad capacitance. The Company has manufactured additional modules and banks for demonstration and application purposes, including a 170-volt bank specifically intended to address the power quality requirements of semiconductor manufacturers and a 650-volt system for power quality applications for industrial computers. Additional potential applications include remote telephone switching offices and utility switching stations handling major power grid realignments. Automotive. In conventional combustion engine vehicles, the Company's PowerCache ultracapacitor has potential applications in catalytic converter pre-heating, air bag deployment, seat belt tightening and engine starting. In addition, the Company's ultracapacitor may create significant energy efficiencies by enabling the replacement of vacuum and hydraulic subsystems for power steering and power brakes with electrical subsystems utilizing pulsed power. In electric vehicles, the Company's ultracapacitor can reduce the load on the battery pack by using its stored 2 5 energy for acceleration power and recapturing energy otherwise lost during braking. Ultracapacitors can thus significantly extend battery life and improve driving range. Similarly, in hybrid electric vehicles, the ultracapacitor provides power for acceleration, passing and hill climbing, thereby allowing highly efficient, low pollution constant power engines to be used. The timing of development and consumer acceptance of electric vehicles is uncertain because such acceptance is driven by factors including legislative mandates and continued technical improvement. As a result, the Company believes market acceptance of ultracapacitor use in electrical subsystems for combustion vehicles will precede widespread use of electric vehicles and may provide a larger initial potential market for ultracapacitors. The Company is working with substantially all of the world's major automobile, truck and bus manufacturers and major automotive component manufacturers in connection with the evaluation of ultracapacitors for use in vehicle subsystems and in electric and hybrid electric vehicles. Purification Systems The Company's PureBright(R) and CoolPure(R) purification systems are based on two patented pulsed power processes incorporating capacitors and other pulsed power components designed and manufactured by the Company. The PureBright system utilizes intense pulsed light to kill microorganisms and viruses in water and pharmaceuticals, and on food, food packaging and medical products. The CoolPure system uses pulsed electrical fields to kill microorganisms in liquids and liquid foods, such as juices, dairy products and sauces. Water Quality. In a strategic partnership with an international restaurant chain, the Company has developed a PureBright system for water treatment in hotels, restaurants, laboratories and similar establishments. The PureBright water treatment system designed for this use is a four-gallon per minute wall-mounted unit that plugs into standard electrical power outlets and treats the water at the point of entry into the establishment. The restaurant partner has purchased several systems for use in restaurants in the San Diego and Tijuana, Mexico area. The Company is marketing the system to restaurant operators in the U.S. and other countries. The Company is evaluating the development of a smaller, point-of-use water treatment system suitable for under the counter residential or other point of use applications. The Company believes PureBright technology will be particularly useful in developing nations because of uneven water quality levels found in some of those countries, and that PureBright can be an effective and easily monitored safeguard against domestic water quality problems, such as cryptosporidium outbreaks, that are not effectively controlled by some conventional technologies. During fiscal 1998, the Company signed an agreement with Pall Corporation to develop and test a PureBright system for treating ultra high purity water used in semiconductor manufacturing. Upon successful testing of a prototype 250 gallon per minute system, the Company and Pall expect to conclude a license under which the PureBright system will be integrated into Pall's line of water treatment products for semiconductor applications. Beta site testing is expected to be completed in fiscal 1999. Medical and Pharmaceutical Product Sterilization. Maxwell is also marketing PureBright systems for sterilization of medical and pharmaceutical products and packaging materials. PureBright systems for medical and pharmaceutical applications consist of a standard enclosure containing the pulsed power delivery system, linked by cable to a flash lamp unit. The flash lamp unit is configurable to the customer's specific requirements for integration into processing line equipment. The Company has strategic partnerships with medical and pharmaceutical product companies, which are seeking FDA approval for PureBright's integration into blow-fill-seal plastic packaging equipment and certain disposable medical product manufacturing equipment. The Company also intends to market PureBright for medical product sterilization applications where it would provide a cost-effective alternative to expensive, time consuming autoclave heat-based sterilization systems. Food Packaging. Through a long-standing relationship with Tetra Pak, the Company has developed PureBright systems for food packaging applications similar in size, price and customizable features to the PureBright systems for medical and pharmaceutical products. Upon successful completion of field tests, Tetra Pak will incorporate PureBright as an option in its next generation of container filling machines. The Company's relationship with Tetra Pak prohibits the Company from pursuing additional customers in most food packaging 3 6 applications, but permits it to pursue additional customers in cup, lid, bottle cap, certain large bottles and hot-filled pouch purification applications. Food Treatment. PureBright systems similar to those used in medical and food packaging may also have application in the market for reducing microbial contamination on the surface of food products. The Company believes reduction of surface microbes will extend the shelf life of a variety of foods. Among other potential applications, the Japanese government is funding a study testing the efficacy of purification systems, including the PureBright system, for meat decontamination. The CoolPure system, currently in the prototype stage, kills microorganisms using pulses of electricity, rather than light. The CoolPure system can be used with opaque or cloudy liquids or pumpable foods such as juices, dairy products and sauces, which the PureBright light pulses are unable to penetrate. CoolPure is effective against vegetative bacteria, a narrower range of microorganisms than those controlled by PureBright. The Company has supplied CoolPure prototypes to the National Center for Food Safety and Technology and an international food products company. The prototype CoolPure systems are composed of 89" x 68" x 84" pulsed power units, linked to smaller treatment chambers with electrodes applying the electrical pulses. EMI Filters The Company designs, manufactures and sells a line of filters to absorb the electromagnetic fields and signals generated by electronic devices which interfere with and disrupt the functioning of other electronic devices. Certain categories of electronic products, including implantable medical devices such as pacemakers and defibrillators and aerospace guidance and communications systems, may fail to perform as required in the presence of EMI. In recent years, the FDA has publicly expressed concern about the potentially deleterious effect on the safe operation of implantable medical devices caused by an increasingly large variety of EMI sources, including household appliances and cellular telephones and other wireless communication devices that operate in an increasingly large part of the electromagnetic spectrum. The Company's product blocks EMI from entering an electronic device at the opening used by, for example, power leads or sensors (the "feedthrough"). These feedthrough filters block EMI from entering an electronic device without interfering with its functionality. Maxwell's patented EMI feedthrough filter capacitor absorbs electromagnetic energy from a broad band of frequencies. The Company believes it has significant advantages over competing technologies because its filters block a broad band of EMI frequencies from entering the device, in contrast to filters that are embedded in the internal circuitry and are designed to absorb only a specific frequency. Furthermore, the Company's surface mount filter design enables a smaller form factor than competing feedthrough filters. The FDA has approved the implantable pacemakers and heart defibrillators of medical device manufacturers which contain the Company's filter. The Company currently has a supply agreement with one of the largest manufacturers of implantable medical devices, CPI/Guidant, whose implantable defibrillators use the Company's filters, and is supplying its filters and capacitors to other device manufacturers for both defibrillator and pacemaker applications. The Company continues to work with several other major medical device manufacturers to qualify its EMI filters for use with implantable defibrillators and pacemakers and has begun work with two companies on hearing aid applications of its EMI filter. The Company also manufacturers and sells high-reliability feedthrough filter capacitors for military and commercial space program applications in which broad band screening of EMI and device size are important specifications. Other Pulsed Power Products The Company designs, manufactures and sells a number of electrical components, including a range of high voltage capacitors supplying from thousands of volts to tens of thousands of volts. Maxwell has long been a major supplier of capacitors used in portable and stationary heart defibrillators used by medical personnel to treat heart attacks. The Company also manufactures high voltage capacitors for lasers for medical applications such as eye surgery, dentistry and dermatology, and for industrial applications such as microlithography for semiconductor 4 7 manufacturing, flat panel annealing for LCD displays, marking, welding, drilling and cutting. Other high-voltage capacitors are sold for use in specialized applications and for use in large systems for the United States government. The Company has licensed traction capacitor technology from Thomson-CSF, a multi-national industrial company, with rights to manufacture and distribute such products in the United States. Traction capacitors, used in locomotives to condition electric power running from a diesel generator to the electric motor, have been used for years in Europe's high speed trains. Maxwell is supplying traction capacitors to the consortium led by Bombardier and GEC Alsthom selected to build AMTRAK's Northeast Corridor train, which is expected to be the first high speed tilt train system in the United States. AMTRAK has announced that it plans to upgrade its rail network to high speed trains nationwide over the next 20 years and the Company intends to pursue opportunities with locomotive manufacturers to supply traction capacitors as well as capacitors for braking and other subsystems for these programs. The Company significantly expanded its capabilities in power protection products by the acquisition in fiscal 1998 of San Diego-based Phoenix Power Systems, Inc. Phoenix Power is a manufacturer of power distribution units, uninterruptable power supplies, power conditioners and inverters, and other power protection products which are sold either under the Company's name or under private label agreements for medical, telecommunications, industrial and commercial applications. Phoenix Power has recently begun manufacturing and selling a power conditioning product for a medical application which uses the Company's PowerCache ultracapacitor as an energy storage device. The Company also develops, manufactures and sells a line of compact power supplies used for charging high voltage capacitors for the medical and industrial laser markets. Portions of this product line are manufactured under license from Auburn University. Government Funded Research and Systems Development Maxwell is engaged in a variety of research and development programs in pulsed power, weapons effects simulation and pulsed power and sensor systems design and construction. These services are primarily supplied to the United States government and its agencies including the Air Force and the Defense Special Weapons Agency. The Company also provides systems and services to national laboratories and industrial and defense companies. The Company typically performs research and development under contracts that allow the Company to apply developed technology in commercial markets. The Company performs above-ground simulation and testing of weapons effects via the design and operation of large-scale X-ray and electromagnetic pulse producing systems. These systems employ the Company's capacitors and other pulsed power components. The Company also has developed power quality systems and power conditioning systems, including a power conditioning system for an accelerator for tritium production. The Company provides technology oversight and planning for space-based sensor design and development and testing of hardening techniques for electronics modified to withstand hazardous effects of hostile environments. In addition, the Company performs on-site technical, operations and maintenance support at government facilities involving applications such as electric and electrothermal gun research, advanced pulsed power development, high-power microwave source development, energy storage and system integration of advanced concept demonstration experiments. During fiscal 1998 the Company acquired the electromagnetic systems operation of Primex Physics International ("Physics International") a unit of Primex Technologies, Inc., substantially enhancing the Company's pulsed power systems and simulation capabilities. Along with Maxwell, Physics International is a leader in pulsed power technology and operates five systems at its San Leandro, California, site for the generation of x-rays and electromagnetic pulses used in high energy weapons simulation tests. Physics International is also engaged in the design, development and manufacture of advanced pulsed power systems with applications complementary to those pursued in the Company's San Diego-based operations. 5 8 Industrial Computers and Subsystems Through its industrial computers and subsystems business, the Company designs, manufactures and supplies standard, custom and semi-custom industrial computer modules, platforms and fully-integrated systems to OEMs, on a worldwide basis. The Company's product line ranges from enclosures, CPU boards and backplanes to fully integrated and highly customized computer systems. The Company's product line primarily employs passive backplane architecture, complemented by the Company's recent development of its first CompactPCI products. The Company's custom and semi-custom components and systems are design-intensive applications. All of the Company's products are based on Intel's x86 and Pentium architectures and are PC-compatible. The Company's products are utilized primarily in computer telephony equipment such as voice-mail servers, interactive voice response servers, telephone switching servers and telephone network transaction control servers. The Company's industrial computers are also used in a number of non-telecommunication applications such as broadcasting, medical (CT Scan, MRI equipment and drug dispensing equipment), test instrumentation (data acquisition and test), imaging instrumentation (large-scale optical reading and sorting equipment) and manufacturing automation (pick-and-place equipment). The Company's products utilize passive backplane technology in which CPU and input/output functionality is provided by add-in cards for flexibility and ease of replacement. The Company provides fault resistant and fault tolerant systems that include redundant components -- cooling fans, power supplies and hard disks -- that can be "hot-swapped" without shutting down or otherwise affecting the system. The Company also provides enclosures with segmented backplanes that allow two or more independent computer systems to operate within a single enclosure, an important feature in systems in which fault tolerance or size requirements are critical. Enclosures are available to support from six to twenty-five slots and can be configured in rack mount, table top or tower models. The Company's products employ several industry standard buses, form factors and interfaces, which enable OEMs to integrate the Company's products with many widely available and economical third party products thereby reducing reliance on potentially higher priced or scarce custom component parts. The Company's products incorporate standard bus architecture including ISA Bus, PCI Bus, CompactPCI, SCSI Bus and IDE and microprocessors in the Intel family up to the Pentium II and support operating systems including Windows 95, Windows NT and Solaris. The Company substantially broadened its product offering and geographic scope through the acquisition of Tri-MAP International, a United Kingdom-based supplier of industrial computers and subsystems. Tri-MAP is a leading supplier in the U.K. market of standard products sold primarily through product catalogues. After integrating the product offering of Tri-MAP, the Company now offers a full range of products from design-intensive, high-end OEM systems to off-the-shelf standard systems and components, enhancing its penetration into European markets as well as the domestic U.S. market. Shortly after the end of fiscal 1998, the Company opened an integration and sales facility in France, and is taking preliminary steps to open a similar facility in Germany. Computer-Based Analytic Services and Software Maxwell provides complex computer-based analytic services, primarily to the United States Department of Defense, and sells various commercial software products. A primary focus of the Company's government funded research is computer modeling of physical phenomena and improvement of the architecture of the computer-based systems and networks used for transmitting and applying data. The Company has developed highly advanced computer software for modeling and predicting physical effects such as electromagnetic pulses, electric currents, shock waves, ground shock and ground movement. The Company uses this software to perform analysis of weapons effects and systems hardening, space environment effects and satellite design, electric propulsion and geothermal and earthquake effects. In commercial markets, Maxwell primarily provides software-related products and services for cost accounting and management information systems. The Company is marketing these products, which incorporate sophisticated job-cost and activity-based accounting capabilities, to large contractors and others interested in tracking costs by 6 9 job, activity or cost center. The software is sold under the JAMIS(R) (Job-cost Accounting and Management Information Systems) label, and contains modules necessary for a comprehensive, enterprise-wide system including accounting functions, Federal Acquisition Regulation compliant billings, human resources, payroll, contracts and purchasing. Development continued in fiscal 1998 on a new, open platform, graphical user interface based version of this software. The Company completed development in fiscal 1997 of JAMIS Timecard, an online time recording system that currently operates in a client-server environment including remote-site entry, and is developing Internet compatibility for this product. In fiscal 1998 the Company discontinued a portion of its software related business and reorganized other software related businesses. The wide area and local area network and software integration services previously offered by the Company were discontinued, as was the Company's business involving criminal justice information systems. The Company continues to perform services under two multi-year contracts in the criminal justice information business, which contracts are expected to be completed substantially in the current fiscal year. As a result of these actions, the Company no longer reports results in an information products and services business segment. STRATEGIC PARTNERSHIPS In recent years the Company has formed or expanded several strategic partnerships. Through these alliances, Maxwell may obtain an enhanced understanding of market demands and needs, access to funding for continued development and commercialization of products, or a channel for market penetration. The strategic partner obtains an opportunity for early adoption or use of the product or service. For purification products, the Company frequently accepts initial funding to engineer a specific application for the strategic partner, thus reducing the Company's product development expense, and in exchange the strategic partner often receives a period of exclusivity for the application. The Company's longest strategic relationship is with Tetra Pak, which has provided research and product development funding to the Company's PurePulse Technologies, Inc. subsidiary since its inception, and owns approximately 5% of PurePulse. The Company's PureBright system has been designed-in as an option in some of Tetra Pak's next generation food packaging machinery. Tetra Pak has an exclusive license for PureBright in most aseptic food packaging applications. In similar fashion, the Company has received funding from Pall Corporation for development and testing of a prototype 250 gallon per minute PureBright water treatment system for high purity water used in semiconductor manufacturing. Successful testing of the prototype could lead to a commercialization agreement for that market, which will include exclusive rights for Pall Corporation for a period of time. For CoolPure, an international food products company is providing product development funding and is currently evaluating prototype units, and in exchange, has been granted a period of exclusivity for use of CoolPure in some applications. The Company has also developed strategic partner relationships for product development and marketing of ultracapacitors. PacifiCorp has provided funding for early-stage product analysis, development and testing of ultracapacitors in power quality applications and has provided an additional $7 million in funding for product development, preferred access to the technology, royalty rights and an equity investment in the Company's subsidiary, Maxwell Energy Products, Inc. The Company has signed a broad-based licensing agreement relating to ultracapacitors with Siemens Matsushita Components, GmbH, providing for technology transfer, joint product improvement and non-exclusive rights for Siemens Matsushita to manufacture ultracapacitor products and to sell such products in all countries of the world other than the U.S., Canada and Mexico. SALES AND MARKETING The Company's commercial products sales teams consist of sales personnel based in its operating facilities and for the Company's industrial computing products, geographically-dispersed sales offices. These sales teams are often supported by scientists, application engineers and technical specialists. Sales and marketing for the Company's products in the United States is handled directly by the Company. The Company utilizes sales representatives to assist in the marketing of its products outside the United States. During fiscal 1998 the Company hired a president for European operations who is now located in London, England. Marketing of the Company's products in Europe 7 10 will be overseen by such individual. In the case of industrial computers and subsystems, products are also being assembled and sold through the U.K. and French facilities. The Company conducts marketing programs intended to position and promote its products and services, including trade shows, seminars, advertising, public relations, distribution of product literature and web-sites on the Internet. Emerging technologies require customer acceptance of new and different technical approaches, and the sales effort for new products, particularly in the power conversion products business segment, includes substantial involvement from engineers to demonstrate the applications of the Company's products. Senior management is also significantly involved in gaining access to customers or potential strategic partners to discuss the Company's emerging product lines. The time required to demonstrate technical and cost effectiveness for new technologies often requires an extended initial marketing effort by the Company. As a result, an important part of the sales strategy for new products is to capitalize on strategic partnerships formed to develop the product and establish an avenue to obtain product validation. In its technology programs and systems segment, the Company's sales and marketing is primarily conducted by key scientists and other members of its technical staff. A large portion of this business is obtained in response to requests for proposals by the government, with the Company's bids and proposals focused on providing the government with detailed technical information as well as competitive pricing. Successful performance of the Company's contracts is an important factor in securing follow-on business, an important source of new contracts for the Company. COMPETITION In most of the markets in which it operates, Maxwell has a number of competitors, many of which have longer operating histories, significantly greater financial, technical, marketing and other resources, greater name recognition, and a larger installed base of customers than the Company. In some of the Company's business areas involving emerging technologies, the Company faces competition from products utilizing alternative technologies. Although a number of companies are researching and developing ultracapacitor technology, the Company has three principal competitors in ultracapacitor products, Panasonic, a division of Matsushita Electric Industries, Ltd., SAFT, a unit of the Alcatel-Alsthom Group and a prominent international battery supplier, and Polystor, a manufacturer of batteries and ultracapacitors. The key competitive factors are performance (energy stored and power delivered per unit volume), form factor and breadth of product offerings. The Company believes it competes favorably with respect to each of these factors. In addition, the Company will rely on strategic partnerships to secure design wins and on aggressive pricing where necessary. Ultracapacitors also compete with other technologies including high-power batteries in power quality and automobile load leveling applications, flywheels in power quality and automotive applications (including as a power source for electric vehicles), and superconducting magnetic energy storage in power quality. The Company does not believe that its PureBright products have direct competitors in the application of pulsed broad spectrum light to treat water, decontaminate food packaging, or sterilize medical or pharmaceutical products. Pulsed light competes with many other established and developing technologies, most of which are available in forms that are significantly less expensive than the Company's products. For water treatment, the Company faces competition from many alternative technologies including filtration systems, reverse osmosis, chemicals, distillation technology and continuous wave ultraviolet light systems. Alternative technologies also exist for the sterilization, disinfection and purification of medical products, food packaging and food products, including technologies such as autoclave heat sterilization, chemicals, gamma radiation and modified atmosphere packaging. The Company believes its purification systems will be competitive because of their efficacy in microbial reduction, their speed in providing treatment, and their ability to be integrated directly into processing lines rather than providing treatment after the product comes off the line, and their capability to provide treatment without producing hazardous wastes. The Company's EMI filter business competes with AVX Filter, a subsidiary of Kyocera, in the EMI feedthrough filter market. The competitive factors in this market include price, breadth of electromagnetic spectrum filtered, small size and reliability. The Company believes it competes favorably with respect to each of these factors. The 8 11 Company believes its patent for mounting of the filter at the surface of an implantable medical device's feedthrough provides a competitive advantage by allowing manufacture of a smaller sized device. The Company's traditional high voltage capacitors face competition from numerous independent electronics suppliers as well as from component manufacturing operations within certain medical and industrial OEM organizations. The largest independent competitor in the United States is Aerovox, which has competing high voltage capacitor lines very similar to the Company's. Customers generally select capacitor components for their systems based on criteria such as price, functionality (i.e. voltage requirements) and past experience with a vendor. The Company focuses on high-end, high-power capacitors, maintains relationships with customers geared towards achieving design wins and offers competitive pricing. The Company's primary competition in its passive backplane target markets include Texas Microsystems, Diversified Technology, Advantech, the Industrial Computer Source division of Dynatech, Teknor and Trenton, among others, resulting in a highly fragmented market in which no one entrant is dominant. In addition, there are industrial computers and subsystems divisions within several large OEM operations. Competitive factors in this market include price, design expertise, functionality and fault tolerance. The Company believes it competes favorably with respect to each of these factors. CompactPCI is an emerging technology that is neither widely marketed nor accepted; it will potentially compete with passive backplane and much more widely installed VME-based systems for market share. The competitive factors surrounding CompactPCI are very similar to passive backplane systems; however, traditional VME manufacturers such as Motorola and Force are entering the market. In complex computer-based analytic services, the Company often competes with larger, better funded entities to secure government and other contracts. The Company relies on its expertise in modeling and analysis and its ability to make competitive bids to secure contracts. In commercial software, the JAMIS accounting system competes principally with one similar government contract based software application produced by Deltek Systems, as well as with numerous customized and several off-the-shelf accounting software products. The Company relies on superior performance and an attractive price point to secure market share. In all of its businesses, the Company's competitive position depends in part on its ability to hire and retain highly qualified engineers, scientists and management personnel. See "Risk Factors -- Competition." MANUFACTURING AND SUPPLIERS Maxwell currently manufactures all of its pulsed power components and EMI filters. It performs primarily design, assembly and system integration in its industrial computer and subsystems operation. The Company has several manufacturing and assembly facilities in the United States and the United Kingdom. Three facilities in San Diego have obtained ISO 9001 certification and one of the United Kingdom facilities is ISO 9002 certified. The Company is currently seeking ISO 9001 certification for other facilities. The Company performs low volume manufacturing for certain products, such as purification systems and major pulsed power systems. For certain emerging products, the Company will evaluate whether outsourcing or licensing arrangements are preferable to establishing its own high volume manufacturing capacity for that product. The Company generally purchases components and materials, such as electronics components, dielectric materials and enclosures of metal and plastic, from a number of suppliers. In certain operations, the Company relies on a limited number of suppliers or a single supplier. Although the Company believes there are alternative sources for components and materials currently obtained from a single source, there can be no assurance that the Company will be able to identify and qualify alternative suppliers in a timely manner. Maxwell's industrial computer business relies on single qualified suppliers for some of its critical components, primarily CPU boards and some power supplies. The Company considers the sources of supply to be adequate. However, after one of the Company's significant OEM customers specified a particular source for power supplies, in fiscal 1996 the Company experienced interruptions in shipments from this vendor and the interruption had a materially adverse short-term impact on the Company's operations. The EMI filter produced by the Company relies on a sole domestic source for one component, and that supplier has indicated its plans to design, build and sell a competing filter in the future. The Company believes this supplier will continue to sell to the Company but, if necessary, the Company could replace this supplier or design and 9 12 manufacture the component itself. Although the Company seeks to reduce its dependence on sole and limited source suppliers, the partial or complete loss of these sources could have at least a temporary material adverse effect on the Company's results of operations and damage customer relationships due to the complexity of the products supplied and the significant amount of time required to qualify new suppliers. See "Risk Factors -- Reliance on Third Party Suppliers." The Company has limited experience with volume manufacturing of commercial products. To date, the Company has not manufactured in volume its ultracapacitors or purification systems. The Company may face challenges in scaling up production of its new products, especially those products that contain newly developed technologies. In addition, the Company will need to expand its current facilities or obtain additional production equipment or both in order to manufacture a substantial quantity of its products. There can be no assurance that the Company will be successful in expanding its facilities or obtaining additional facilities, or that it will be able to overcome the management, technological, engineering and other challenges associated with the production of significant quantities of products at acceptable cost on a timely basis. Outsourcing of manufacturing involves risks with respect to quality assurance, cost and the absence of close engineering support. See "Risk Factors - --Limited Volume Manufacturing Experience." RESEARCH AND DEVELOPMENT The Company conducts internally-funded engineering, research and development to refine and expand its products and services. Approximately 18% of the reported research and development expense consists of the Company's preparation of proposals principally for contracts for funded research and development for the government. For fiscal 1998, 1997, and 1996, expenditures for internally-funded research and development were approximately $8,206,000, $5,303,000, and $5,081,000 respectively. In addition, the Company performs substantial research and development work funded by customers, including agencies of the U.S. Government and commercial companies under strategic partnership arrangements. PATENTS, LICENSES AND TRADEMARKS The Company's success is heavily dependent upon the establishment and maintenance of proprietary technologies. Although the Company attempts to protect its intellectual property rights through patents, copyrights, trade secrets and other measures, there can be no assurance that the steps taken by the Company to protect its proprietary technologies will be adequate to prevent misappropriation by third parties or will be adequate under the laws of some foreign countries, which may not protect the Company's proprietary rights to the same extent as do the laws of the United States. The Company uses employee and third-party confidentiality and non-disclosure agreements to protect its trade secrets and unpatented know-how. The Company requires each of its employees to enter into a proprietary rights and non-disclosure agreement in which the employee agrees to maintain the confidentiality of all proprietary information of the Company and, subject to certain exceptions, to assign to the Company all rights in any proprietary information or technology made or contributed by the employee during his or her employment. In addition, the Company regularly enters into non-disclosure agreements with third parties, such as potential joint venture partners and customers. The Company has historically relied primarily on its technological and engineering abilities and on its design and production capabilities to gain competitive business advantages, rather than on patents or other intellectual property rights. However, the Company does file patent applications on concepts and processes developed by the Company's personnel, and, as its commercial businesses expand, the Company has placed increased emphasis on patents to provide protection for certain of its technologies and products. The Company's success will depend in part on its ability to maintain its patents, add to them where appropriate, and to develop new products and applications without infringing the patent and other proprietary rights of third parties and without breaching or otherwise losing rights in technology licenses obtained by the Company for other products. There can be no assurance that any patent owned by the Company will not be circumvented or challenged, that the rights granted thereunder will provide competitive advantages to the Company or that any of the Company's pending or future patent applications will be 10 13 issued with claims of the scope sought by the Company, if at all. If challenged, there can be no assurance that the Company's patents (or patents under which it licenses technology) will be held valid or enforceable. In addition, a number of the patents and patent applications owned or licensed by the Company are subject to "march-in" rights and non-exclusive, royalty-free, confirmatory licenses held by various governmental agencies or other entities. Competing research and patent activity in many of the Company's technologies is substantial and the markets are large enough that conflicting patent and other proprietary rights claims may result in disputes or litigation. Although the Company does not believe any of its products or proprietary rights infringe the rights of third parties, there can be no assurance that infringement claims will not be asserted against the Company in the future. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, or at all. If infringement were established, the Company could be required to pay damages or be enjoined from making, using or selling the infringing product. Likewise, there can be no assurance that a third party's product, if infringing on the Company's proprietary rights, may be prevented from doing so without litigation. Any of the foregoing could have a material adverse effect upon the Company's business, financial condition and results of operations. See "Risk Factors -- Dependence on Proprietary Technology." BACKLOG The Company's funded backlog as of July 31, 1998 and 1997 amounted to approximately $41 million and $39 million respectively. The funded backlog consists of remaining funding under cost-plus contracts for tasks not yet completed, remaining revenues to be recognized on contracts accounted for on a percentage of completion basis and firm orders for products not yet delivered. The Company expects to complete or deliver substantially all of its currently funded backlog within 12 months. The unfunded portion of contracts awarded was approximately $34 million and $23 million at July 31, 1998 and 1997, respectively. GOVERNMENT BUSINESS A substantial portion of the Company's sales (approximately 32% in fiscal 1998, 33% in fiscal 1997 and 40% in fiscal 1996) is derived from contracts with the United States government, principally agencies of the United States Department of Defense, and subcontracts with government suppliers. The reductions in defense budgets in the 1990's has adversely affected the Company's activities, particularly in the area of system survivability products and services, such as weapons effects simulation and testing. The Company has also experienced increased competition in bidding for new defense programs from contractors seeking to replace their lost business. The Company has experienced significant reductions in its business with the Department of Defense through fiscal 1995 as the Department responded to reduced global threats and shrinking defense budgets. While the Department of Defense has continued to fund, although at lower levels, research on next-generation pulsed power concepts, the operation of existing simulation machines in San Diego has been curtailed. Three of the four weapons effects simulators in San Diego which were designed, built, and operated by the Company and owned by the Department of Defense ceased operation on October 1, 1995. The Company has provided services to the Department of Defense to assist in the closure of these facilities. The Company currently continues to provide testing and analysis on the fourth simulation facility and on the simulation facilities now operated by Maxwell Physics International in San Leandro, California. The Company's government contracts are typically performable over a one-year or multi-year period, with funding provided in increments of one year or less. Government agencies may terminate their contracts, in whole or in part, at their discretion, and in such event, the government agency is obligated generally to pay the costs incurred by the Company thereunder plus a fee based upon work completed. Contract costs for services or products supplied to government agencies, including allocated indirect costs, are subject to audit and adjustment. Contract costs have been reviewed and accepted by the government through fiscal 1994. Contract revenues for periods subsequent to fiscal 1993 have been recorded in amounts which are expected to be realized upon final review and settlement. Contracts entered into by the Company with government agencies are fixed-price contracts or cost-plus contracts. Under a fixed-price contract, the customer agrees to pay a specific price for performance. Under a cost-plus contract, the customer agrees to pay an amount equal to the Company's allowable costs in performing the contract, 11 14 plus a fixed or incentive fee. Certain costs of doing business, such as interest expenses and advertising expenses, are not allowable under cost-plus contracts. Greater risks are involved under a fixed-price contract than under a cost-plus contract because in a fixed-price contract the Company assumes responsibility for providing the specified product or services regardless of the actual costs incurred. Failure to anticipate technical problems, estimate costs accurately or control costs during contract performance reduces or eliminates the contemplated profit and can result in a loss. On the other hand, the government generally permits higher profit margins when establishing prices for fixed-price contracts because of such risks. In the technology programs and systems business segment approximately 87% and 77% of sales were derived from cost-plus contracts in fiscal 1998 and 1997, respectively, and the balance of sales in such years were derived from fixed-price contracts. See "Risk Factors - -- Risks Associated with Government Business." GOVERNMENT REGULATION The testing, manufacture and sale of certain of the Company's products are subject to regulation by numerous governmental authorities. Pursuant to the Federal Food, Drug, and Cosmetic Act, and the regulations promulgated thereunder, the FDA regulates the pre-clinical and clinical testing, manufacture, labeling, storage, distribution and promotion of food and medical products and processes. The Company has obtained clearance from the FDA for use of CoolPure technology for preservation of liquid foods. In addition, the Company has obtained clearance from the FDA for PureBright for food use and is applying for similar approvals in Canada and Europe, as well as supporting customers in obtaining clearance of PureBright for medical applications. The Company's EMI filter capacitor has been approved for use in implantable defibrillators and implantable pacemakers of certain medical device manufacturers. Delays in receipt of or failure to receive anticipated approvals or clearances, the loss of previously received approvals or clearances, limitations on intended use imposed as a condition of such approvals or clearances, or failure to comply with existing or future regulatory requirements would have a material adverse effect on the Company's business, financial condition and results of operations. The testing, preparation of necessary marketing applications and processing of those applications with the FDA is expensive and time consuming, can vary based on the type of product and may take several years to complete. There is no assurance that the FDA will act favorably or quickly in making such reviews, and significant difficulties or costs may be encountered by the Company in its efforts to obtain FDA approvals that could delay or preclude the Company from marketing any products it may develop or furnish an advantage to competitors. The FDA may also require post-marketing testing and surveillance to monitor the effects of approved products or place conditions on any approvals that could restrict the commercial applications of such products. Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant pre-market clearance or pre-market approval for products, withdrawal of marketing clearances or approvals and criminal prosecution. See "Risk Factors -- Government Regulation." Because of the nature of its operations and the use of hazardous substances in certain of its ongoing manufacturing and research and development activities, the Company is subject to stringent federal, state and local laws, rules, regulations and policies governing the use, generation, manufacturing, storage, air emission, effluent discharge, handling and disposal of certain materials and wastes. Although the Company believes it is in material compliance with all applicable government and environmental laws, rules, regulations, and policies, there can be no assurance that the Company's business, financial condition and results of operations will not be materially adversely affected by current or future environmental laws, rules, regulations and policies or by liability arising out of any past or future releases or discharges of materials that could be hazardous. See "Risk Factors -- Environmental Regulations." SEGMENTS The Company's business segments are discussed in Note 11 of Notes to Consolidated Financial Statements incorporated herein by reference. The Company currently operates in three business segments: Power Conversion Products (includes design, development and manufacture of electrical components, systems and subsystems, 12 15 including products that capitalize on pulsed power such as ultracapacitors, microbial purification systems, high voltage capacitors and other electrical components, power supplies and power conditioning systems and EMI filter capacitors); Industrial Computers and Subsystems (includes design and manufacture of standard, custom and semi-custom industrial computer modules, platforms and fully-integrated systems) and Technology Programs and Systems (includes research and development and programs in pulsed power, pulsed power systems design and construction, weapons effects simulation and computer-based analytic services, primarily for the Department of Defense and computer software services and products). The Company's operating subsidiaries are Maxwell Energy Products, Inc. (Power Conversion Products), Phoenix Power Systems, Inc. (Power Conversion Products), PurePulse Technologies, Inc. (Power Conversion Products), I-Bus, Inc. (Industrial Computers and Subsystems), Maxwell Technologies Systems Division, Inc. (Technology Programs and Systems), and Maxwell Business Systems, Inc. (Technology Programs and Systems). See "Management's Discussion and Analysis of Financial Condition and Results of Operations." EMPLOYEES At July 31, 1998, the Company had 837 employees, including 55 employees with Ph.D. degrees and 67 others with post-graduate degrees. None of the Company's employees is represented by a labor union. Maxwell considers its relations with its employees to be good. See "Risk Factors -- Dependence on Key Personnel." RISK FACTORS Stockholders should consider carefully, in addition to other information contained in this Annual Report on Form 10-K, the following factors. DEPENDENCE ON PRODUCT DEVELOPMENT AND MARKET ACCEPTANCE Many of the Company's products, especially its ultracapacitor and purification products, are in the development stage and are alternatives to existing technologies or are new technologies providing new capabilities not presently found in the marketplace. The Company's success is dependent in part on market acceptance of its new products and there can be no assurance that any material commercial market will develop for these products. The Company expects that its ultracapacitor and purification products will compete with existing products that are well established in the marketplace and that, in some cases, are less expensive. The future success of the Company will depend in large part on the Company's ability to accurately anticipate market demand for its products and services as well as improve its existing technologies and products. The Company's ability to demonstrate a technological or economic advantage, or both, over competitive products in addition to the technical, financial and other risks involved in introducing new products and technologies are critical to the Company achieving its goals. There can be no assurance that the Company will be successful in identifying markets for its technologies or in developing, manufacturing and marketing new commercial products or enhancements to existing products that address the needs of these markets, any of which could have a material adverse effect on the Company's business, results of operations and financial condition. CONTINUING TRANSITION TO COMMERCIAL BUSINESS The Company is continuing its transition from its historical reliance on funded research and development business for defense and other federal government agencies to developing, manufacturing and marketing of products for commercial markets. The Company's success in this regard will depend upon a number of factors, including the Company's ability to develop and produce products at a commercially viable cost, to gain customer acceptance for its products and services, to expand its customer base through sales and marketing efforts, to expand successfully its manufacturing capacity, to develop extensions of its existing products and services into new applications and to conceive and develop new products and services. Commencing in fiscal 1996, the Company changed its senior management and reorganized its operations along product and service lines. There can be no assurance that the Company will be able to continue its transition to commercial businesses. The Company's inability to achieve any of these objectives would have a material adverse effect on the Company's business, results of operations and financial condition. 13 16 EXTENSIVE RELIANCE ON STRATEGIC RELATIONSHIPS; RESTRICTIONS DUE TO EXCLUSIVITY RIGHTS The Company has established and will continue to seek to establish strategic relationships with corporate partners and research relationships with United States government agencies to support its various development programs, leverage its expertise and manufacturing resources, obtain an understanding of and access to markets and validate products. The Company currently collaborates with a variety of strategic partners, including, for purification systems, Tetra Pak, a leading food packaging machinery and products company, and Pall Corporation, a leading provider of filters, membranes and other separation devices for healthcare, aeropower and fluid processing markets, and in the ultracapacitor business area, PacifiCorp, a leading utility holding company, and Siemens Matsushita Components, a joint venture of two of the world's leading technology-oriented companies. The loss of certain of its strategic relationships could have a material adverse effect on the Company's sales and growth. The Company's future success will depend in part on its continued relationships with various of its strategic partners, its ability to enter into other similar collaborative arrangements, the interest of certain of the Company's strategic partners in the potential products under development, the Company's success in meeting expectations of strategic partners and, ultimately, their success in marketing or willingness to purchase any such products. These programs may require the Company to share control over its development, manufacturing and marketing programs, limit its ability to license its technology to others, relinquish certain rights to its technology or restrict its ability to engage in certain areas of product development, production and marketing. Some of the Company's existing collaborative arrangements permit, and future arrangements also may permit, the Company's strategic partners to use or disclose the technology developed in the program without any royalty obligation, to the extent that the technology is jointly developed. Furthermore, the Company often grants an exclusivity right to its strategic partner as an inducement to the partner to participate in the development of a product or application. Any exclusivity rights granted to strategic partners may inhibit the Company's ability to find a wider market for certain of its commercial products and thus may materially reduce revenues during the exclusivity period. There can be no assurance that the Company will be able to enter into strategic arrangements on commercially reasonable terms or that these arrangements, if established, will result in successful programs to develop, manufacture or market pulsed power and other products or that the Company's strategic partners will not seek to manufacture jointly developed products themselves or obtain them from alternative sources. See "Business -- Strategic Partnerships." FLUCTUATIONS IN OPERATING RESULTS; HISTORY OF LOSSES Although the Company had net income in fiscal 1997 and in fiscal 1998 (before acquired in-process R&D and other acquisition-related charges), it has incurred significant losses in two of the past five years. Net losses for the Company's 1996 and 1994 fiscal years were approximately $15.2 million and $1.7 million, respectively. Of the fiscal 1996 loss, $14.4 million arose from charges related to the reorganization of the Company's operations, a change in accounting principle and other charges more fully described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the Consolidated Financial Statements and Notes thereto incorporated by reference herein. The Company may in the future experience significant fluctuations in revenues and operating results from period to period as a result of a number of factors including, without limitation, the volume and timing of orders and market acceptance of the Company's products; the structure and timing of new strategic relationships; the Company's ability to fill orders on a timely basis; pricing policies of the Company or its competitors; variations in the mix of product sales; the timing of product introductions by the Company or its competitors; cancellation, suspension or other action taken by the United States government or its agencies on its programs and contracts with the Company; product obsolescence resulting from new product introductions or changes in customer demand; and expenses associated with the acquisition of businesses, products or technologies. The Company anticipates that, in order to obtain market penetration, from time to time it will sell new products at prices yielding margins below those it ultimately expects to achieve, and significant aggressive pricing in a particular quarter or quarters could adversely affect the results of operations for such periods. The impact of the foregoing factors may cause the Company's operating results to be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock could be materially adversely affected. Quarterly results are not necessarily indicative of future performance for any particular period, and there can be no 14 17 assurance that the Company will attain or sustain growth in sales and profitability on a quarterly or annual basis. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." LIMITED VOLUME MANUFACTURING EXPERIENCE The Company has limited experience with volume manufacturing of commercial products. To date, the Company has not manufactured in substantial volume its ultracapacitors or purification systems. The Company may face challenges in scaling up production of its new products, especially those products that contain newly developed technologies, including problems involving production yields, quality control and assurance, component supply and shortages of qualified management and other personnel. In addition, the Company will need to continue to expand its current facilities or obtain additional facilities in order to manufacture a substantial quantity of its ultracapacitor, and purification products. There can be no assurance that the Company will be successful in expanding its facilities or obtaining additional facilities, or that it will be able to overcome the management, technological, engineering and other challenges associated with the production of significant quantities of products at acceptable cost on a timely basis. The Company may elect to outsource manufacturing of certain of its products, if such opportunities are available. Outsourcing of manufacturing involves risks with respect to quality assurance, cost and the absence of close engineering support. In addition, part of the Company's ultracapacitor development strategy is the implementation of a process that could allow customization of products while retaining the benefits of volume manufacturing and materials procurement. There can be no assurance that such a process can be developed and implemented in time to meet the Company's needs in this regard. Difficulties in manufacturing or in obtaining appropriate facilities or locating and qualifying outsourcing for manufacturing could have a material adverse effect on the Company's business, financial condition and results of operations. LIMITED SALES AND MARKETING EXPERIENCE The Company has limited experience marketing and selling ultracapacitors and purification systems. To sell these products, the Company will be required to develop a marketing and sales force that will be able to effectively demonstrate the advantages of these products over competing products and other traditional solutions. Furthermore, the highly technical nature of the Company's products limits the pool of potential sales personnel. The Company also enters into agreements with distributors or sales representatives regarding the marketing of its products. By entering into such agreements, the Company may be substantially dependent upon the efforts of others in deriving commercial benefits from its products. There can be no assurance that the Company will be successful in marketing and selling its products, that it will be able to establish adequate sales and distribution capabilities, that it will be able to enter into marketing agreements with third parties on financially acceptable terms or that any third parties with whom it enters into such arrangements will be successful in marketing and selling the Company's products. The Company's inability to achieve any of these objectives would have a material adverse effect on the Company's business, results of operations and financial condition. RISKS ASSOCIATED WITH ACQUISITIONS As part of its business strategy, the Company regularly reviews possible acquisitions of complementary companies, technologies or products, and periodically engages in discussions regarding such possible acquisitions. During fiscal 1998, the Company acquired four businesses with strategic importance to four different areas of the Company's operations. These acquisitions are geographically dispersed, with two located in California, one in Minnesota and the other in the United Kingdom. Acquisitions involve numerous risks, including evaluating new technologies; difficulties in the assimilation of the operations, products, personnel and cultures of the acquired companies; the ability to manage effectively geographically remote units; the diversion of management's attention from other day-to-day business concerns; risks of entering markets in which the Company has limited or no direct experience and the potential loss of key employees of the acquired companies. In addition, acquisitions may result in dilutive issuances of equity securities; the incurrence of debt; reduction of any then-existing cash balances; amortization expenses related to goodwill and other intangible assets and other charges to operating results, including acquired in process R&D meeting certain criteria, such as charges that were taken in connection with two acquisitions in fiscal 1998, that may materially adversely affect the Company's results of operations. Moreover, there can be no assurance that any equity or debt financings proposed in connection with any acquisition would be 15 18 available to the Company on acceptable terms or at all, when, and if, suitable strategic acquisition opportunities arise. Although management expects to carefully analyze any opportunity before committing the Company's resources, there can be no assurance that any acquisition that is completed will result in long-term benefits to the Company or its stockholders or that the Company's management will be able to manage effectively the resulting business. DEPENDENCE ON OEM CUSTOMERS; LENGTHY SALES CYCLES A substantial portion of the Company's sales are derived from sales to a relatively small number of OEM customers. The timing and amount of sales to these customers ultimately depend on sales levels and shipping schedules for the OEM products into which the Company's products are incorporated. The Company has no control over the shipping date or volumes of products shipped by its OEM customers, and there can be no assurance that any OEM will continue to ship products that incorporate the Company's products at current levels or at all. Failure of these OEMs to achieve significant sales of products incorporating the Company's products and fluctuations in the timing and volume of such sales could have a material adverse effect on the Company's business, financial condition and results of operations. The decision process leading to the selection of the Company's products and services is typically lengthy, with significant additional time required for design, engineering and product approval before commercial shipments can begin. Moreover, although customers sometimes substitute a new and better product into an existing product, market opportunities with respect to any particular customer typically occur at the time the customer is engaged in the design of a new product or a substantial enhancement of an existing product, which typically occur at infrequent intervals. Any failure of the Company to maintain continuing awareness of its customers' product development schedules, or its inability to provide the optimum solution at the time of such development can cause the Company to miss a market opportunity that may not reappear for a substantial period of time. DEPENDENCE ON PROPRIETARY TECHNOLOGY The Company's success is heavily dependent upon the establishment and maintenance of proprietary technologies. Although the Company attempts to protect its intellectual property rights through patents, copyrights, trade secrets and other measures, there can be no assurance that the steps taken by the Company to protect its proprietary technologies will be adequate to prevent misappropriation by third parties or will be adequate under the laws of some foreign countries, which may not protect the Company's proprietary rights to the same extent as do the laws of the United States. In addition, others could "reverse engineer" the Company's products in order to determine their method of operation and introduce competing products or develop competing technology independently. Any such adverse circumstances could have a material adverse effect on the Company's business, financial condition and results of operations. The Company uses employee and third-party confidentiality and non-disclosure agreements to protect its trade secrets and unpatented know-how. The Company requires each of its employees to enter into a proprietary rights and non-disclosure agreement in which the employee agrees to maintain the confidentiality of all proprietary information of the Company and, subject to certain exceptions, to assign to the Company all rights in any proprietary information or technology made or contributed by the employee during his or her employment. In addition, the Company regularly enters into non-disclosure agreements with third parties, such as consultants, potential joint venture partners, acquisition candidates and customers. No assurance can be given that these methods will enable the Company to maintain its trade secrets or unpatented know-how or that third parties will not independently develop and/or patent substantially equivalent proprietary information or copy, develop or otherwise obtain and use the Company's proprietary technology without authorization. The Company has historically relied primarily on its technological and engineering abilities and on its design and production capabilities, rather than on patents, for the development and maintenance of its business. However, the Company does file patent applications on concepts and processes developed by the Company's personnel and, as its commercial businesses expand, the Company has placed increased emphasis on patents to provide protection for certain of its technologies and products. The Company believes that its future success will depend in part on its 16 19 ability to maintain its patents, add to them where appropriate, and to develop new products and applications without infringing the patent and other proprietary rights of third parties and without breaching or otherwise losing rights in technology licenses obtained by the Company for other products. There can be no assurance that any patent owned by the Company will not be circumvented or challenged, that the rights granted thereunder will provide competitive advantages to the Company or that any of the Company's pending or future patent applications will be issued with claims of the scope sought by the Company, if at all. If challenged, there can be no assurance that the Company's patents (or patents under which it licenses technology) will be held valid or enforceable. In addition, there can be no assurance that others will not claim rights in the technology covered by the patents and other proprietary technology owned or licensed by the Company or that others have not developed or will not develop similar products or technology without violating the Company's proprietary rights. The invalidity of a patent or determination that the Company (or its licensor) does not hold sole rights to the technology covered thereby could have a material adverse effect on the Company, particularly if the Company is unable to design around others' proprietary rights. Competing research and patent activity in many of the Company's technologies is substantial and the markets are large enough that conflicting patent and other proprietary rights claims may result in disputes or litigation. Although the Company does not believe any of its products or proprietary rights infringe the rights of third parties, there can be no assurance that infringement claims will not be asserted against the Company in the future. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, or at all. If infringement were established, the Company could be required to pay damages or be enjoined from making, using or selling the infringing product. Likewise, there can be no assurance that a third party's product, if infringing on the Company's proprietary rights, may be prevented from doing so without litigation. Any of the foregoing could have a material adverse effect upon the Company's business, financial condition and results of operations. A number of the patents and patent applications owned or licensed by the Company are subject to "march-in" rights and non-exclusive, royalty-free, confirmatory licenses held by various governmental agencies or other entities. March-in rights refer to the right of the United States government or a United States government agency to cancel agreements and require a contractor to grant licenses to third parties if the contractor fails to continue to develop the technology related to the agreements. Confirmatory licenses permit the United States government agencies or other governmental entities to select vendors other than the Company to produce products for the United States government which would otherwise infringe the Company's patent rights which are subject to the royalty-free licenses. In addition, the United States government has the right to require the Company to grant licenses (including exclusive licenses) under such patents and patent applications or other inventions to a third party if the United States government determines that adequate steps have not been taken to commercialize such inventions, such action is necessary to meet public health or safety needs, such action is necessary to meet requirements for public use under federal regulations or such action is necessary because the Company has not exercised reasonable efforts to ensure products manufactured pursuant to such invention are manufactured in the United States. See "Business -- Patents, Licenses and Trademarks." RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS An increasing portion of the Company's revenues are derived from sales to customers located outside of the United States, and in fiscal 1998, the Company acquired an industrial computer company in the U.K. and took the first steps toward opening an industrial computer facility in France. The Company expects sales outside of the United States to continue to represent a significant and increasing portion of its future revenues. As a result, the Company's business will continue to be subject to certain risks generally associated with doing business abroad, such as foreign government regulations and export controls, as well as changes in tax laws, tax treaties, tariffs and freight rates. As the Company's international operations continue to grow, more management resources will be required to focus on the operation and expansion of the Company's worldwide business and to manage cultural, language and legal differences inherent in international operations. To the extent that political, economic and other conditions in these countries result in any prolonged work stoppages or other inability of the Company to obtain components or finished products, the Company's business, results of operations and financial condition could be materially adversely affected. Moreover, changes in the mix of income from the Company's foreign subsidiaries, 17 20 expiration of tax holidays and changes in tax laws and regulations could result in increased tax rates for the Company. COMPETITION The markets in which the Company sells commercial products are highly competitive, rapidly changing and significantly affected by the cost and pricing of products, by new product introductions and other market activities of industry participants. The Company's emerging products also compete with established technologies in many markets, including batteries in ultracapacitor products and a number of established methods of treating water and decontaminating food packaging and medical products with respect to the Company's purification systems. Many of the Company's competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, greater name recognition, and a larger installed base of customers than the Company. In addition, certain competitors have well-established relationships with customers and potential customers of the Company. Furthermore, as the Company's new products gain acceptance, companies with significantly greater resources than the Company could attempt to increase their presence in these markets. In order to be successful in the future, the Company must produce products that can be competitively priced, and must continue to respond promptly and effectively to the challenges of technological change and its competitors' innovations by continually enhancing its own product offerings. There can be no assurance, however, that the Company's products will continue to compete favorably or that the Company will be successful in the face of increasing competition from new products and enhancements introduced by existing competitors or new companies entering its markets. See "Business -- Competition." RISKS ASSOCIATED WITH GOVERNMENT BUSINESS A substantial portion of the Company's sales (approximately 32% in fiscal 1998, 33% in fiscal 1997, 40% in fiscal 1996) is derived from contracts with the United States government, principally agencies of the United States Department of Defense, and subcontracts with government suppliers. The reductions in defense budgets in the 1990's has adversely affected the Company's business, particularly in the area of system survivability products and services, such as weapons effects simulation and testing. Several years ago, the Company experienced significant reductions in this business as the Department of Defense responded to reduced global threats and shrinking defense budgets. The Company has also experienced increased competition in bidding for new defense programs from contractors seeking to replace their lost government business. There can be no assurance that defense spending in general or that contract awards to the Company specifically will not be reduced in the future. A significant loss of United States government funding would have a material adverse effect on the Company's business, results of operations and financial condition. The Company's United States government business is also subject to various other risks, including: unilateral termination for the convenience of the government; reduction or modification in the event of changes in the government's requirements or budgetary constraints; increased or unexpected costs causing losses or reduced profits under fixed-price contracts or unallowable costs under cost-plus contracts; risks of potential disclosure of the Company's confidential information to third parties; the failure or inability of a contractor to perform its obligations under a contract in circumstances where the Company is a prime contractor or subcontractor; the failure of the government to exercise options provided for in the contracts and the exercise of march-in rights or confirmatory licenses by the government. There can be no assurance that the Company's contracts with the Department of Defense and other government agencies will not be terminated, reduced or modified or that the grant of march-in rights or confirmatory licenses will not result in a loss of potential revenues, any of which could have a material adverse effect on the Company's business, results of operations and financial condition. The Company participates in government funded programs which may extend for several years, but are normally funded on an annual basis and shorter periods in some cases. There can be no assurance that funding will continue for programs covering the Company's development projects or that the Company can compete successfully in obtaining contracts for such programs. A significant reduction in, or discontinuation of, such funding or of the 18 21 Company's participation insuch programs would have a material adverse effect on the Company's business, results of operations and financial condition. SUBSTANTIAL FUTURE CAPITAL NEEDS The Company believes that, in order to achieve its long-term strategic objectives and maintain and enhance its competitive position, it will need significant additional financial resources over the next several years. To meet anticipated volume production requirements for several of the Company's product lines, in particular ultracapacitors and purification systems, the Company will need expanded manufacturing capabilities and facilities or viable production alternatives. The Company anticipates that it will require additional capital in the future to fund its continuing expansion into commercial markets, to construct and equip additional facilities, or to acquire new or complementary businesses, product lines and technologies. There can be no assurance that the necessary additional financing will be available to the Company on acceptable terms or at all. If adequate funds are not available, the Company may be required to change, delay, reduce or eliminate its planned product commercialization strategy or its anticipated facilities expansion plans and expenditures, which could have a material adverse effect on the Company's business, results of operations and financial condition. DEPENDENCE ON KEY PERSONNEL The Company's future performance depends in significant part upon the continued service of its key technical and senior management personnel. The Company is dependent on its ability to identify, hire, train, retain and motivate high quality personnel, especially key manufacturing executives and highly skilled engineers and scientists involved in the ongoing development, introduction and enhancement of the Company's products and technologies. The industries in which the Company competes are characterized by a high level of employee mobility and aggressive recruiting of skilled personnel. The Company's employees may terminate their employment with the Company at any time. Accordingly, there can be no assurance that any of the Company's current key employees will continue to work for the Company. Loss of services of key employees could have a material adverse effect on the Company's business, financial condition and results of operations. YEAR 2000 COMPLIANCE A significant percentage of the software that runs most computers relies on two digit date codes to perform a number of computation and decision making functions. As the year 2000 approaches, these computer programs may fail from an inability to interpret data codes properly, misreading "00" for the year 1900 instead of 2000. The Company believes that its major computer systems are in compliance with Year 2000 criteria or will be brought into compliance on a timely basis, though there can be no assurance in that regard and the Company may experience problems with its application software programs, including its financial accounting, billing, payroll, manufacturing, and engineering software programs, among others. The Company has taken steps to bring any of its products which could be impacted by Year 2000 software problems into compliance, but no assurance can be given that all such products previously sold can be brought into compliance or that customers and end users will implement corrective action recommended by the Company or that such corrective action will effectively address the problem. Additionally, the Company's customers or third-party component suppliers and vendors may also experience business disruptions in connection with the Year 2000 software problem. The Company's business, operating results and financial condition could be materially adversely affected by Year 2000 problems with its own systems and products or if any of these customers, vendors or other third-party entities experience such a business disruption as a result of Year 2000 problems. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". RELIANCE ON THIRD PARTY SUPPLIERS The Company's success is dependent in part on its ability to secure qualified and adequate sources for supplies of materials, components and sub-assemblies at prices which will facilitate cost competitive products for the Company. The Company manufactures most of its products using a large number of components or sub-assemblies, 19 22 many of which are commercially available industrial parts and the remainder of which are custom-made to the Company's specifications (by the Company and certain qualified outside manufacturers). The Company endeavors to maintain more than one source of supply for each of its major components or subassemblies, to the extent possible, although certain suppliers are currently the sole source of one or more items upon which the Company is dependent in the manufacture of its EMI filters and industrial computing products. In the past, the Company has on occasion experienced difficulty in obtaining timely delivery of power supplies for industrial computers from outside suppliers which has adversely impacted the Company's delivery time to its customers and in one circumstance the Company believes such delivery problems were a contributing factor to the loss of certain business from a major customer. There can be no assurance that these and other similar supply problems will not recur. The current sole domestic source of a component of the Company's EMI filter has indicated it plans to design, build and sell a competing filter in the future. The Company believes this supplier will continue to sell to the Company but that, if necessary, the Company believes it could replace this supplier with another vendor or with a component manufactured by the Company. Although the Company seeks to reduce its dependence on sole and limited source suppliers, the partial or complete loss of these sources could have at least a temporary material adverse effect on the Company's results of operations and damage customer relationships due to the complexity of the products supplied and the significant amount of time required to qualify new suppliers. PRODUCT LIABILITY RISKS Certain of the Company's products may expose it to product liability risks. The Company's EMI filters are components of implantable medical devices and, due to the litigious environment surrounding the medical device industry, subject the Company to an increased risk of product liability claims that may involve significant defense costs. Other of the Company's products, such as ultracapacitors and purification systems, may also be used in functions involving significant product liability risks. There can be no assurance that product liability claims will not be asserted against the Company in the future. Although the Company maintains product liability insurance with coverage limits it believes to be adequate, there can be no assurance that this coverage will in fact be adequate to protect the Company against future product liability claims. In addition, product liability insurance is expensive and there can be no assurance that, in the future, product liability insurance will be available to the Company in amounts or on terms satisfactory to the Company, if at all. A successful product liability claim or series of claims brought against the Company could have a material adverse effect on the Company's business, financial condition and results of operations. ENVIRONMENTAL REGULATIONS The Company is subject to a variety of governmental regulations relating to the use, storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances. The failure to comply with current or future regulations could result in substantial fines being imposed on the Company, suspension of production, alteration of its manufacturing process or cessation of operations. Such regulations could require the Company to acquire expensive remediation or abatement equipment or to incur substantial expenses to comply with environmental regulations. Any failure by the Company to control the use, disposal or storage of, or adequately restrict the discharge of, hazardous or toxic substances could subject the Company to significant liabilities. POTENTIAL DILUTIVE IMPACT OF EMPLOYEE STOCK OPTION PROGRAMS AT SUBSIDIARIES The Company has adopted employee stock option plans at each of its four principal operating subsidiaries providing for the issuance of incentive and nonqualified stock options to purchase common stock of these companies. In addition, employee stock options are outstanding in a fifth subsidiary which is not currently conducting any active business operations. Any of these subsidiary stock options that have an exercise price per share less than the fair market value per share of the common stock of a subsidiary ("in-the-money") will have a negative impact on the Company's earnings per share. The Company expects that its reported diluted earnings per share will be reduced in future quarters due to the increased fair market value of certain of the Company's subsidiaries. Such options, when and if exercised, will dilute the Company's actual ownership interests in its subsidiaries, thus reducing the Company's share of the net income, potential dividends or distributions and proceeds 20 23 of any sale or other disposition of such subsidiary. The equity interests upon exercise of stock options in the subsidiaries would be accounted for as a minority interest. Based on current programs, the dilutive impact attributable to these option plans could be up to 12% at each of the Company's principal operating subsidiaries (15% at one subsidiary). In addition, certain key employees of one of the Company's subsidiaries, Maxwell Business Systems, Inc., which markets the JAMIS accounting software package, currently own an aggregate of 20% and have the right to purchase up to an additional 29% of that subsidiary. Currently, no established trading market exists for the common stock underlying any of the subsidiary options and such options are not exchangeable for Common Stock of the Company. The Company has no plan to offer an exchangeability feature for options to purchase Company Common Stock or otherwise provide liquidity for these subsidiary options, but the Company could consider such alternatives in the future. ECONOMIC IMPACT OF POTENTIAL PUBLIC OFFERINGS OF SUBSIDIARY STOCK By conducting its operations through separate subsidiaries, the Company promotes clearer market definition and product identity. This business unit focus also allows the Company to more actively monitor opportunities for growth or cost savings and to promote entrepreneurism with each subsidiary. While this corporate structure also affords the Company a high level of flexibility to implement various strategic alternatives, including future public offerings of subsidiary stock, sales of subsidiaries or strategic acquisitions, certain of these alternatives may have negative effects upon the Company's consolidated sales, gross profit, net income and earnings per share. For example, any public offering or other sale of a minority portion of a subsidiary's stock would reduce that subsidiary's contribution to the Company's net income and earnings per share. While any transaction would be preceded by a determination that such transaction is in the best interests of the Company and its stockholders, such transaction could, nonetheless, have a material adverse effect on the Company's results of operations. GOVERNMENT REGULATION The testing, manufacture and sale of certain of the Company's products are subject to regulation by numerous governmental authorities. Pursuant to the Federal Food, Drug, and Cosmetic Act, and the regulations promulgated thereunder, the United States Food and Drug Administration (the "FDA") regulates the pre-clinical and clinical testing, manufacture, labeling, storage, distribution and promotion of food and medical products and processes. The Company has obtained clearance from the FDA of its CoolPure technology for preservation of liquid foods. In addition, the Company has obtained clearance from the FDA of PureBright for food use and is applying for similar approvals in Canada and Europe, as well as supporting customers in obtaining clearance of PureBright for medical applications. Implantable defibrillators and pacemakers that incorporate the Company's EMI filter have been approved by the FDA. Delays in receipt of or failure to receive anticipated approvals or clearances, the loss of previously received approvals or clearances, limitations on intended use imposed as a condition of such approvals or clearances, or failure to comply with existing or future regulatory requirements would have a material adverse effect on the Company's business, financial condition and results of operations. The testing, preparation of necessary marketing applications and processing of those applications with the FDA is expensive and time consuming, can vary based on the type of product and may take several years to complete. There is no assurance that the FDA will act favorably or quickly in making such reviews, and significant difficulties or costs may be encountered by the Company or others in its efforts to obtain FDA approvals that could delay or preclude the Company from marketing any products it may develop. The FDA may also require postmarketing testing and surveillance to monitor the effects of approved products or place conditions on any approval that could restrict the commercial applications of such products. Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the United States government to grant pre-market clearance or pre-market approval for products, withdrawal of marketing clearances or approvals and criminal prosecution. 21 24 LONG-TERM FIXED-PRICE CONTRACTS A portion of Maxwell's software business consists of work under a small number of large, multi-year fixed-price contracts with state and local government agencies involving sophisticated integration and networking tasks and a certain amount of application software development. In addition, certain of the Company's other businesses, primarily those conducted in its government funded research and systems development business, may also enter into long-term fixed-price contracts for large hardware systems or components. Events and developments such as unanticipated delays in program schedule, failure to anticipate costs accurately over a two- or three-year period or performance problems with important vendors can adversely affect the profitability of such contracts. See "Business -- Government Business." ANTI-TAKEOVER PROVISIONS The Company's Board of Directors is divided into three classes, each of which is elected and serve overlapping three-year terms. In addition, the Company has adopted a rights plan that, among other things, grants rights to purchase Common Stock to all stockholders at a price significantly below market value upon a business combination in the event a single person or group has previously acquired more than 20% of the outstanding Common Stock without the Board of Directors having elected to redeem such rights. Furthermore, the Company's certificate of incorporation contains a "fair price provision" intended to require an acquirer to obtain the consent of the Board of Directors to any business combination involving the Company. The Company's certificate of incorporation and bylaws also contain provisions barring stockholders action by written consent and the calling by stockholders of a special meeting. Amendment of such provisions requires a super majority vote by the stockholders, except with the consent of the Board of Directors. The rights plan and provisions of the Company's certificate of incorporation and bylaws could delay, deter or prevent a merger, tender offer, or other business combination or change in control involving the Company that some, or a majority of, stockholders might consider to be in their best interests, including offers or attempted takeovers that might otherwise result in such stockholders receiving a premium over the market price of the Common Stock. See "Description of Capital Stock -- Common Stock Rights" and "-- Additional Anti-Takeover Provisions." LIMITED TRADING VOLUME; VOLATILITY OF STOCK PRICE The Company's Common Stock is traded on the Nasdaq National Market. Trading volume in the twenty trading days ended September 30, 1998 averaged 55,625 shares traded per day. Trading of relatively small blocks of stock can have a significant impact on the price at which the stock is traded. The Company believes factors such as quarterly fluctuations in financial results, announcements of new technologies impacting the Company's products, announcements by competitors or changes in securities analysts' recommendations may cause the market price to fluctuate, perhaps substantially. These fluctuations, as well as general economic conditions, in the United States and worldwide, such as recessions or high interest rates, may adversely affect the market price of the Common Stock. See "Item 5 -- Market for the Registrant's Common Equity and Related Stockholder Matters." ITEM 2. PROPERTIES The Company owns a 45,600 square foot engineering and administrative support facility, a 22,000 square foot manufacturing facility and a 35,000 square foot office and laboratory building situated on approximately 8.9 acres of land located in San Diego, California. The 35,000 square foot building is currently unoccupied and on the market for sale or lease. In addition, the Company owns a 25,000 square foot manufacturing facility on 2.6 acres of land located in Carson City, Nevada. The Company leases six other facilities in the San Diego area and a 240,000 square foot facility in San Leandro, California, of which 45,000 square feet is subleased to a third party. The Company also leases a 8,200 square foot facility in Minneapolis, Minnesota, three facilities totaling 30,000 square feet in the United Kingdom and 4,500 square foot facility in Nice, France. The Company leases office space in Virginia; Albuquerque, New Mexico; and Mission Viejo, California. The Company's leased facilities are leased for varying terms and some of them contain options permiting the Company to extend the lease term. The Company utilizes its facilities in the following manner: corporate, sales and administrative (122,000 sq. ft.); manufacturing, assembly and testing, research and development laboratories and engineering (470,000 sq. ft.) The Company also 22 25 utilizes on a rent free basis 22,000 square feet at Kirkland Air Force Base in Albuquerque, New Mexico and operates a 500 acre test site in San Diego under a facilities contract with the Defense Special Weapons Agency. ITEM 3. LEGAL PROCEEDINGS In January 1991, the California Department of Toxic Substances Control, or DTSC, notified the Company that it had been identified as one of a number of "potentially responsible parties" with respect to alleged hazardous substances released into the environment at a recycling facility in San Diego County. As Maxwell is not in the business of transporting or disposing of waste materials, the Company retained the services of the owners of the recycling facility to transport certain waste material generated by Maxwell. After properly delivering the materials to the transporter, Maxwell was not further involved in the transportation, treatment or disposal of the materials. Under California and Federal "Superfund" laws, Maxwell is a potentially responsible party even though it was not involved in the transport or disposal of the substances. Moreover, it is the Company's understanding that alleged hazardous substances from at least approximately 160 other potentially responsible parties were released at the facility. In 1992, the Company and approximately 40 other potentially responsible parties signed a consent order with the State of California with respect to costs to be incurred at a recycling facility to characterize and remediate hazardous substances. To date, the site has been characterized, and the Company and the other potentially responsible parties have paid substantially all of their respective shares of the costs of such characterization. The estimated cost of monitoring and remediation activities, of which the Company's share is currently estimated at approximately 3.3%, totals approximately $23 million. Approximately $21 million of this amount will consist of maintenance, monitoring and related costs to be incurred over a 25-30 year period. The Company has accrued its share of such estimated costs; on the basis of amounts accrued by the Company, it is management's opinion that any additional liability resulting from this situation will not have a material effect on the Company's financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 4.1 EXECUTIVE OFFICERS OF THE REGISTRANT The Executive officers of the Company are set forth below. The Company's officers serve at the pleasure of the Board of Directors.
Name Age Position - ---- --- -------- Kenneth F. Potashner 41 Chairman of the Board, President and Chief Executive Officer. Mr. Potashner has served Maxwell as Chairman of the Board since April 1997, and all other capacities since April of 1996. From 1991 through 1994 he was Vice President, Product Engineering, for Quantum Corporation. From 1994 to April of 1996, he served as Executive Vice President, Operations, Conner Peripherals. Gary J. Davidson 43 Vice President - Finance and Administration, Treasurer and CFO. Mr. Davidson served as Corporate Controller of the Company from May 1986 until his appointment as Vice President-Finance, Treasurer and Chief Financial Officer in March, 1994. Mr. Davidson assumed the duties of Vice President-Administration in March 1995. Prior to joining the Company, Mr. Davidson was a manager with the international accounting firm of Ernst & Young, serving in both audit and tax capacities.
23 26
Thomas J. Horgan 38 Vice President and Director. Mr. Horgan is Corporate Vice President and in September 1998 was named President of Advanced Energy Products. Previously, he served as Corporate Vice President, Business Development, and was elected to the Board of Directors of the Company in January 1997. Prior to joining Maxwell in June of 1996, Mr. Horgan served from 1991 through 1993 as European Information Security Center Manager for Digital Equipment. In 1993 he joined Quantum Corporation and until 1995 served as Director, Customer Service. From 1995 until joining Maxwell, he was Vice President, Customer Service, for Conner Peripherals. Gregg McKee 55 Vice President. Mr. McKee became Corporate Vice President and President of Maxwell Energy Products, Inc. in September of 1996. From 1990 until joining Maxwell he served Quantum Corporation in various capacities. From 1990 to January 1993 he was Director of the Customer Service Group; from February 1993 to December 1995, he served as Corporate Director of Malaysian Operations; and from January of 1995 until joining Maxwell he was President, Quantum Malaysia. Donald M. Roberts 50 General Counsel and Secretary. Mr. Roberts has served as General Counsel since joining the Company in April, 1994, and was appointed Secretary in June, 1996. For more than five years prior thereto, Mr. Roberts was a shareholder of the law firm of Parker, Milliken, Clark, O'Hara & Samuelian, a Professional Corporation, and a partner of the predecessor law partnership, and in that capacity had served the Company as outside legal advisor for more than ten years. Walter P. Robertson 56 Vice President. Mr. Robertson was named Corporate Vice President and President of Maxwell Technologies Systems Division, Inc. in August of 1996. Prior to that he served General Dynamics as Vice President, Aircraft Production from 1991 through 1992 and as Vice President and General Manager, Space Magnetics from 1992 through 1994. From May 1994 through November 1994, Mr. Robertson was Transition Director for Martin Marietta. In April of 1995 and until joining Maxwell, he served BioSolutions Technologies, a start-up company, as President and Chief Executive Officer. Ted Toch 50 Vice President. Mr. Toch joined the Company in June 1998, as Corporate Vice President and President of PurePulse Technologies, Inc. Prior to joining PurePulse Technologies he was Vice President of Marketing and Sales for Johnson&Johnson's Advanced Sterilization Products Division from 1993 to 1998 with earlier experience as Vice-President and General Manager of the Instrument's Division of Nellcor, Inc. John D. Werderman 52 Vice President. Mr. Werderman was named Corporate Vice President and President of I-Bus, Inc. in July 1997. Previously, Mr. Werderman served as Chief Operating Officer of Maxwell Technologies Systems Division, Inc. Prior to joining Maxwell in October 1996, Mr. Werderman worked for M/A.COM, Inc. for over 15 years, most recently as President and General Manager of their Baltimore, Maryland operation, M/A.COM Government Products, Inc.
24 27 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market under the symbol "MXWL." The following table sets forth, for the fiscal periods indicated, the high and low closing sales prices for the Common Stock as reported by the Nasdaq National Market. The prices for fiscal 1996 and the first and second quarters of fiscal 1997 have been adjusted to reflect the 2-for-1 stock split which occurred in December 1996.
HIGH LOW ---- --- FISCAL YEAR 1997 Quarter ended October 31, 1996...................... $15-1/2 $ 6-3/4 Quarter ended January 31, 1997...................... 25-1/8 17 Quarter ended April 30, 1997........................ 23 18 Quarter ended July 31, 1997......................... 23-1/4 18 FISCAL YEAR 1998 Quarter ended October 31, 1997...................... $38-1/2 $ 21-3/4 Quarter ended January 31, 1998...................... 36-3/8 21 Quarter ended April 30, 1998........................ 32-5/16 25 Quarter ended July 31, 1998......................... 28-7/8 22
The last reported sale price of the Common Stock on the Nasdaq National Market on October 23, 1998 was $25-1/4 per share. As of September 30, 1998, there were 512 holders of record of the Company's Common Stock. The Company currently anticipates that any earnings will be retained for the development and expansion of its business and, therefore, does not anticipate paying dividends on its Common Stock in the foreseeable future. In addition, under the Company's Line of Credit Agreement, neither the Company nor any of its subsidiaries may, directly or indirectly, pay any cash dividends to its stockholders. ITEM 6. SELECTED FINANCIAL DATA See the Index included at "Item 14. Exhibits Financial Statement Schedules, and Reports on Form 8-K." ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. See the Index included at "Item 14. Exhibits Financial Statement Schedules, and Reports on Form 8-K." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See the Index included at "Item 14. Exhibits Financial Statement Schedules, and Reports on Form 8-K." ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEMS 10 THROUGH 13 The information required under Item 10 (Directors and Executive Officers of the Registrant), Item 11, (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management) and Item 13 (Certain Relationships and Related Transactions) will be reported in the Company's Proxy Statement for the 1998 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A as follows and is incorporated herein by reference: 25 28
Item Number Heading in Proxy Statement - ----------- -------------------------- 10........ "ELECTION OF DIRECTORS" 11........ "EXECUTIVE COMPENSATION" 12 ....... "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" 13........ "EXECUTIVE COMPENSATION"
(See also Item 4.1 - "Executive Officers of the Registrant," Part I, supra) PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS.
PAGE NUMBER ------ 1. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... F-2 2. Selected Consolidated Financial Data................................. F-11 3. Report of Ernst & Young LLP, Independent Auditors.................... F-12 4. Consolidated Balance Sheets at July 31, 1997 and 1998................ F-13 5. Consolidated Statement of Operations for the Years Ended July 31, 1996, 1997 and 1998....................................... F-14 6. Consolidated Statement of Stockholders' Equity for the Three Years Ended July 31, 1998............................................... F-15 7. Consolidated Statement of Cash Flows for the Years Ended July 31, 1996, 1997 and 1998 ..................................... F-16 8. Notes to Consolidated Financial Statements........................... F-17
(a)(2) INDEX TO FINANCIAL STATEMENT SCHEDULES. Schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because they are inapplicable or not required under the related instructions. (a)(3) LIST OF EXHIBITS. 3.1 Restated Certificate of Incorporation of the Registrant -- Exhibit 3.1 to the Registrant's Form 10-K Annual Report for the year ended July 31, 1987 ("1987 Form 10-K") is incorporated by reference. 3.2 Certificate of Amendment of Restated Certificate of Incorporation of the Registrant increasing the number of authorized shares to 20 million, dated November 22, 1996 -- Exhibit 3.2 to the Registrant's 1997 Form 10-K Annual Report for the year ended July 31, 1997 ("1997 Form 10-K") is incorporated by reference. 3.3 Bylaws of the Registrant as amended to date -- Exhibit 3.2 to the 1987 Form 10-K is incorporated by reference.
26 29 3.4 Revised Article IV of the Bylaws of the Registrant -- Exhibit 3.4 to the 1997 Form 10-K is incorporated by reference. 4.1 Form of Rights Certificate -- Exhibit 1 to the Registrant's Form 8-A filed June 30, 1989 is hereby incorporated by reference. 4.2 Amendment to Form of Rights Certificate, dated April 2, 1997 -- Exhibit 4.2 to the 1997 Form 10-K is incorporated by reference. 4.3 Form of Rights Agreement between the Registrant and First Interstate Bank, the Rights Agent -- Exhibit 4.2 to the Registrant's Form 10-K Annual Report for the year ended July 31, 1990 ("1990 Form 10-K") is incorporated by reference. 10.1 Maxwell Laboratories, Inc. Director Stock Option Plan -- Exhibit 10.23 to the Registrant's Form 10-K Annual Report for the year ended July 31, 1989 ("1989 Form 10-K") is incorporated by reference. 10.2 Amendment Number One to Maxwell Laboratories, Inc. Director Stock Option Plan, dated February 7, 1997 -- Exhibit 10.2 to the 1997 Form 10-K is incorporated by reference 10.3 Maxwell Laboratories, Inc. 1985 Stock Option Plan as amended to date -- Exhibit 10.3 to the Registrant's Form 10-K Annual Report for the year ended July 31, 1991 ("1991 Form 10-K") is incorporated by reference. 10.4 Maxwell Laboratories, Inc. 1995 Stock Option Plan -- Exhibit 10.3 to the Registrant's Form 10-K Annual Report for the year ended July 31, 1995 ("1995 Form 10-K") is incorporated by reference. 10.5 Amendment Number One to Maxwell Laboratories, Inc. 1995 Stock Option Plan, dated March 19, 1997-- Exhibit 10.6 to the 1997 Form 10-K is incorporated by reference. 10.6+ Amendment Number Two to Maxwell Technologies, Inc. 1995 Stock Option Plan, dated January 28, 1998. 10.7 Maxwell Laboratories, Inc. 1994 Employee Stock Purchase Plan -- Exhibit 10.4 to the 1995 Form 10-K is incorporated by reference. 10.8 Maxwell Laboratories, Inc. 1994 Director Stock Purchase Plan-- Exhibit 10.5 to the 1995 Form 10-K is incorporated by reference. 10.9 Lease dated December 1, 1988 between Philip MacDonald, as Lessor, and the Registrant, as Lessee --Exhibit 10.4 to the 1989 Form 10-K is incorporated by reference. 10.10 Lease dated February 28, 1986 between the Registrant, as Lessee, and Elkhorn Ranch, Inc., as Lessor -- Exhibit 10.11 to the Registrant's Form 10-K Annual Report for the year ended July 31, 1986 ("1986 Form 10-K") is incorporated by reference. 10.11 First Amendment to Industrial Real Estate Lease between the Registrant, as Lessee, and Elkhorn Ranch, Inc., as Lessor, dated June 30, 1995 -- Exhibit 10.11 to the 1997 Form 10-K is incorporated by reference. 10.12+ Maxwell Technologies, Inc. Officer and Director Stock Repurchase Policy. 10.13 Office Lease Agreement dated August 28, 1987 by and between Airport Property Company, a N.M. Limited Partnership, as Lessor, and the Registrant, as Lessee -- Exhibit 10.16 to the Registrant's Form 10-K Annual Report for the year ended July 31, 1988 ("1988 Form 10-K") is incorporated by reference.
27 30 10.14 Agreement of May, 1994 between the Registrant and Compagnie Europeene de Composants Electroniques --LCC under which the Registrant licenses, manufactures and distributes certain capacitors -- Exhibit 10.11 to the 1995 Form 10-K is incorporated by reference. 10.15 Lease dated April 17, 1995, by and between Cody Three, Inc., as Lessor, and the Registrant, as Lessee -- Exhibit 10.12 to the Registrant's Form 10-K Annual Report for the year ended July 31, 1996 ("1996 Form 10-K") is incorporated by reference. 10.16 Amended and Restated Industrial Real Estate Lease dated January 1, 1997 by and between Equus 9177, LLC, as Lessor, and I-Bus, Inc., as Lessee. -- Exhibit 10.16 to the 1997 Form 10-K is incorporated by reference. 10.17+ Maxwell Laboratories, Inc. Executive Deferred Compensation Plan, dated September 1, 1998. 10.18 Consulting Agreement dated June 25, 1996, between the Registrant and Alan C. Kolb-- Exhibit 10.14 to the 1996 Form 10-K is incorporated by reference. 10.19 Separation Agreement dated June 25, 1996, between the Registrant and Alan C. Kolb-- Exhibit 10.15 to the 1996 Form 10-K is incorporated by reference. 10.20 Chief Executive Officer Employment Contract dated March 25, 1996 and Amendment dated April 16, 1996 between the Registrant and Kenneth F. Potashner -- Exhibit 10.16 to the 1996 Form 10-K is incorporated by reference. 10.21 Second Amendment to the Chief Executive Officer Employment Contract dated June 23, 1997 between the Registrant and Kenneth F. Potashner -- Exhibit 10.21 to the 1997 Form 10-K is incorporated by reference. 10.22 Restricted Stock Agreement dated July 25, 1996, between the Registrant and Kenneth F. Potashner --Exhibit 10.17 to the 1996 Form 10-K is incorporated by reference. 10.23 Amendment Number One to Restricted Stock Agreement, dated June 24, 1997, between the Registrant and Kenneth F. Potashner -- Exhibit 10.23 to the 1997 Form 10-K is incorporated by reference. 10.24 Lease dated October 12, 1994 by and between Madison Square Partnership, as Lessor, and PurePulse Technologies, Inc. (formerly Foodco Corporation), as Lessee -- Exhibit 10.18 to the 1995 Form 10-K is incorporated by reference. 10.25 Lease dated November 1, 1996, by and between Ponderosa Pines Partnership, as Lessor, and PurePulse Technologies, Inc., as Lessee -- Exhibit 10.25 to the 1997 Form 10-K is incorporated by reference. 10.26+ Line of Credit Agreement dated March 4, 1998, between the Registrant and Sanwa Bank California and First Amendment dated May 29, 1998 between the Registrant and Sanwa Bank of California. 10.27 License Agreement dated effective March 13, 1991 between the Registrant and Auburn University -- Exhibit 10.26 to the 1991 Form 10-K is incorporated by reference. 10.28 Lease dated February 13, 1994 by and between Terilee Enterprises, Inc., as Lessor, and the Registrant, as Lessee -- Exhibit 10.23 to the 1994 Form 10-K is incorporated by reference. 10.29 Lease dated June, 1997 by and between AEW/LBA Acquisition Company II, LLC, as Lessor and the Registrant as Lessee -- Exhibit 10.29 to the 1997 Form 10-K is incorporated by reference. 10.30+ Executive Bonus Plan for Fiscal 1999.
28 31 10.31 PurePulse Technologies, Inc. 1994 Stock Option Plan -- Exhibit 10.26 to the 1996 Form 10-K is incorporated by reference. 10.32 Maxwell Federal Division, Inc. 1996 Stock Option Plan -- Exhibit 10.34 to the 1997 Form 10-K is incorporated by reference. 10.33 Maxwell Energy Products, Inc. 1996 Stock Option Plan -- Exhibit 10.35 to the 1997 Form 10-K is incorporated by reference. 10.34 I-Bus, Inc. 1996 Stock Option Plan -- Exhibit 10.36 to the 1997 Form 10-K is incorporated by reference. 10.35 Maxwell Information Systems, Inc. 1996 Stock Option Plan -- Exhibit 10.37 to the 1997 Form 10-K is incorporated by reference. 10.36 Amendment Number One to the Maxwell Laboratories, Inc. 1994 Employee Stock Purchase Plan, effective as of April 30, 1997 -- Exhibit 10.38 to the 1997 Form 10-K is incorporated by reference. 10.37+ Lease dated March 1, 1998, between Hassan H. Yarpezeshkan and Maryam Yarpezeshkan, as Lessor and the Registrant, as Lessee. 10.38 Stock Purchase Agreement among Maxwell Technologies, Inc., Maxwell Energy Products, Inc., and PacifiCorp Energy Ventures, Inc., dated October 30, 1997. Exhibit 10 to the Registrant's October 31, 1997 Form 10-Q is incorporated by reference. 10.39 Amended and Restated Agreement of Purchase and Sale of Assets, dated as of March 29, 1998, among the Company, Maxwell Technologies Systems Division, Inc., Primex Technologies, Inc. and Primex Physics International Company -- Exhibit 2.1 to the Registrant's Form 8-K filed April 29, 1998 is hereby incorporated by reference. 10.40+ Assignment and Assumption Agreement (Facility Lease) dated April 15, 1998, by and between Primex Physics International Company, as assignor and Maxwell Technologies Systems Division, Inc., as assignee. 10.41+ Assignment and Assumption Agreement (Ground Lease) dated April 15, 1998, by and between Primex Physics International Company, as assignor and Maxwell Technologies Systems Division, Inc., as assignee. 10.42+ Underlease dated March 6, 1997 by and between Pegasus Airwave Limited, as Lessor and I-Bus UK, Limited (formerly Tri-MAP International, Limited), as Lessee. 21.1+ List of subsidiaries of the Registrant. 23.1+ Consent of Ernst & Young LLP, Independent Auditors. 27+ Financial Data Schedule.
(b) REPORTS ON FORM 8-K. On June 29, 1998, the Registrant filed a Form 8-K/A amendment to the Current Report on Form 8-K filed on April 29, 1998, reporting the acquisition of the assets and assumption of certain liabilities of the electromagnetic systems groups of Primex Physics International. The amendment provided certain historical and pro-forma financial information of said group. - ---------- + Filed herewith. 29 32
MAXWELL TECHNOLOGIES, INC. INDEX TO FINANCIAL INFORMATION PAGE ---- Management's Discussion and Analysis of Financial Condition and Results of Operations............ F-2 Selected Consolidated Financial Data............................................................. F-11 Report of Ernst & Young LLP, Independent Auditors................................................ F-12 Consolidated Balance Sheets at July 31, 1997 and 1998............................................ F-13 Consolidated Statement of Operations for the Years Ended July 31, 1996, 1997 and 1998............ F-14 Consolidated Statement of Stockholders' Equity for the Three Years Ended July 31, 1998........... F-15 Consolidated Statement of Cash Flows for the Years Ended July 31, 1996, 1997 and 1998............ F-16 Notes to Consolidated Financial Statements....................................................... F-17
F-1 33 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Two years ago Maxwell implemented a business reorganization that became effective August 1, 1996 (the "Reorganization"). In the Reorganization, the Company was recast into distinct business and operating units, and new senior management was put in place. While commercial business opportunities underlay the Reorganization, the Company continues to perform research and development, primarily in its core pulsed power and advanced software areas for the United States Department of Defense ("DOD"). These activities have produced a suite of innovative products, technologies and research and development capabilities. Entering fiscal 1998, the new senior management team focused on utilizing these resources to lay the foundation for a global, commercially-focused enterprise. To this end, the following major steps were taken during the year. - Completed a follow-on offering of common stock, raising approximately $47 million in equity capital. - Placed a strong focus on the PowerCache(TM) ultracapacitor product line, including build-up of infrastructure and manufacturing capability, and direct-line organizational reporting. - Hired a senior executive with international expertise, Claude Barathon, as President of European Operations with an initial emphasis on sales and marketing for Europe. - Acquired three domestic companies related to the Company's core business areas of pulsed power products, systems and R&D. - Acquired a United Kingdom-based company which both complements Maxwell's line of industrial PC's and provides a strong base of operations overseas. - Discontinued the separate operation of the primarily software-related Information Products and Services business segment; the Company is now organized in three business segments, and effective with the third quarter of fiscal 1998, is reporting its results accordingly. Primarily due to the acquisitions mentioned above, the Company incurred special charges during the year of $8.9 million, including costs of acquired in-process research and development meeting certain criteria. Excluding these special charges, net income for fiscal 1998 was $8.2 million, or more than double the $4.0 million of 1997. After special charges, the Company incurred a net loss of $769,000. See "Special Charges" below, and Note 9 of Notes to Consolidated Financial Statements. The net loss of $15.2 million in fiscal 1996 included $14.4 million of charges related to the Reorganization, adoption of new accounting standards, a valuation allowance for net deferred income tax assets and other charges. See Note 9 of Notes to Consolidated Financial Statements. The Company's business segments are as follows: - Power Conversion Products: Includes design, development and manufacture of electrical components, systems and subsystems, including products that capitalize on pulsed power such as ultracapacitors, microbial purification systems, high voltage capacitors and other electrical components, power supplies and power conditioning systems and electromagnetic interference filter capacitors. - Industrial Computers and Subsystems: Includes design and manufacture of standard, custom and semi-custom industrial computer modules, platforms and fully integrated systems primarily for OEMs. F-2 34 - Technology Programs and Systems: Includes research and development programs in pulsed power, pulsed power systems design and construction, weapons effects simulation and computer-based analytic services, primarily for the DOD. - Information Products and Services: Includes design, development and integration of software products and services including job cost accounting and management information systems and other software products including applications for the Internet, as well as wide-area and local-area network and software integration services. As mentioned above, the Company reorganized the operations within the Information Products and Services business segment, including a refocusing of certain operations along the lines of other of the Company's existing business segments and the discontinuation of certain businesses. Therefore, effective as of the beginning of the fiscal 1998 third quarter, the Company no longer operates or reports in the Information Products and Services segment. Partial-year results from that segment, covering the first six months of fiscal 1998, are included in the Company's segment reporting. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected operating data for the Company, expressed as a percentage of sales.
YEAR ENDED JULY 31, --------------------------------- 1996 1997 1998 ------ ----- ----- Sales ...................................................... 100.0% 100.0% 100.0% Cost of sales .............................................. 81.4 69.1 66.6 ----- ----- ----- Gross profit ............................................. 18.6 30.9 33.4 Operating expenses: Selling, general and administrative expenses ............. 19.3 21.6 21.1 Research and development expenses ........................ 6.3 5.2 6.5 Acquired in-process R&D and other special charges ........ -- -- 7.1 Restructure and asset impairment losses .................. 7.0 -- -- ----- ----- ----- Total operating expenses .............................. 32.6 26.8 34.7 ----- ----- ----- Operating income (loss) .................................... (14.0) 4.1 (1.3) Interest expense ........................................... 0.4 0.2 0.2 Other-net .................................................. (0.5) (0.2) (1.1) ----- ----- ----- Income (loss) before income taxes, minority interest and loss from cumulative effect of change in accounting principle ................................................ (13.9) 4.1 (0.4) Income tax expense ......................................... 1.6 -- 0.2 Minority interest in net income of subsidiaries ............ 0.1 0.1 -- Loss from cumulative effect of change in accounting principle ................................................ 3.2 -- -- ----- ----- ----- Net income (loss) ........................................ (18.8)% 4.0% (0.6)% ===== ===== =====
The following table sets forth, for the periods indicated, the Company's business segment sales, gross profit and gross profit as a percentage of business segment sales.
YEAR ENDED JULY 31, ------------------------------------ 1996 1997 1998 -------- ------- ------- (IN THOUSANDS) Power Conversion Products: Sales............................................... $ 16,448 $27,039 $39,312 Gross profit..................................... 3,887 10,142 16,226 Gross profit as a percentage of sales............ 23.6% 37.5% 41.3% Industrial Computers and Subsystems: Sales............................................... $ 26,131 $34,259 $40,864 Gross profit..................................... 7,633 11,537 14,210 Gross profit as a percentage of sales............ 29.2% 33.7% 34.8% Technology Programs and Systems: Sales............................................... $ 30,198 $31,087 $40,446 Gross profit..................................... 5,659 6,246 9,107 Gross profit as a percentage of sales............ 18.7% 20.1% 22.5% Information Products and Services: Sales............................................... $ 8,134 $ 9,026 $ 4,666 Gross profit..................................... (2,161) 3,379 2,306 Gross profit as a percentage of sales............ (26.6)% 37.4% 49.4%
F-3 35 Sales In fiscal 1998, the Company's total sales increased $23.9 million, or 23.6%, to $125.3 million from $101.4 million in fiscal 1997. In fiscal 1997, sales increased $20.5 million, or 25.3%, to $101.4 million from $80.9 million in fiscal 1996. International sales totaled $19.6 million in fiscal 1998, $12.6 million in fiscal 1997 and $7.6 million in fiscal 1996. The increase in international sales in fiscal 1998 over fiscal 1997 was primarily due to revenues from the expansion of the Company's industrial computer business into Europe. The increase in these sales in fiscal 1997 over fiscal 1996 was primarily attributable to increased international revenues from customer funded development in the Power Conversion Products business segment. Power Conversion Products. In fiscal 1998, Power Conversion Products sales increased $12.3 million, or 45.4%, to $39.3 million from $27.0 million in fiscal 1997. Power Conversion Products exhibited sales growth in nearly all product areas; in particular, a switch component for a National Laboratory pulsed power project; the ultracapacitor business area, which included marketing and technology access rights with two new strategic partners during the fiscal year, Siemens Matshusita Components and PacifiCorp; electromagnetic interference ("EMI") filters for implantable medical products and aerospace applications; as well as two newly acquired business areas for the Company involving power systems and glass-to-metal seals, both of which have application to the ultracapacitor product line, all contributed to the increase in sales. In fiscal 1997, Power Conversion Products sales increased $10.6 million, or 64.4%, to $27.0 million from $16.4 million in fiscal 1996. This increase was primarily attributable to higher revenues from customer funded ultracapacitor development and sales of prototype ultracapacitor products to potential OEM customers for evaluation, increased sales of EMI filters for implantable medical products and increased revenues from customer funded development of pulsed power purification systems. Industrial Computers and Subsystems. In fiscal 1998, Industrial Computers and Subsystems sales increased $6.6 million, or 19.3%, to $40.9 million from $34.3 million in fiscal 1997. Sales in this business segment are made principally to OEM customers and are primarily derived from the shipment of computers and subsystems that are "designed-in" to the OEM's product. In fiscal 1998, the Company expanded its product offering and marketing strategy with the acquisition of an United Kingdom-based company that offers standard products to OEMs primarily via catalogs. The Company expects to be selling standard products in the U.S. in fiscal 1999, and to leverage leads from catalog sales into additional OEM design-ins going forward. Sales to a long-standing OEM customer under a major multi-year program were completed during fiscal 1998. Other OEM projects as well as the expansion into the standard product area more than offset the major program completion, and resulted in the increase in sales for the year. In fiscal 1997, Industrial Computers and Subsystems sales increased $8.1 million, or 31.1%, to $34.3 million from $26.1 million in fiscal 1996. The sales increase in fiscal 1997 was derived from increased sales to OEM customers primarily in the computer telephony market. The largest portion of the increase consisted of sales to a single, long-standing OEM customer under a program that was concluded in the subsequent fiscal year, as described above. Technology Programs and Systems. In fiscal 1998, sales in the Technology Programs and Systems segment increased $9.4 million, or 30.2%, to $40.5 million from $31.1 million in fiscal 1997. The Company had an increase in revenues in its core, Government-funded pulsed power research and development activities, including revenue in this business area from the Physics International acquisition. In addition, the Company's job-cost accounting software business, which is primarily focused on Government contractors, was shifted to this segment during the third quarter of the year when the commercial software-oriented business segment was reorganized. In fiscal 1997, sales in the Technology Programs and Systems segment increased $0.9 million, or 2.9%, to $31.1 million from $30.2 million in fiscal 1996. This increase was primarily attributable to revenues from a contract for high-voltage power supplies for a Department of Energy accelerator project and increased work levels on two large multi-year contracts for the DOD. This increase was partially offset by the absence of revenue from the Company's chemical analytical services business, which was sold in the fourth quarter of fiscal 1996, the winding-down of the Company's environmental consulting business and lower hardware systems sales. F-4 36 Revenues for fiscal 1997 and a portion of fiscal 1998 include amounts related to the closure of three DOD pulsed power simulation facilities operated by the Company for many years in San Diego. The closure activities were concluded in the first half of fiscal 1998. The Company continues to perform services under long-term contracts with the DOD, including both research for next-generation pulsed power technology for x-ray simulators as well as conducting experiments using existing simulators at the newly acquired Physics International facility. These and other contracts with the DOD are subject to periodic Government funding provisions. The level of future DOD expenditures in the Company's research and development area and the related impact on funding for the Company's contracts are not predictable and, therefore, previously reported results are not necessarily indicative of those to be expected in the future. Information Products and Services. As previously discussed, the Information Products and Services business was operated as a segment only for the first six months of fiscal 1998. During this six-month period, sales of Information Products and Services decreased $4.3 million, or 48.3%, to $4.7 million from $9.0 million for the full twelve months of fiscal 1997. This decrease reflects both the partial-year of operations and the wind-down and near completion of two large multi-year software development contracts for criminal justice information systems (the "CJIS Contracts"). In fiscal 1997, sales of Information Products and Services increased $0.9 million, or 11.0%, to $9.0 million from $8.1 million in fiscal 1996. This increase primarily reflects greater sales of the Company's job-cost accounting software, partially offset by a decline in revenues from the CJIS Contracts. Gross Profit In fiscal 1998, the Company's gross profit was $41.8 million, or 33.4% of sales, compared to $31.3 million, or 30.9% of sales, in fiscal 1997. In fiscal 1997, the Company's gross profit was $31.3 million, or 30.9% of sales, compared to $15.0 million, or 18.6% of sales, in fiscal 1996. The increase in gross profit as a percentage of sales in each year was primarily due to the increases in overall sales, resulting in improved overhead absorption, and the mix of products and services, particularly in the Power Conversion Products business segment. In addition, the lower gross profit margin in fiscal 1996 reflects the portion of the $14.4 million charge taken in that year that was recorded in costs of sales. Power Conversion Products. In fiscal 1998, Power Conversion Products gross profit increased $6.1 million to $16.2 million from $10.1 million in fiscal 1997. As a percentage of sales, gross profit increased to 41.3% in fiscal 1998 from 37.5% in fiscal 1997. This increase in gross profit as a percentage of sales reflected improved overhead absorption on the higher level of sales, and a higher margin mix of products and services, including switch components for a National Laboratory pulsed power system and increased funded development and related marketing and technology access rights associated with strategic partnering arrangements. In fiscal 1997, Power Conversion Products gross profit increased $6.3 million to $10.1 million from $3.9 million in fiscal 1996. As a percentage of sales, gross profit increased to 37.5% in fiscal 1997 from 23.6% in fiscal 1996. This increase in gross profit as a percentage of sales reflected improved overhead absorption and a more favorable mix of products and services, including higher sales of EMI filters for implantable medical devices and greater revenues from funded research and development. Also, the gross profit margin was lower in fiscal 1996 due to a portion of the $14.4 million charge taken in that year that was recorded in cost of sales. As the Company introduces ultracapacitor products it may offer aggressive pricing to gain market penetration. This would have an adverse impact on gross profit margins until the Company reaches full production volumes. F-5 37 Industrial Computers and Subsystems. In fiscal 1998, Industrial Computers and Subsystems gross profit increased $2.7 million, or 23.2%, to $14.2 million from $11.5 million in fiscal 1997. As a percentage of sales, gross profit increased to 34.8% in fiscal 1998 from 33.7% in fiscal 1997. This increase in gross profit as a percentage of sales was primarily due to increased sales during the first half of fiscal 1998 of certain higher margin customized OEM products to a long-standing customer under a program that was completed during the second quarter of the year. As a result of the completion of this program, as well as the Company's entry into the lower-price standard product arena, gross profit margins were higher in the first half of fiscal 1998 than in the second half in this business area. The Company won several major contracts with large OEMs during fiscal 1998 and believes it will continue to win OEM projects and that its distribution of catalogs with new lower-price standard products will provide access to a larger number of OEM opportunities. The competition for such programs, however, is beginning to include more foreign competitors, including Asian companies. In addition, consolidations and other market trends can adversely impact projected volumes under contracts previously awarded, as happened in fiscal 1998 when Compaq's acquisition of Digital Equipment Corporation curtailed a Company project. Further, a new form factor, CompactPCI, is beginning to gain favor in the marketplace. While the Company has developed its own line of CompactPCI products and believes it is well positioned to gain market share in this product area, the impact of these factors on the Company's business is not yet predictable. In fiscal 1997, Industrial Computers and Subsystems gross profit increased $3.9 million, or 51.1%, to $11.5 million from $7.6 million in fiscal 1996. As a percentage of sales, gross profit increased to 33.7% in fiscal 1997 from 29.2% in fiscal 1996 due to increased sales of certain higher margin customized OEM products and improved overhead absorption from the higher overall sales. In addition, cost of sales in fiscal 1996 reflected higher inventory write-offs than in fiscal 1997. Technology Programs and Systems. Technology Programs and Systems gross profit was $9.1 million, $6.2 million and $5.7 million in fiscal years 1998, 1997 and 1996, respectively. As a percentage of sales, gross profit remained relatively constant at 22.5% in fiscal 1998, 20.1% in fiscal 1997 and 18.7% in fiscal 1996. There is a base of business in this segment with relatively stable gross profit margins due to the predominance of government cost-plus contracts in this business segment. This base of cost-plus business was the major factor in the comparability of gross profit as a percentage of sales in fiscal years 1997 and 1996. The increase in gross profit, both as a dollar amount and as a percentage of sales, in fiscal 1998 as compared to fiscal 1997 was primarily due to the addition of Physics International and reorganization of the software businesses late in the fiscal year, as previously described, and to work on a commercial pulsed power systems contract won during fiscal 1998. This systems contract was substantially complete as of fiscal year-end. Information Products and Services. As discussed above, operation of the Information Products and Services business as a separate segment was discontinued as of the beginning of the third quarter of fiscal 1998; therefore, on 48% lower revenue, segment gross profit decreased in fiscal 1998 by $1.1 million, or 32%, to $2.3 million from $3.4 million in fiscal 1997. As a percentage of sales, gross profit increased to 49.4% in fiscal 1998 from 37.4% in fiscal 1997. In fiscal 1997, Information Products and Services gross profit increased $5.5 million to $3.4 million from $(2.2) million in fiscal 1996. As a percentage of sales, gross profit increased to 37.4% in fiscal 1997 from (26.6)% in fiscal 1996. In fiscal 1996, the Company recorded reserves against the CJIS Contracts because total contract completion costs were projected to exceed the contract value on these fixed price contracts. In addition, fiscal 1996 included a write-off of certain capitalized software development costs. Selling, General and Administrative Expenses In fiscal 1998, the Company's selling, general and administrative expenses increased $4.5 million, or 20.5%, to $26.4 million from $21.9 million in fiscal 1997. As a percentage of total sales, selling, general and administrative expenses decreased slightly to 21.1% in fiscal 1998 from 21.6% in fiscal 1997. The increase in the dollar amount of these expenses is primarily in support of the Company's growth during the year, as well as a continued ramp-up of the organizational structure and selling efforts for the ultracapacitor business area. F-6 38 In fiscal 1997, the Company's selling, general and administrative expenses increased $6.3 million, or 40.7%, to $21.9 million from $15.6 million in fiscal 1996. As a percentage of total sales, selling, general and administrative expenses increased to 21.6% in fiscal 1997 from 19.3% in fiscal 1996. These increases were attributable primarily to (i) increased sales and marketing costs, principally from the addition of new sales and marketing personnel added as part of the Company's plan to grow its commercial businesses, and commissions earned on higher commercial sales in fiscal 1997 primarily in the Company's Power Conversion Products and Industrial Computers and Subsystems business segments; (ii) accruals under new incentive and profit sharing plans implemented in fiscal 1997 and (iii) additions to senior management, both at the executive and business unit levels, to support the Company's new strategic direction. Research and Development Expenses The Company's research and development expenses reflect only internally funded research and development programs. Costs associated with United States government and other customer funded research and development contracts are included in cost of sales. Research and development expenses were $8.2 million, $5.3 million and $5.1 million for fiscal 1998, 1997 and 1996, respectively. As a percentage of sales, research and development expenses were 6.5% in fiscal 1998, 5.2% in fiscal 1997, and 6.3% in fiscal 1996. The level of research and development expenses reflects the Company's ability to obtain customer funding to support a significant portion of its research and product development activities. The increase in internally funded research and development in fiscal 1998 over the level expended in fiscal 1997 and 1996 reflects the Company's focus on new commercial product areas, and is primarily due to ultracapacitor and other power conversion products and power electronics systems development, and Compact PCI and continued product development for major new programs in the Industrial Computers and Subsystems business segment. Special Charges During the third quarter of fiscal 1998, the Company completed the acquisition of three businesses. In acquiring these businesses, the Company acquired certain intangible assets. Some of these intangible assets have been capitalized and will be amortized over their estimated economic lives; the acquired in-process research and development meeting certain criteria, however, was expensed during the quarter as the technology had no alternative future use and the ultimate recovery of the acquired value was not assured. In addition, certain costs of acquisitions, as well as certain charges related to the discontinued business segment, were also charged to operations. The total amount of all such charges was $8.9 million and has been classified as "Acquired in-process research and development and other special charges" in the consolidated statement of operations. Approximately $6.3 million of the charge is acquisition related, and approximately $2.6 million relates to the Information Products and Services business segment. See Notes 8 and 9 of Notes to Consolidated Financial Statements. Interest Expense Interest expense was $214,000 and $173,000 in fiscal years 1998 and 1997, respectively, compared to $329,000 in fiscal 1996. The decrease from fiscal 1996 is a result of lower average borrowings in the two more recent fiscal years. The Company completed a follow-on stock offering in fiscal 1998, and used a portion of the proceeds from that offering to pay off an outstanding balance on the bank line of credit and the remaining balance on a bank term loan. Other-net In fiscal 1998, other-net was $1.4 million, compared to $150,000 in fiscal 1997 and $398,000 in fiscal 1996. The increase in other-net is primarily attributable to interest income from the investment of the net cash proceeds of the Company's follow-on offering which was completed in November 1997. In addition, fiscal 1996 other-net reflects completion in April 1996 of the amortization into income of amounts contributed by minority stockholders upon the organization of the Company's PurePulse Technologies, Inc. subsidiary over such stockholders' proportionate share of PurePulse's equity. Fiscal 1996 other-net included $379,000 of such income, while none is included in subsequent fiscal years. F-7 39 Income Tax Expense The Company had net operating loss carryforwards which offset the Company's provision for U.S. income taxes in both fiscal years 1998 and 1997. Fiscal 1998 income tax expense is primarily due to foreign taxes on the profits of the Company's U.K. subsidiary that was acquired during the year. Fiscal 1996 income tax expense was primarily due to the establishment of a valuation allowance of $1.1 million for the net deferred income tax assets of the Company. LIQUIDITY AND CAPITAL RESOURCES The Company has historically relied on a combination of internally generated funds and bank borrowings to finance its working capital requirements and capital expenditures. In addition, in fiscal years 1998 and 1997, the Company received approximately $2.3 million and $2.5 million, respectively, from the exercise of stock options and purchases under employee stock purchase plans. In November 1997, the Company completed a follow-on public offering of 1.5 million shares of its Common Stock, and received net proceeds of approximately $47 million. A portion of the proceeds was used to repay an outstanding balance on the bank line of credit and the remaining balance on a bank term loan. Approximately $12 million of cash was used in fiscal 1998 in completing the acquisitions discussed in Results of Operations above. Cash used in operations in fiscal 1998 was $5.0 million, primarily attributable to increases in accounts receivable and inventory, due both to acquired businesses and in support of the higher fiscal 1998 sales. The Company's capital expenditures in fiscal 1998, excluding acquired businesses, increased to $7.0 million from $4.7 million in fiscal 1997, primarily for facility expansion and production equipment and other assets needed to support growth of the Company's business units, principally in the Power Conversion Products business segment. The Company has currently budgeted capital expenditures of $8.7 million for fiscal 1999, including commitments for capital expenditures to support volume manufacturing of ultracapacitors in its existing facilities. The Company will continue to assess its capital needs in this area; alternatively, it may consider leasing facilities or manufacturing equipment or both or may satisfy high-volume manufacturing requirements through outsourcing or under licensing arrangements with third parties. If the Company decides to internally finance construction of additional facilities, a significant amount of capital would be required. The Company re-negotiated its unsecured bank line of credit during fiscal 1998, increasing the amount available to $20.0 million from its previous level of $10.0 million. The interest rate on the line of credit is tied to LIBOR or the bank's prime rate. As of July 31, 1998, there were no outstanding borrowings under the line of credit. The Company believes that funds on hand, together with cash generated from operations and funds available under its bank line of credit, will be sufficient to finance its operations and capital expenditures through fiscal 1999. In addition to addressing the need for high-volume manufacturing of its ultracapacitor products, the Company may continue from time-to-time to consider acquisitions of complementary businesses, products or technologies, which may require additional funding. Sources of additional funding for these purposes could include one or more of the following: cash flow from operations; investments by strategic partners and additional debt or equity financing. There can be no assurance that the Company will be able to obtain additional sources of financing on favorable terms, if at all, at such time or times as the Company may require such capital. INFLATION AND CHANGES IN PRICES Generally, the Company has been able to increase prices to offset its inflation-related increased costs in its commercial businesses. A substantial portion of the Company's business with agencies of the United States government consists of cost-reimbursement contracts which permit recovery of inflation costs. Fixed-price contracts with government and other customers typically include estimated costs for inflation in the contract price. F-8 40 SOFTWARE COMPATIBILITY WITH YEAR 2000 DATE PROCESSING The Year 2000 ("Y2K") issue is the result of computer programs using a two-digit format, as opposed to four digits, to indicate the year. Computer systems utilizing such programs may be unable to interpret dates beyond the year 1999, which could cause a system failure or other computer errors, leading to disruptions in operations. In 1998, the Company developed a three-phase program for Y2K information systems compliance. Phase 1 is to identify and solve Y2K issues in the Company's significant information systems infrastructure and enterprise business applications, including telecommunications and networking systems as well as accounting and manufacturing software. Phase 2 is to identify and plan for Y2K issues that are specific to the Company's business units, including local software, product matters, facilities related systems and vendor and key partner concerns. Phase 3 is the final testing of each major area of exposure to ensure compliance, and the development of contingency plans for unsolved Y2K deficiencies, such as key vendors failing to adequately address their Y2K problems. The Company has identified four major areas determined to be critical for successful Y2K compliance: (1) networking and telecommunications, (2) financial and manufacturing informational systems applications, (3) products and (4) third-party relationships. In Phase 1 of the program, the Company has completed its review of company-wide and large systems, several of which have been identified as being Y2K compliant due to their recent implementation or upgrade. Such installations were unrelated to the Y2K concern, but rather were needed as part of the ordinary course of business. For certain accounting and manufacturing systems, upgrades are needed. These upgrades are available from the third party suppliers, and are in the process of being evaluated. Implementation of the updated systems is expected by calendar year end. Remaining upgrades of system infrastructure have been identified and planned. Final testing and documentation under Phase 1 is currently anticipated in the January 1999 time frame. Under Phase 2, the Company is currently identifying and evaluating business unit exposures. In the third-party area, the Company is in the process of contacting its significant third parties, primarily key vendors and customers, regarding their Y2K readiness. As to products, preliminary findings indicate that most Company products appear to be Y2K compliant. For several of those that are not, the Company has made upgrades available via the Company's Internet web site. For other products, the Company is still completing its evaluation process. The testing and contingency plan development under Phase 3 will begin in early 1999, and is expected to be completed in mid-1999. The Company believes it will cost approximately $100,000 to complete the replacement of network and telecommunication infrastructure requiring Y2K upgrades. The Company has yet to determine what costs, if any, will be incurred in connection with local software, facilities, products and the third party area. The anticipated costs relating to resolving Y2K issues are based on estimates which were derived utilizing assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved and, as additional Y2K remediation activities are developed and planned, that actual results will not differ materially from those in the current estimate. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the completion of the Company's Y2K investigations, the ability to locate and correct all relevant computer codes, and similar uncertainties. In addition, there can be no assurance that Y2K compliance problems will not be revealed in the future which could have a material adverse affect on the Company's business, financial condition and results of operations. Many of the Company's customers and suppliers may be affected by Y2K issues that may require them to expend significant resources to modify or replace their existing systems, which may result in those customers having reduced funds to purchase the Company's products or those suppliers experiencing difficulties in producing or shipping key components to the Company on a timely basis or at all. Such third party issues could have a material adverse affect on the Company's business, financial condition and results of operations. This discussion of the Company's Y2K status constitutes a "Year 2000 Readiness Disclosure" as that item is defined in the Year 2000 Information and Readiness Disclosure Act, and also contains forward-looking statements (see "Forward-Looking Statements " below). F-9 41 ACCOUNTING PRINCIPLES In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income, and Statement No. 131, Disclosures About Segments of an Enterprise and Related Information, both of which are effective for fiscal periods beginning after December 15, 1997. The Company believes the statements, which will be adopted in fiscal 1999, will not have a material effect on its financial statements. FORWARD-LOOKING STATEMENTS To the extent that the above discussion goes beyond historical information and indicates results or developments which the Company plans or expects to achieve, these forward-looking statements are identified by the use of terms such as "expected," "anticipates," "plans," and the like. Readers are cautioned that such statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are subject to a number of risks and uncertainties. Actual results in the future could differ materially from those described in any forward-looking statements as a result of various risk factors. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. Readers are referred to item 1 of the Company's Annual Report on Form 10-K for fiscal 1998 for a discussion of certain of those factors. F-10 42 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated statement of operations data for the fiscal years ended July 31, 1996, 1997 and 1998, and consolidated balance sheet data at July 31, 1997 and 1998 are derived from the Consolidated Financial Statements of the Company and Notes thereto, which have been audited by Ernst & Young LLP, independent auditors. The following selected consolidated statement of operations data for the years ended July 31, 1994 and 1995 and consolidated balance sheet data at July 31, 1994, 1995 and 1996 are derived from audited consolidated financial statements of the Company not included in this Appendix. The following selected data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company and Notes thereto appearing elsewhere in this Appendix.
YEAR ENDED JULY 31, ----------------------------------------------------------------- 1994 1995 1996 1997 1998 ----------------------------------------------------------------- ( IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Sales .......................................... $ 85,463 $ 75,004 $ 80,911 $ 101,411 $ 125,308 Cost of sales .................................. 68,555 56,447 65,893 70,107 83,459 --------- --------- --------- --------- --------- Gross profit ................................. 16,908 18,557 15,018 31,304 41,849 Operating expenses: Selling, general and administrative expenses . 14,068 13,636 15,564 21,900 26,391 Research and development expenses ............ 4,794 5,038 5,081 5,303 8,206 Acquired in-process R&D and other special charges (1) ....................... -- -- -- -- 8,942 Restructure and asset impairment losses(1) ... -- -- 5,703 -- -- Loss on closing of Brobeck division .......... 1,018 -- -- -- -- --------- --------- --------- --------- --------- Total operating expenses .................. 19,880 18,674 26,348 27,203 43,539 --------- --------- --------- --------- --------- Operating income (loss) ........................ (2,972) (117) (11,330) 4,101 (1,690) Interest expense ............................... 252 315 329 173 214 Other-net ...................................... (589) (848) (398) (150) (1,441) --------- --------- --------- --------- --------- Income (loss) before income taxes, minority interest and loss from cumulative effect of change in accounting principle ......... (2,635) 416 (11,261) 4,078 (463) Income tax expense (benefit) ................... (1,028) 15 1,296 -- 226 Minority interest in net income of subsidiaries .............................. 80 86 50 54 80 Loss from cumulative effect of change in accounting principle (1) ............... -- -- 2,569 -- -- --------- --------- --------- --------- --------- Net income (loss) .............................. $ (1,687) $ 315 $ (15,176) $ 4,024 $ (769) ========= ========= ========= ========= ========= Basic income (loss) per share: Basic income (loss) per share before cumulative effect of change in accounting principle ...................... $ (0.32) $ 0.06 $ (2.29) $ 0.68 $ (0.10) Basic income (loss) per share: ............... $ (0.32) $ 0.06 $ (2.76) $ 0.68 $ (0.10) ========= ========= ========= ========= ========= Diluted income (loss) per share: Diluted income (loss) per share before cumulative effect of change in accounting principle ...................... $ (0.32) $ 0.06 $ (2.29) $ 0.60 $ (0.10) Diluted income (loss) per share: ............. $ (0.32) $ 0.06 $ (2.76) $ 0.60 $ (0.10) ========= ========= ========= ========= ========= Shares used in computing: Basic income (loss) per share: ............ 5,350 5,351 5,494 5,949 7,677 ========= ========= ========= ========= ========= Diluted income (loss) per share: .......... 5,350 5,356 5,494 6,644 7,677 ========= ========= ========= ========= ========= JULY 31, ------------------------------------------------------------------ 1994 1995 1996 1997 1998 ------------------------------------------------------------------ (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents ................... $ 4,579 $ 4,053 $ 1,465 $ 826 $ 21,224 Working capital ............................. 18,091 17,855 7,288 10,908 48,132 Total assets ................................ 54,322 52,370 40,724 47,120 105,065 Long-term debt, excluding current portion.... 2,797 1,928 1,018 465 361 Total stockholders' equity .................. 34,960 35,364 20,745 27,410 75,838
- ---------- (1) See Note 9 of Notes to Consolidated Financial Statements. F-11 43 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Stockholders Maxwell Technologies, Inc. We have audited the accompanying consolidated balance sheets of Maxwell Technologies, Inc., and subsidiaries as of July 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended July 31, 1998. 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 consolidated financial position of Maxwell Technologies, Inc. and subsidiaries at July 31, 1997 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended July 31, 1998, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP San Diego, California September 15, 1998 F-12 44 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
JULY 31, ----------------------------- 1997 1998 ------------ ------------- ASSETS Current assets: Cash and cash equivalents........................................ $ 826 $ 21,224 Accounts receivable: Trade and other, less allowance for doubtful accounts of $350 and $950 at July 31, 1997 and 1998, respectively............ 9,391 23,339 Long-term contracts........................................... 9,221 12,723 ------------ ------------- 18,612 36,062 Inventories...................................................... 8,722 15,823 Prepaid expenses................................................. 1,203 2,016 Deferred income taxes............................................ 161 161 ------------ ------------- Total current assets.......................................... 29,524 75,286 Property, plant and equipment, net................................. 16,929 23,276 Goodwill and other non-current assets.............................. 667 6,503 ------------ ------------- $ 47,120 $ 105,065 ============ ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................................. $ 13,640 $ 20,680 Accrued employee compensation.................................... 4,465 6,353 Current portion of long-term debt................................ 511 121 ------------ ------------- Total current liabilities..................................... 18,616 27,154 Long-term debt..................................................... 465 361 Minority interest.................................................. 629 1,712 Commitments and contingencies (Notes 6 and 10) Stockholders' equity: Common stock, $0.10 par value, 40,000 shares authorized, 6,143 and 8,384 shares issued and outstanding at July 31, 1997 and 1998, respectively............................................. 614 838 Additional paid-in capital....................................... 22,364 70,926 Deferred compensation............................................ (622) (413) Retained earnings................................................ 5,054 4,487 ------------ ------------- Total stockholders' equity.................................... 27,410 75,838 ------------ ------------- $ 47,120 $ 105,065 ============ =============
See accompanying notes. F-13 45 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JULY 31, --------------------------------------------- 1996 1997 1998 --------- --------- --------- Sales .................................................. $ 80,911 $ 101,411 $ 125,308 Cost of sales .......................................... 65,893 70,107 83,459 --------- --------- --------- Gross profit ......................................... 15,018 31,304 41,849 Operating expenses: Selling, general and administrative expenses ......... 15,564 21,900 26,391 Research and development expenses .................... 5,081 5,303 8,206 Acquired in-process R&D and other special charges .... -- -- 8,942 Restructure and asset impairment losses .............. 5,703 -- -- --------- --------- --------- Total operating expenses .......................... 26,348 27,203 43,539 --------- --------- --------- Operating income (loss) ................................ (11,330) 4,101 (1,690) Interest expense ....................................... 329 173 214 Other-net .............................................. (398) (150) (1,441) --------- --------- --------- Income (loss) before income taxes, minority interest and loss from Cumulative effect of change in accounting principle ................................. (11,261) 4,078 (463) Income tax expense ..................................... 1,296 -- 226 Minority interest in net income of subsidiaries ........ 50 54 80 Loss from cumulative effect of change in accounting principle ............................................ 2,569 -- -- --------- --------- --------- Net income (loss) ...................................... $ (15,176) $ 4,024 $ (769) ========= ========= ========= Basic income (loss) per share: Basic income (loss) per share before cumulative effect of change in accounting principle ........ $ (2.29) $ 0.68 $ (0.10) ========= ========= ========= Basic income (loss) per share: .................... $ (2.76) $ 0.68 $ (0.10) ========= ========= ========= Diluted income (loss) per share: Diluted income (loss) per share before cumulative effect of change in accounting principle ........ $ (2.29) $ 0.60 $ (0.10) ========= ========= ========= Diluted income (loss) per share: .................. $ (2.76) $ 0.60 $ (0.10) ========= ========= ========= Shares used in computing: Basic income (loss) per share ..................... 5,494 5,949 7,677 ========= ========= ========= Diluted income (loss) per share ................... 5,494 6,644 7,677 ========= ========= =========
See accompanying notes. F-14 46 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
THREE YEARS ENDED JULY 31, 1998 ------------------------------------------------------------------------------- ADDITIONAL TOTAL COMMON PAID-IN DEFERRED RETAINED STOCKHOLDERS' STOCK CAPITAL COMPENSATION EARNINGS EQUITY -------- --------- ------------ -------- ------------- Balance at August 1, 1995 ................... $ 537 $ 18,621 $ -- $ 16,206 $ 35,364 Issuance of 130,796 shares under stock purchase and option plans .............. 13 504 -- -- 517 Deferred compensation related to issuance of 177,960 shares ............. 18 627 (645) -- -- Amortization of deferred compensation ..... -- -- 40 -- 40 Net loss for the year ..................... -- -- -- (15,176) (15,176) -------- -------- -------- -------- -------- Balance at July 31, 1996 .................... 568 19,752 (605) 1,030 20,745 Issuance of 445,785 shares under stock purchase and option plans ............. 45 2,423 -- -- 2,468 Deferred compensation related to issuance of 10,000 shares ............. 1 189 (190) -- -- Amortization of deferred compensation ..... -- -- 173 -- 173 Net income for the year ................... -- -- -- 4,024 4,024 -------- -------- -------- -------- -------- Balance at July 31, 1997 .................... 614 22,364 (622) 5,054 27,410 Issuance of 1,500,000 shares in a follow-on public stock offering, net of offering costs of $3.9 million ................. 150 46,967 -- -- 47,117 Issuance of 356,240 shares under stock purchase and option plans ............. 36 2,302 -- -- 2,338 Issuance of 544,785 shares in connection with acquisitions ..................... 54 3,270 -- 609 3,933 Repurchase of 162,073 shares for cash under repurchase program ............. (16) (3,977) -- -- (3,993) Amortization of deferred compensation ..... -- -- 209 -- 209 Dividends paid to shareholders of subchapter S corporation prior to acquisition ........................... -- -- -- (407) (407) Net loss for the year ..................... -- -- -- (769) (769) -------- -------- -------- -------- -------- Balance at July 31, 1998 .................... $ 838 $ 70,926 $ (413) $ 4,487 $ 75,838 ======== ======== ======== ======== ========
See accompanying notes. F-15 47 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED JULY 31, ------------------------------------------ 1996 1997 1998 -------- -------- -------- Operating activities: Net income (loss) .............................................. $(15,176) $ 4,024 $ (769) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization .......................... 2,128 2,587 3,781 Restructure and asset impairment losses ................ 5,960 -- -- Acquired in-process R&D and other special charges ...... -- -- 7,450 Loss from cumulative effect of change in accounting principle ........................................... 2,569 -- -- Provision for losses on accounts receivable ............ 105 184 534 Loss on sales of property and equipment ................ 118 10 50 Deferred income taxes .................................. 1,124 -- -- Minority interest in net income of subsidiaries ........ 50 54 80 Deferred compensation .................................. 40 173 209 Changes in operating assets and liabilities: Accounts receivable .................................. 252 (3,223) (12,534) Inventories .......................................... (469) (1,914) (4,708) Prepaid expenses and other ........................... 614 (702) (1,115) Accounts payable ..................................... 2,153 (683) 909 Accrued employee compensation ........................ 185 1,599 1,139 Income taxes payable/recoverable ..................... 121 832 (45) -------- -------- -------- Net cash provided by (used in) operating activities ..................................... (226) 2,941 (5,019) Investing activities: Purchases of property, plant and equipment ..................... (1,976) (4,725) (7,026) Business acquisitions under purchase accounting, net of cash acquired ................................................. -- -- (11,481) Proceeds from sales of property and equipment .................. 6 8 149 -------- -------- -------- Net cash used in investing activities ............. (1,970) (4,717) (18,358) Financing activities: Principal payments on long-term debt ........................... (909) (952) (2,336) Proceeds from issuance of Company and subsidiary stock ......... 517 2,502 50,518 Repurchase of Company and subsidiary stock ..................... -- (413) (4,000) Dividends paid to shareholders of Subchapter S corporation prior to acquisition ............................................. -- -- (407) -------- -------- -------- Net cash provided by (used in) financing activities ..................................... (392) 1,137 43,775 -------- -------- -------- Increase (decrease) in cash and cash equivalents .. (2,588) (639) 20,398 Cash and cash equivalents at beginning of year ................... 4,053 1,465 826 -------- -------- -------- Cash and cash equivalents at end of year .......... $ 1,465 $ 826 $ 21,224 ======== ======== ========
See accompanying notes. F-16 48 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business The Company is a leader in pulsed power technologies, providing pulsed power based systems and components for a wide range of commercial applications and research and development for both commercial customers and the United States government. The Company also offers industrial computers and subsystems, primarily to OEMs in computer telephony and other markets, and software products and services, both for government research and for various commercial applications. Consolidation and Minority Interest Amounts The consolidated financial statements include the accounts of Maxwell Technologies, Inc. and its subsidiaries. All significant intercompany transactions and account balances are eliminated in consolidation. Cash Equivalents The Company classifies all highly liquid investments with a maturity of three months or less when purchased as cash equivalents. Inventories Inventories are stated at the lower of cost (principally average cost method) or market. Property, Plant and Equipment Property, plant and equipment are carried at cost and are generally depreciated using the straight-line method. Depreciation and amortization are provided over the estimated useful lives of the related assets (three to thirty years). Depreciation and amortization of property, plant and equipment amounted to $2,507,000, $2,587,000 and $3,745,000 in fiscal 1996, 1997 and 1998, respectively. Revenue Recognition The Company recognizes substantially all revenue from the sale of manufactured products and short-term fixed price contracts upon shipment of products or completion of services. Revenues, including estimated profits, on long-term fixed price contracts are recognized as costs are incurred. Revenues, including fees earned, on cost plus contracts are also recognized as costs are incurred. Contract and license revenue is reflected in the Company's sales and includes amounts received from the United States government and commercial customers for the funded research and development efforts of the Company. Provisions are made on a current basis to fully recognize any anticipated losses on contracts. Foreign Currency In March 1998, the Company acquired a United Kingdom-based subsidiary (see Note 8 - Business Combinations). The assets and liabilities of this foreign subsidiary are translated to U.S. dollars at year-end exchange rates, and revenues and expenses are translated at average rates prevailing during the year. There have been no material effects of foreign currency translation during the year ended July 31, 1998. Income (Loss) Per Share Effective November 1, 1997, the Company adopted Financial Accounting Standards Board ("FASB") Statement No. 128, Earnings Per Share. Statement No. 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings per share is calculated using the weighted average number of common shares outstanding. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share, and is calculated on the basis of the weighted average number of common shares outstanding plus the dilutive effect of outstanding stock options assuming their exercise using the "treasury stock" method and the outstanding preferred shares in the Maxwell Energy Products subsidiary assuming F-17 49 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) their conversion. Earnings per share amounts for all prior periods have been restated as necessary to conform to Statement No. 128 requirements. For the years ended July 31, 1996 and 1998, all potentially dilutive common shares have been excluded from the calculation of diluted loss per share as their inclusion would have been antidilutive. The following table sets forth the computation of basic and diluted income per share:
YEAR ENDED JULY 31, ------------------------------------------ 1996 1997 1998 -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Basic: Net income (loss) ............................. $(15,176) $ 4,024 $ (769) ======== ======== ======== Weighted average shares ....................... 5,494 5,949 7,677 -------- -------- -------- Basic income (loss) per share ................. $ (2.76) $ 0.68 $ (0.10) ======== ======== ======== Diluted: Net income (loss) ............................. $(15,176) $ 4,024 $ (769) Effect of majority-owned subsidiaries' dilutive securities ........................ -- (12) -- -------- -------- -------- Income (loss) available to common shareholders, as adjusted................................. $(15,176) $ 4,012 $ (769) ======== ======== ======== Weighted average shares ....................... 5,494 5,949 7,677 Effect of dilutive stock options .............. -- 695 -- -------- -------- -------- Weighted average shares, as adjusted .......... 5,494 6,644 7,677 -------- -------- -------- Diluted income (loss) per share ............... $ (2.76) $ 0.60 $ (0.10) ======== ======== ========
Use of Estimates 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 the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Several of the industries in which the Company operates are characterized by rapid technological change and short product life cycles. As a result, estimates are required to provide for product returns and product obsolescence as well as other matters. Historically, actual amounts recorded have not varied significantly from estimated amounts. Stock Split In November 1996, the Company declared a 2-for-1 stock split of the Company's common shares, effected as a 100% stock dividend that was distributed on December 17, 1996 to stockholders of record as of November 26, 1996. Common stock accounts, income (loss) per share and weighted average number of share amounts from prior periods have been restated to reflect the stock split. New Accounting Standards In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income, and Statement No. 131, Disclosures About Segments of an Enterprise and Related Information, both of which are effective for fiscal periods beginning after December 15, 1997. The Company believes the statements, which will be adopted in fiscal 1999, will not have a material effect on its financial statements. F-18 50 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- ACCOUNTS RECEIVABLE The following tabulation shows the component elements of accounts receivable from long-term contracts at July 31:
1997 1998 ------- ------- (IN THOUSANDS) U.S. Government: Amounts billed ............................ $ 2,108 $ 7,248 Amounts unbilled .......................... 1,326 3,024 Retainage due upon completion of contracts 287 -- Commercial customers: Amounts billed ............................ 2,693 905 Amounts unbilled .......................... 2,681 1,546 Retainage due upon completion of contracts 126 -- ------- ------- $ 9,221 $12,723 ======= =======
The balances billed but not paid by customers pursuant to retainage provisions under long-term contracts will be due upon completion of the contracts and acceptance by the customers. Substantially all unbilled receivables at July 31, 1998 are expected to become due and payable within the next year. NOTE 3 -- CREDIT AGREEMENT The Company has an unsecured two-year bank line of credit agreement dated March 1998, under which the Company may borrow up to $20 million at the bank's prime rate, or at LIBOR plus 1.75%. At July 31, 1998, there were no outstanding borrowings under the line. The line of credit agreement provides that neither the Company nor any of its subsidiaries may, directly or indirectly, make any distributions of cash dividends. NOTE 4 -- STOCK ACTIVITY AND STOCK PLANS Follow-on Public Stock Offering In November 1997, the Company issued 1,500,000 shares of its common stock in a follow-on public offering at $34.00 per share. Proceeds to the Company (net of offering costs of $1.1 million and underwriters' commissions of $2.8 million) totaled approximately $47 million, and are intended for general corporate purposes, including working capital and capital expenditures, as well as acquisitions. Stock Option Plans In December 1995, the Company adopted the 1995 Stock Option Plan under which 500,000 shares of Common Stock were reserved for future grant. In January 1997 and January 1998, an additional 300,000 and 490,000 shares, respectively, were reserved for future issuance under the plan. This plan and the Company's Director Stock Option Plan provide for granting either Incentive Stock Options or Non-Qualified Stock Options to employees and non-employee members of the Company's Board of Directors, respectively. Options are also outstanding under an expired stock option plan. Options granted under these plans are for the purchase of Common Stock of the Company at not less than the stock's fair market value at the date of grant. Employee options are generally exercisable in cumulative annual installments of 20 - 30 percent, while options in the Director Option Plan are exercisable in full one year after date of grant. All options have terms of five to ten years. F-19 51 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- STOCK ACTIVITY AND STOCK PLANS (CONTINUED) The following table summarizes Company stock option activity for the three years ended July 31, 1998.
NUMBER WEIGHTED AVERAGE OF SHARES EXERCISE PRICE --------- -------------- Balance at August 1, 1995 ............... 717,744 $ 4.84 Granted ............................... 623,600 $ 4.31 Exercised ............................. (37,684) $ 4.13 Expired or forfeited .................. (107,634) $ 5.05 --------- Balance at July 31, 1996 ................ 1,196,026 $ 4.57 Granted ............................... 373,700 $15.95 Exercised ............................. (406,656) $ 4.61 Expired or forfeited .................. (108,390) $ 4.42 --------- Balance at July 31, 1997 ................ 1,054,680 $ 8.60 Granted ............................... 591,500 $25.23 Exercised ............................. (324,825) $ 5.49 Expired or forfeited .................. (56,200) $18.57 --------- Outstanding at July 31, 1998 ............ 1,265,155 $16.73 ========= Available for future grant under the 1995 Stock Option Plan ..................... 35,460 ========= Available for future grant under the Director Option Plan .................. 85,074 =========
The following table summarizes information concerning outstanding and exercisable Company stock options at July 31, 1998.
WEIGHTED WEIGHTED AVERAGE WEIGHTED AVERAGE REMAINING AVERAGE RANGE OF EXERCISE OPTIONS EXERCISE CONTRACTUAL OPTIONS EXERCISE PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE ----------------- ----------- -------- ----------- ----------- --------- $ 3.56 - 5.00 307,659 $ 4.04 4.4 years 150,825 $ 4.17 $ 5.12 - 7.25 125,696 $ 6.72 2.7 years 61,082 $ 6.41 $ 11.00 - 20.63 259,300 $17.90 4.9 years 69,810 $19.14 $ 21.75 - 24.75 279,000 $23.63 9.7 years -- $ -- $ 25.88 - 28.88 293,500 $26.71 9.2 years 1,250 $27.50 ------------ -------- 1,265,155 282,967 ============ ========
In addition, the Company has established separate stock option plans for four of its principal operating subsidiaries. Options to purchase shares of subsidiary stock were granted primarily during fiscal 1997. Options outstanding at July 31, 1998 total from 8% to 15% of such various subsidiaries' outstanding common stock. The Company has adopted the disclosure-only provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation. In accordance with the provisions of Statement No. 123, the Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plans, and accordingly, no compensation expense has been recognized for stock options granted in 1996, 1997 or 1998. If the Company had elected to recognize compensation cost based on the fair value method prescribed by Statement No. 123, the Company's net income (loss) and net income (loss) per share would have been adjusted to the pro-forma amounts indicated below:
YEAR ENDED JULY 31, ------------------------------------------------- 1996 1997 1998 --------------- --------------- --------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net income (loss) As reported............ $(15,176) $ 4,024 $ (769) Pro forma.............. (15,305) 3,405 (4,102) Net income (loss) per share As reported............ $ (2.76) $ 0.60 $ (0.10) Pro forma.............. (2.78) 0.51 (0.53)
F-20 52 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- STOCK ACTIVITY AND STOCK PLANS (CONTINUED) The impact of outstanding non-vested stock options granted prior to 1996 has been excluded from the pro forma calculations; accordingly, the 1996, 1997 and 1998 pro forma adjustments are not indicative of future period pro forma adjustments when the calculation will reflect all applicable stock options. The fair value of Company options at the date of grant was estimated using the Black-Scholes option-pricing model with assumptions as follows: 1998 - risk-free interest rate of 5.5%; dividend yield of 0%; volatility factor of 54%; and a weighted-average expected term of 4 years; 1996 and 1997 - risk-free interest rate of 6.0%; dividend yield of 0%; volatility factor of 52%; and a weighted-average expected term of 3 years. The fair value of subsidiary options at the date of grant was estimated using the Minimum Value option-pricing model, which is similar to the Black-Scholes model except that it excludes the factor for volatility since there is no public market for the subsidiary shares. The estimated weighted average fair value at grant date for Company options granted during 1996, 1997 and 1998 was $1.74, $7.33 and $12.09 per option, respectively. Stock Purchase Plans In December 1994, the Company established the 1994 Employee Stock Purchase Plan and a Director Stock Purchase Plan. The employee plan permits substantially all employees to purchase Common Stock through payroll deductions at 85% of the lower of the trading price of the Stock at the beginning or at the end of each six-month offering period. The director plan permits non-employee directors to purchase common stock at 100% of the trading price of the Stock on the date a request for purchase is received. In fiscal years 1997 and 1998, 39,129 and 40,795 shares were issued under the two plans for an aggregate of $442,000 and $759,000, respectively. At July 31, 1998, 298,540 shares are reserved for future issuance under these plans. Stock Repurchase Program In January 1998, the Company adopted a common stock repurchase program whereby up to 600,000 shares of common stock could be repurchased during a two-year period. In fiscal year 1998, 162,000 shares were repurchased at an aggregate cost of approximately $4.0 million. Stockholder Rights Plan In 1989, the Company adopted a Stockholder Rights Plan, and subsequently distributed one nonvoting Common Stock purchase right ("Right") for each outstanding share of Common Stock. The Rights are not exercisable and will not trade separately from the Common Stock unless a person or group acquires, or makes a tender offer for, 20% or more of the Company's Common Stock. Initially, each Right entitles the registered holder to purchase one-half of a share of Company Common Stock at a price of $16.25 per one-half share, subject to certain anti-dilution adjustments. The Rights expire on June 20, 1999. If the Rights become exercisable and certain conditions are met, then each Right not owned by the acquiring person or group will entitle its holder to receive, upon exercise, Company Common Stock having a market value of four times the exercise price of the Right. These provisions will not apply if a majority of the Board of Directors determines that the acquisition or other business combination is in the best interest of the stockholders. In addition, the Company may redeem the Rights at a price of $0.01 per Right, subject to certain restrictions. Deferred Compensation In 1996 and 1997, an executive officer of the Company was granted shares of the Company's Common Stock subject to certain restrictions. The shares granted vest ratably over a four year period, and at the grant dates, the shares had a fair value of approximately $645,000 and $190,000, respectively. Those values, net of accumulated amortization, are shown as deferred compensation in the Consolidated Balance Sheet and Consolidated Statement of Stockholders' Equity. The deferred compensation is being amortized to expense over the four year vesting periods, and such amortization totaled $40,000, $173,000 and $209,000 in fiscal 1996, 1997 and 1998, respectively. F-21 53 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -- INCOME TAXES Income taxes are as follows for the years ended July 31:
1996 1997 1998 ------ ------ ------ (IN THOUSANDS) Federal: Current....................... $ 128 $ -- $ -- Deferred...................... 814 -- -- ------ ------ ------ 942 -- -- State and foreign: Current....................... 44 -- 200 Deferred...................... 310 -- 26 ------ ------ ------ 354 -- 226 ------ ------ ------ $1,296 $ -- $ 226 ====== ====== ======
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The primary components of the Company's deferred tax assets and liabilities are as follows at July 31:
1997 1998 ------ ------ (IN THOUSANDS) Deferred tax assets: Uniform capitalization, contract and inventory-related reserves.......................................... $1,465 $1,527 Environmental and restructure reserves................ 1,195 1,430 Asset write-downs under FASB Statement No. 121........ 943 1,112 Acquired in-process R&D............................... -- 959 Accrued vacation...................................... 594 733 Allowance for doubtful accounts....................... 321 371 Other................................................. 313 373 NOL carryforwards..................................... 1,800 1,300 Valuation allowance................................... (5,814) (6,735) ------ ------ Total deferred tax assets..................... 817 1,070 ------ ------ Deferred tax liabilities: Tax over book depreciation............................ 656 686 R&D expense tax over book............................. -- 223 ------ ------ Total deferred tax liabilities................ 656 909 ------ ------ Net deferred tax assets....................... $ 161 $ 161 ====== ======
As the Company cannot carry losses back to prior years, and had a loss in the current year, a valuation allowance is provided on the net operating loss carryforwards and net deferred income tax assets of the Company. The valuation allowance at July 31, 1998 includes approximately $2,000,000 relating to employee stock option and stock purchase plan activity, which upon realization will result in a credit to additional paid-in capital. Income tax expense in fiscal year 1996 was to provide for a valuation allowance on beginning of year net deferred tax assets, and to provide for income tax expense at the PurePulse Technologies subsidiary, which filed a separate tax return for that year. Income tax expense in fiscal year 1998 was primarily due to foreign taxes on the profits of the Company's newly acquired United Kingdom subsidiary. As of July 31, 1998, the Company has net operating loss carryforwards for federal and state income tax purposes of approximately $3,000,000 and $3,500,000, respectively. The federal loss carryforward expires in fiscal year 2011, while the state loss carryforwards expire in fiscal years 1999 through 2001. F-22 54 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -- INCOME TAXES (CONTINUED) The provisions for income taxes in the accompanying statements of operations differ from the tax provision calculated by applying the statutory income tax rate of 35% to income (loss) before income taxes and minority interest. The primary components of such difference are as follows for the years ended July 31:
1996 1997 1998 ------- ------- ------- (IN THOUSANDS) Tax at federal statutory rate ............................................ $(3,941) $ 1,427 $ (162) State taxes, net of federal benefit ...................................... (674) 246 58 Effect of foreign subsidiary ............................................. -- -- (47) Impact of asset basis difference in acquisitions ......................... -- -- 1,237 Utilization of net operating loss carryforwards .......................... -- (700) (500) Amortization of minority interest ........................................ (129) -- -- Valuation allowance and other items ...................................... 6,040 (973) (360) ------- ------- ------- $ 1,296 $ -- $ 226 ======= ======= =======
NOTE 6 -- LEASES Rental expense amounted to $1,992,000, $1,831,000 and $3,303,000 in fiscal 1996, 1997 and 1998, respectively, and was incurred primarily for facility rental. Future minimum rental commitments as of July 31, 1998, are as follows (in thousands): 1999.......................................................... $ 4,799 2000.......................................................... 4,377 2001.......................................................... 4,158 2002.......................................................... 3,583 2003.......................................................... 2,973 Thereafter.................................................... 7,583 -------- $ 27,473 ========
Certain leases include renewal options for periods ranging from one to twenty-five years and are subject to rental adjustment based on consumer price indices. Substantially all leases provide that the Company pay for property taxes, insurance, and repairs and maintenance. The Company also subleases certain of its leased facilities under non-cancellable subleases ranging from one to five years. Future amounts due to the Company under such subleases for the next five years are as follows: 1999 - $371,000; 2000 - $392,000; 2001 - $404,000; 2002 - $168,000; 2003 - None. NOTE 7 -- EMPLOYEE BENEFIT PLAN Substantially all employees are eligible to elect coverage under a contributory employee savings plan which provides for Company matching contributions based on one-half of employee contributions up to certain plan limits. The Company's matching contributions under this plan totaled $541,000, $592,000 and $749,000 in fiscal 1996, 1997 and 1998, respectively. NOTE 8 -- BUSINESS COMBINATIONS In January 1998, the Company acquired Tekna Seal, Inc., a privately-held manufacturer of glass-to-metal seals for a variety of industrial applications, in a stock-for-stock exchange accounted for as a pooling of interests. Under the terms of the agreement, Maxwell purchased all of the outstanding stock of Tekna Seal for an aggregate of 154,000 shares of Maxwell common stock with a fair market value of approximately $4 million. The Company incurred direct transaction costs of approximately $85,000, which were charged to operations during the quarter ended January 31, 1998. The historical results of operations for Tekna Seal are not material in relation to those of Maxwell and financial information for prior periods has not been restated to reflect the merger. Retained earnings as of November 1, 1997, was restated to reflect Tekna Seal's accumulated earnings of approximately $1.3 million as of such date. F-23 55 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- BUSINESS COMBINATIONS (CONTINUED) In March 1998, the Company acquired Phoenix Power Systems, Inc. ("Phoenix Power"), a privately-held company with leading products for power electronics and power conditioning applications in the telecommunications, broadcasting, semiconductor manufacturing, medical, and biotechnology markets. Under the terms of the agreement, Maxwell purchased all of the outstanding stock of Phoenix Power for approximately $4 million ($1.3 million in cash and 100,679 shares of Maxwell common stock valued at approximately $2.7 million). Direct acquisition costs were approximately $95,000. The purchase price was allocated to the estimated fair values of the net tangible and intangible assets acquired, approximately $3 million of which was charged to acquired in-process R&D in the three months ended April 30, 1998. The value assigned to other intangible assets is $1.6 million, and is being amortized on a straight-line basis over the estimated economic lives. The aggregate purchase price of Phoenix Power could increase to as much as $13 million dependent upon the financial performance of Phoenix Power over the next two years. Also in March 1998, the Company acquired Tri-MAP International, Ltd. ("Tri-MAP"), a privately-held, United Kingdom-based manufacturer of industrial-grade PC-compatible computer systems. Tri-MAP was acquired in a stock-for-stock exchange accounted for as a pooling of interests for an aggregate of 290,000 shares of Maxwell common stock valued at approximately $7.0 million. The Company incurred direct transaction costs of approximately $625,000, which were charged to operations during the quarter ended April 30, 1998. The historical results of operations for Tri-MAP were not material in relation to those of Maxwell and financial information for prior periods has not been restated to reflect the merger. Retained earnings as of February 1, 1998 was restated to reflect Tri-MAP's accumulated deficit of approximately $660,000 as of such date. In April 1998, the Company acquired the majority of the assets of the Electromagnetic Systems Group of Primex Physics International Company ("Physics International"), for cash of $10 million, assumption of certain liabilities and direct acquisition costs of $175,000. Physics International specializes in high-energy pulsed power technology, primarily performing research and development for the U.S. government. The acquired assets consisted primarily of intangible assets and intellectual property, fixed assets, existing customer contracts and accounts receivable. The liabilities assumed consisted primarily of the majority of Physics International's current liabilities, and obligations under acquired customer contracts. The purchase price was allocated to the estimated fair values of the net assets acquired, of which approximately $2.5 million was charged to acquired in-process R&D during the quarter ended April 30, 1998. The value assigned to the other intangible assets is $3.7 million, and is being amortized on a straight-line basis over the estimated economic lives. Pro forma results of operations, as if the Physics International acquisition had occurred at the beginning of fiscal years 1997 and 1998, are as follows (after eliminating all significant intercompany transactions and excluding the charge for acquired in-process R&D):
PHYSICS MAXWELL INTERNATIONAL COMBINED --------- ------------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Year ended July 31, 1997: Sales.................... $101,411 $ 16,383 $117,794 Net income (loss)........ 4,024 (1,574) 2,450 Basic income per share... $ 0.68 -- $ 0.41 Diluted income per share. $ 0.60 -- $ 0.37 Year ended July 31, 1998: Sales.................... $125,308 $ 11,267 $136,575 Net income............... 1,681 (1,240) 441 Basic income per share... $ 0.22 -- $ 0.06 Diluted income per share. $ 0.20 -- $ 0.05
F-24 56 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- BUSINESS COMBINATIONS (CONTINUED) Shares used in computing pro forma basic and diluted income per share are 5,949,000 and 6,644,000 in fiscal 1997, and 7,677,000 and 8,356,000 in fiscal 1998. The pro forma information is presented as an illustration only and does not necessarily indicate the operating results that would have occurred had the acquisition been completed as of the beginning of the years indicated, nor does it necessarily indicate future operating results. Pro forma results for Phoenix Power are not presented as the acquisition was not material to the Company. NOTE 9 -- LOSSES, RESTRUCTURING AND OTHER SPECIAL CHARGES Primarily due to the acquisition of three businesses during the quarter, the Company recorded an $8.9 million pre-tax charge in the third quarter of fiscal 1998. Approximately $6.3 million of the charge related to the acquisitions, including transaction costs for business combinations accounted for as a pooling of interests and the appraised amount of acquired in-process research and development for the two purchase business combinations. Also during the fiscal 1998 third quarter, the Company reorganized the operations within the Information Products and Services business segment, including a refocusing of certain operations along the lines of other business segments and the discontinuation of certain businesses. Charges related to this discontinued business segment amounted to $2.6 million, of which approximately $1.3 million remained to be paid as of July 31, 1998. The majority of the remaining charge is expected to be incurred by the end of the second quarter of fiscal 1999. In fiscal 1996, the Company recorded $14.4 million of pre-tax charges. Of this amount, $9.5 million was recorded during the first two quarters, and included asset write-downs due to the adoption of FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, an increase in the valuation allowance against the Company's net deferred income tax assets, the cost, primarily in the form of inventory reserves, of re-positioning the Sierra Capacitor/Filter operation to focus on a new commercial business area, and other operational reserves primarily associated with fixed-price contracts and inventory. An additional $4.9 million charge was recorded in the third quarter primarily for costs associated with management changes and a restructuring of the Company's business units. NOTE 10 -- ENVIRONMENTAL MATTER In 1992, the Company and approximately 40 other potentially responsible parties signed a consent order with the State of California with respect to costs to be incurred at a recycling facility to characterize and remediate hazardous substances. To date, the site has been characterized, and the Company and the other potentially responsible parties have paid substantially all of their respective shares of the costs of such characterization. The estimated cost of monitoring and remediation activities, of which the Company's share is currently estimated at approximately 3.3%, totals approximately $23 million. Approximately $21 million of this amount will consist of maintenance, monitoring and related costs to be incurred over a 25-30 year period. The Company has accrued its share of such estimated costs; on the basis of amounts accrued by the Company, it is management's opinion that any additional liability resulting from this situation will not have a material effect on the Company's consolidated financial statements. NOTE 11 -- BUSINESS SEGMENTS For purposes of analyzing and understanding the financial statements, the Company's operations have been classified into the following business segments: Power Conversion Products: Includes design, development and manufacture of electrical components, systems and subsystems, including products that capitalize on pulsed power such as ultracapacitors, microbial purification systems, high voltage capacitors and other electrical components, power supplies and power conditioning systems and eltromagnetic interface filter capacitors. Industrial Computers and Subsystems: Includes design and manufacture of standard, custom and semi-custom industrial computer modules, platforms and fully integrated systems primarily for OEMs. F-25 57 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 -- BUSINESS SEGMENTS (CONTINUED) Technology Programs and Systems: Includes research and development programs in pulsed power, pulsed power systems design and construction, weapons effects simulation and computer-based analytic services, primarily for the Department of Defense. Information Products and Services: Includes design, development and integration of software products and services including job cost accounting and management information systems and other software products including applications for the Internet, as well as wide-area and local-area network and software integration services. In fiscal 1998, the Company reorganized the operations within the Information Products and Services business segment, including a refocusing of certain operations along the lines of other business segments and the discontinuation of certain businesses. Effective as of the beginning of the fiscal third quarter, the Company no longer operates or reports in the Information Products and Services business segment. Business segment financial data, including partial-year results for fiscal 1998 for the Information Products and Services segment prior to it discontinuance, for the three years ended July 31 is as follows:
1996 1997 1998 --------- --------- --------- (IN THOUSANDS) Sales: Power Conversion Products ................................... $ 16,448 $ 27,039 $ 39,312 Industrial Computers and Subsystems ......................... 26,131 34,259 40,864 Technology Programs and Systems ............................. 30,198 31,087 40,466 Information Products and Services ........................... 8,134 9,026 4,666 --------- --------- --------- Consolidated total .................................. $ 80,911 $ 101,411 $ 125,308 ========= ========= ========= Operating profit (loss): Power Conversion Products ................................... $ (752) $ 2,482 $ 4,358 Industrial Computers and Subsystems ......................... 1,078 2,417 3,149 Technology Programs and Systems ............................. 2,131 1,804 (1,383) Information Products and Services ........................... (3,680) (2,886) (488) --------- --------- --------- Total operating profit (loss) ....................... (1,223) 3,817 5,636 Corporate expenses and revenues ............................. (9,709) 434 (5,885) Interest expense ............................................ (329) (173) (214) --------- --------- --------- Income (loss) before income taxes, minority interest and cumulative effect of change in accounting principle ......................................... $ (11,261) $ 4,078 $ (463) ========= ========= ========= Identifiable assets: Power Conversion Products ................................... $ 11,253 $ 12,299 $ 27,690 Industrial Computers and Subsystems ......................... 9,166 12,167 19,180 Technology Programs and Systems ............................. 7,586 8,298 31,531 Information Products and Services ........................... 3,136 5,920 -- Corporate ................................................... 9,583 8,436 26,664 --------- --------- --------- Consolidated total .................................. $ 40,724 $ 47,120 $ 105,065 ========= ========= ========= Depreciation and amortization: Power Conversion Products ................................... $ 763 $ 887 $ 1,182 Industrial Computers and Subsystems ......................... 316 469 667 Technology Programs and Systems ............................. 994 647 1,413 Information Products and Services ........................... 162 258 157 Corporate ................................................... 272 326 326 --------- --------- --------- Consolidated total .................................. $ 2,507 $ 2,587 $ 3,745 ========= ========= ========= Capital expenditures: Power Conversion Products ................................... $ 670 $ 1,768 $ 3,520 Industrial Computers and Subsystems ......................... 529 992 810 Technology Programs and Systems ............................. 240 424 1,581 Information Products and Services ........................... 482 1,231 166 Corporate ................................................... 55 310 949 --------- --------- --------- Consolidated total .................................. $ 1,976 $ 4,725 $ 7,026 ========= ========= =========
F-26 58 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 -- BUSINESS SEGMENTS (CONTINUED) Intersegment sales are insignificant. Operating profit (loss) is sales less cost of sales and operating expenses, excluding interest expense and corporate expenses and revenues. Corporate expenses fiscal 1998 charges for acquired in-process R&D, and in fiscal 1996 include certain restructuring costs and asset write-downs relating to the adoption of FASB Statement No. 121. Identifiable assets by segment include the assets directly identified with those segments. Corporate assets consist primarily of cash and cash equivalents, facilities and land, and, as of July 31, 1997, the telecommunications, centralized computers and networking equipment of the Company, as well as the assets of the Corporate information systems function. Sales under United States government contracts and subcontracts are primarily in the Technology Programs and Systems business segment, and aggregated $32,622,000 and $33,526,000, and $40,332,000 in fiscal 1996, 1997, and 1998, respectively. The portion of such sales to the United States Air Force amounted to 14% and 10% of Company sales fiscal years 1997 and 1998, respectively. A customer of the Industrial Computers and Subsystems business segment represented 12% of sales of the Company in fiscal 1997. International sales amounted to $7,555,000, $12,609,000 and $19,558,000 in fiscal 1996, 1997, and 1998, respectively, principally to countries in Europe and the Pacific Rim. NOTE 12 -- FINANCIAL STATEMENT DETAILS Inventories are classified as follows at July 31:
1997 1998 ------- ------- (IN THOUSANDS) Finished goods......................................... $ 1,793 $ 1,019 Work in process........................................ 882 2,254 Raw materials and purchased parts...................... 6,047 12,550 ------- ------- $ 8,722 $15,823 ======= =======
Property, plant and equipment consist of the following at July 31:
1997 1998 ------- ------- (IN THOUSANDS) Land and land improvements............................. $ 3,470 $ 3,470 Buildings and building improvements.................... 7,581 8,442 Machinery and equipment................................ 25,939 29,946 Office furniture and equipment......................... 7,861 11,109 Leasehold improvements................................. 3,462 5,292 ------- ------- 48,313 58,259 Less allowances for depreciation and amortization........................................ 32,113 36,137 ------- ------- 16,200 22,122 Construction in progress............................... 729 1,154 ------- ------- $16,929 $23,276 ======= =======
Goodwill and other non-current assets consist of the following at July 31:
1997 1998 ------- -------- (IN THOUSANDS) Goodwill and other acquired intangible assets, net of accumulated amortization......................... $ -- $ 5,280 Deposits and other..................................... 667 1,223 ------- -------- $ 667 $ 6,503 ======= ========
F-27 59 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12 -- FINANCIAL STATEMENT DETAILS (CONTINUED) Accounts payable consist of the following at July 31:
1997 1998 ------- ------- (IN THOUSANDS) Accounts payable and accrued expenses.................. $10,516 $18,853 Environmental reserves................................. 1,252 1,152 Customer advances...................................... 1,872 675 ------- ------- $13,640 $20,680 ======= =======
Included in Other-net in fiscal 1996 is the amortization into income over a three-year period of amounts contributed by minority stockholders upon the organization of the Company's PurePulse Technologies, Inc. subsidiary over such stockholders' proportionate share of PurePulse Technologies' equity. These amounts were fully amortized at the end of the third quarter of fiscal 1996, and amounted to $379,000 in that year. Also included in Other-net is interest income of $128,000, $147,000 and $1,545,000 in fiscal 1996, 1997 and 1998, respectively. The increase in interest income in fiscal 1998 is due to the investment of net cash proceeds from the Company's follow-on public stock offering completed in November 1997. Financial instruments which subject the Company to potential concentrations of credit risk consist principally of investments in cash equivalents and accounts receivable. The Company invests its excess cash with major corporate and financial institutions and in United States government backed securities. The Company has established guidelines relative to diversification and maturities to maintain safety and liquidity, and has not experienced any losses on these investments. The Company's accounts receivable result from contracts with the United States government, as well as contract and product sales to non-government customers in various industries. The Company performs ongoing credit evaluations of selected non-government customers and generally requires no collateral. Supplemental disclosure of cash flow information consists of the following for the three years ended July 31:
1996 1997 1998 ------- ------- ------- (IN THOUSANDS) Cash paid (refunded) for: Interest ............................... $ 329 $ 173 $ 214 Income taxes ........................... $ 152 $(831) $ 45 Non-cash activities: Issuance of Common Stock in connection with Deferred compensation agreement $ 645 $ 190 $ --
60 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, State of California, on this 28th day of October, 1998. MAXWELL TECHNOLOGIES, INC. By: /s/ KENNETH F. POTASHNER ------------------------------------ Kenneth F. Potashner Chairman, Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ KENNETH F. POTASHNER Chairman, Chief Executive October 28, 1998 - --------------------------------------- Officer, President and Director Kenneth F. Potashner (Principal Executive Officer) /s/ GARY J. DAVIDSON Vice President-Finance and October 28, 1998 - --------------------------------------- Administration, Treasurer Gary J. Davidson and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ CARLTON EIBL Director October 28, 1998 - --------------------------------------- Carlton Eibl /s/ THOMAS L. HORGAN Director October 28, 1998 - --------------------------------------- Thomas L. Horgan /s/ ALAN C. KOLB Director October 28, 1998 - --------------------------------------- Alan C. Kolb /s/ MARK ROSSI Director October 28, 1998 - --------------------------------------- Mark Rossi /s/ KARL M. SAMUELIAN Director October 28, 1998 - ---------------------------------------- Karl M. Samuelian
II-1 EX-10.6 2 EXHIBIT 10.6 1 EXHIBIT 10.6 1995 STOCK OPTION PLAN (INCLUDING AMENDMENT NO. TWO) The Board of Directors has adopted an amendment to the Maxwell Technologies, Inc. 1995 Stock Option Plan (the "1995 Plan") which authorizes an increase of 490,000 shares in the number of shares of the Company's Common Stock authorized for the granting of options to purchase such shares to key employees of the Company and its subsidiaries, including officers and directors who are also employees. After this amendment, the maximum number of shares authorized under the 1995 Plan for grant of options is 1,290,000. Under the proposed amendment, the maximum number of options to purchase shares of Common Stock that may be granted to any one eligible individual is the total number of shares authorized for grant of options under the Plan. However, the Committee has in the past and plans to continue in the future to spread available options among key employees both at the corporate level and at the Company's operating units. The Board of Directors of the Company believes that the Company's ability to grant stock options to key employees assists the Company in attracting and retaining key employees by affording them an opportunity to acquire a proprietary interest in the Company. In particular, the Company, during fiscal years 1996 and 1997, underwent a significant change in senior management, including a new chief executive officer and several new corporate officers and operating unit presidents, as well as new key employees in positions critical to the commercialization of the Company's products and technologies. Many of these individuals joined the Company from prior employers which were larger and paid greater cash compensation than the Company. The Board believes that the Company's ability to offer equity incentives is crucial to its ability to attract and retain such individuals. On November 13, 1997, the date on which the Board of Directors adopted the proposed amendment, only 60,300 shares remained available for grant under the 1995 Plan. On that date the Board amended the Plan, subject to shareholder approval, to add 490,000 shares authorized for the grant of options. TERMS AND CONDITIONS OF THE PLAN The 1995 Plan authorizes the granting to key employees during the period commencing on October 24, 1995, the date of adoption of the 1995 Plan by the Board of Directors of the Company, and concluding on the tenth anniversary thereof, of stock options to purchase shares of the Company's Common Stock. Prior to the proposed amendment, the maximum number of shares available for options granted under the 1995 Plan was 800,000 shares. The 1995 Plan provides the flexibility for the grant of options intended to qualify as "incentive stock options" under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and options which do not so qualify, referred to as "non-qualified stock options." The 1995 Plan is administered by the Board of Directors of the Company or, at the discretion of the Board, by a Stock Option Committee appointed by the Board (the "Committee"). The Board of Directors of the Company has delegated the authority to administer the 1995 Plan to such a Committee. Subject to the provisions of the 1995 Plan, the Committee has the authority to determine the employees to whom and the times at which options are granted, the price and terms of and the number of shares covered by each option, and whether it is intended to be an incentive stock option or a non-qualified stock option. 2 The number of shares subject to incentive stock options which may become exercisable by any one individual for any calendar year is limited to a dollar value of $100,000 (measured by the fair market value of the shares on the date of grant). Any options becoming exercisable in excess of such limit in any calendar year will be non-qualified stock options. The purchase price of shares with respect to which an option is granted under the 1995 Plan and the terms covering payment of such purchase price are determined by the Committee in its sole discretion, but such price may not be less than 100% of the fair market value of the shares on the date the option is granted, as such fair market value is determined in good faith. In the event, however, that an incentive stock option is granted to an employee who, at the time the option is granted, owns stock representing more than ten percent of the total combined voting power of all classes of stock of the Company or any subsidiary, the purchase price of shares with respect to which such option is granted must be at least 110% of the fair market value of the shares on the date of grant. Options granted under the 1995 Plan are exercisable in such increments and at such times as the Committee shall specify, provided that no incentive stock option may be exercised after the expiration of ten years from the date of grant, or five years from the date of grant with respect to options granted to an employee who owns more than 10% of the outstanding shares of the Company's stock. No non-qualified stock option may be exercised more than eleven years after the date of grant. Shares covered by the unexercised portion of any terminated or expired option may again be the subject of further options under the 1995 Plan. Upon any exercise of an option granted under the 1995 Plan, the purchase price of the shares purchased upon such exercise shall be paid in full (i) in cash, (ii) by delivery to the Company of shares of its Common Stock having a fair market value equal to the purchase price or (iii) by a combination of cash and stock. The fair market value of shares of the Company's Common Stock delivered in full or partial payment of the exercise price of an option will be determined by the Committee as of the date of exercise in the same manner by which the fair market value of shares of the Company's Common Stock is determined on the date of grant of an option. The Company will receive no consideration upon the grant of any option under the 1995 Plan. Cash proceeds received by the Company from the sale of Common Stock pursuant to the exercise of options granted under the 1995 Plan will constitute general funds of the Company which may be used for general corporate purposes. Under the 1995 Plan, if an optionee's employment with the Company is terminated for any reason, the number of shares purchasable under any option granted thereunder held by such optionee is limited to the number of shares which are purchasable by him at the date of such termination. If termination of employment occurs for any reason other than such optionee's death, the option will expire unless exercised by him within sixty days after the date of such termination. If termination of employment occurs by reason of death, the option will expire unless exercised by the optionee's successor within one year after the date of death. Options granted under the 1995 Plan are exercisable only by the optionee during his lifetime and are not transferable except by will or the laws of descent and distribution. In the event of any change in the Common Stock by reason of recapitalization, reclassification, stock split, combination of shares, stock dividend, or like capital adjustment, 3 the 1995 Plan provides that the Board of Directors shall make appropriate adjustments in the aggregate number, class and kind of shares available for option grants under the 1995 Plan or subject to outstanding options thereunder and also make appropriate adjustments in the per share exercise price of outstanding options. In the event of the merger, consolidation or other reorganization of the Company, or in the event of any dissolution or liquidation of the Company, the 1995 Plan provides that the Board of Directors shall elect either to (i) appropriately adjust the number, class, kind and exercise price of shares subject to all outstanding options thereunder and shares which may become subject to options granted thereafter, or (ii) terminate the 1995 Plan and any options theretofore granted thereunder, subject to the right of optionees under the 1995 Plan to exercise, in whole or in part (including the portions of options which may not otherwise have been exercisable due to any insufficient passage of time), their options during a period of not less than thirty days following notification by the Company of the event causing such termination. The 1995 Plan may be amended, suspended or terminated by the Board of Directors of the Company at any time, except that no amendment, suspension or termination may affect, without his consent, any right or obligation of an optionee under an option theretofore granted to him, and except that no amendment made without shareholder approval shall (i) increase the maximum number of shares for which options may be granted (except pursuant to adjustments of the types described above), (ii) change the provisions relating to the expiration dates of options, (iii) change the provisions relating to the establishment of the option price (except pursuant to adjustments of the types described above), or (iv) change the expiration date of Plan. No options may be granted under the 1995 Plan after its termination on October 24, 2005. FEDERAL INCOME TAX CONSEQUENCES Incentive Stock Options. No federal income tax consequences result from the grant of an incentive stock option, and generally the exercise of an incentive stock option will not result in the recognition of income by an optionee. If an optionee satisfies certain holding period requirements for shares acquired upon the exercise of an incentive stock option, the full amount of his gain upon the sale of such shares (measured by the difference between the amount of his proceeds of sale less the exercise price) will normally be treated as long-term capital gain. The Company will not be entitled to any deduction under such circumstances. Non-Qualified Options. No federal income tax consequences result from the grant of a non-qualified stock option. Generally, an optionee will recognize ordinary income upon exercise of a non-qualified stock option in an amount equal to the difference between the fair market value on the date of exercise of the shares acquired upon exercise of the option and the aggregate exercise price for such shares. The Company will be entitled to an income tax deduction equal to the amount of ordinary income recognized by an optionee as a result of the exercise of a non-qualified stock option. The preceding discussion under the heading "Federal Income Tax Consequences" is based on federal tax laws and regulations as in effect on the date of this Proxy Statement and does not purport to be a complete description of the federal income tax aspects of the 1995 Plan. EX-10.12 3 EXHIBIT 10.12 1 EXHIBIT 10.12 MAXWELL TECHNOLOGIES, INC OFFICER AND DIRECTOR STOCK REPURCHASE POLICY PURPOSE: To facilitate the Company's ability to buy back its shares at favorable prices and without commissions and to facilitate periodic stock sales by officers and directors. CONDITIONS: The trading window under the Company's stock trading policy must be open. Repurchases will be at the discretion of the Company. There will be no advance commitment by the Company on any given repurchase date to buy back shares, and if the Company does so repurchase, there will be no advance commitment as to the number of shares which may be repurchased. Repurchases will not be made from any officer or director if such repurchase will give rise to an accounting charge for the Company. This policy may be amended or terminated by the Board of Directors at any time. TIMING OF REPURCHASE: Repurchases may be made at the close of business on Thursday of each week during an open trading window. PRICE: Shares will be repurchased at a price of $.25 per share below the closing trading price for shares on the repurchase day. NUMBER OF SHARES REPURCHASED: The aggregate number of shares bought back on any given repurchase date will be determined by the members of the Compensation Committee of the Board. Officers and directors may tender no less than 1000 shares on any given repurchase date; the exact number of shares repurchased from each such officer or director tendering shares shall be determined by management. No officer or director shall be permitted to sell to the Company under this policy a number of shares during the time period of this policy, in excess of fifty (50%) percent of (i) the shares owned (plus vested options) on the commencement of this policy, plus (ii) additional shares acquired (and additional options vested) during the period in which this policy is in effect. EX-10.17 4 EXHIBIT 10.17 1 EXHIBIT 10.17 MAXWELL TECHNOLOGIES, INC. EXECUTIVE DEFERRED COMPENSATION PLAN The Board of Directors of Maxwell Technologies, Inc., a corporation, ("Company") has adopted this Executive Deferred Compensation Plan ("Plan") effective September 1, 1998. 1. PURPOSE The primary purpose of the Plan is to provide deferred compensation to a select group of management and highly compensated employees through an unfunded "top hat" arrangement exempt from the fiduciary, funding, vesting, and plan termination insurance provisions of Title I and Title IV of the Employee Retirement Income Security Act ("ERISA"). More specifically, the Company has adopted this Plan to provide Employees with the opportunity to defer Compensation and to receive the Company Contributions they are unable to defer or receive under the Company's tax qualified cash or deferred compensation plan ("Qualified Plan"), because of limits imposed by Sections 401(a)(4), 401(k), 401(m) and 402(g) of the Internal Revenue Code ("Code") on plans to which those sections of the Code apply. 2. DEFINITIONS AND CAPITALIZED TERMS The capitalized terms, set forth in alphabetical order defined below, are used throughout the Plan. (a) "Account" refers to the bookkeeping entries established and maintained by the Company or the Committee for the purpose of recording (i) the amounts of Compensation deferred by an Employee and Company Contributions made by the Company under this Plan, (ii) any interest earnings or losses with respect to those amounts, and (iii) any distributions to an Employee or Beneficiary. (b) "Affiliate" refers to a company or companies which Maxwell Technologies, Inc. owns and or controls at least 50% (Fifty Percent) of the voting stock. (c) "Beneficiary" refers to the person or entity selected to receive any portion of an Employee's Account that has not been distributed from the Plan at the time of the Employee's death. Such designation shall be on a form provided or approved by the Plan Administrator. In the event a married Employee designates someone other than his or her spouse as sole, primary Beneficiary, such initial designation or subsequent change shall be invalid unless the spouse consents in a writing which names the designated Beneficiary. If an Employee fails to designate a Beneficiary or no designated Beneficiary survives the Employee, the Plan Administrator shall direct payment of benefits to the following person or persons in the order given below: the Employee's: 1 2 (i) spouse, or (ii) estate of the Participant. (d) "Board" or "Board of Directors" refers to the Board of Directors of Maxwell Technologies, Inc. (e) "Change in Control" means the occurrence of any one of the following: (i) any transaction or series of transactions (as a result of a tender offer, merger, consolidation or otherwise) that results in any person, entity or group acting in concert, acquiring "beneficial ownership" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of such percentage of the aggregate voting power of all classes of common equity stock of the Company as shall exceed 50% of such aggregate voting power, or (ii) a merger or consolidation of the Company other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the voting power represented by the voting securities of the Company or such entity outstanding immediately after such merger or consolidation, or (iii) the shareholders approve a plan of complete liquidation of the Company or an agreement for the sale of disposition by the Company of all, or substantially all, of the Company's assets (other than in connection with a sale or disposition to subsidiaries of the Company or in connection with a reorganization or restructuring of the Company), or (iv) there occurs a change in the composition of the Board of Directors of the Company as a result of which fewer than a majority of the directors are Incumbent Directors (as hereinafter defined). "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of the date hereof or (B)are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors casting votes at the time of such election or nomination. (f) "Code" refers to the Internal Revenue Code of 1986, as amended from time to time. (g) "Committee" or "Advisory Committee" refers to the same individuals who shall from time to time comprise the Advisory Committee of the Maxwell Technologies, Inc. 401(k) Savings Plan and who shall also act on behalf of the Company in discharging the Company's duties as Plan Administrator under this Plan. Since this Plan is designed to be a "top hat" arrangement, the extent permitted by ERISA, the Committee shall not be subject to the 2 3 duties imposed by the provisions of Part 4 of Title I of ERISA with respect to this Plan. (h) "Company," "Corporation" or "Employer" refers to Maxwell Technologies, Inc., a Delaware corporation and its affiliates. (i) "Company Contributions" refers to amounts described in Section 5.6(a) below. (j) "Compensation" refers to an Employee's gross salary, including bonuses payable by the Company after an Employee first becomes eligible to participate in the Plan and during the period through which such participation continues. (k) "Disabled" or "Disability" refers to a physical or mental condition of an Employee which (i) occurs after an Employee first defers Compensation under this Plan, (ii) results from an injury, disease or disorder, and (iii) renders the Employee totally and permanently incapable of continuing in his or her customary employment with the Company. In determining whether an Employee is disabled, the Committee may rely upon the conclusions of any insurance carrier that has issued a policy of disability income insurance covering the Employee or upon the conclusions of any physician acceptable to the Committee. An Employee automatically will satisfy the requirements under this Plan, with respect to submission of evidence of disability, throughout the period that he or she remains qualified for Social Security disability benefits. Any Employee who believes that he or she is entitled to any advantage, benefit, or other consideration under the Plan as a result of being Disabled shall apply to the Committee for such consideration and shall provide any evidence of Disability which the Committee in its discretion may request in a manner consistent with the Americans with Disabilities Act of 1990 and other relevant laws. All determinations made by the Committee with respect to the existence, extent, or nature of any Disability shall be binding on the Employee. (l) "Effective Date" refers to September 1, 1998 with respect to Compensation first earned, determined or payable after that date. (m) "Employee" refers to any employee, within the meaning of Section 3121(d) of the Code, who is among a select group of highly compensated employees or members of management and is selected by the Committee to participate in this Plan. The Committee shall determine whether an employee is to be considered highly compensated. Where the Plan Administrator considers appropriate in applying the provisions of this Plan, the term Employee shall include only persons who are Participants or Inactive Participants under Plan. (n) "ERISA" refers to the Employee Retirement Income Security Act of 1974, as amended from time to time. 3 4 (o) "Hardship" refers to an Employee's immediate and heavy financial need caused by an unforeseeable emergency, as described in Treasury Regulations Section 1.457-2(h)(4) and (5). In general, but without limitation, the Plan Administrator may approve a Hardship withdrawal from an Employee's Account if the reduction does not exceed the amount needed to pay for the following unreimbursed expenses: (i) medical expenses defined in Code Section 213(d) and incurred (or to be incurred) during the calendar year by the Employee, or his or her spouse or dependents (as described in Code Section 152) as a result of a sudden or unexpected illness or accident; (ii) loss of a participant's property as a result of a casualty or other extraordinary, unforeseeable circumstances attributable to forces beyond the participant's control; and (iii) other costs recognized by the Plan Administrator to pose an immediate and heavy financial need on the Employee as a result of an unforeseeable emergency or other factors beyond an Employee's control. (p) "Inactive Participant" refers to an Employee who deferred Compensation under the Plan during a previous Plan Year but who does not defer any Compensation payable during the current Plan Year. (q) "Normal Retirement Age" refers to fifty (50) years of age. (r) "Participant" refers to an eligible Employee who elects to defer under the Plan part or all of his or her Compensation payable during the current Plan Year. (s) "Plan Administrator" refers to the Company. (t) "Plan Year" refers to the period of 12 consecutive months commencing on the first day of January of each year. The initial plan year shall commence on the Effective Date of the Plan and end on the final day of December. (u) "Qualified Plan" refers to the Company's tax qualified individual account cash or deferred compensation plan subject to the limits imposed by Code Sections 401(a)(4), 401(k), 401(m), 402(g) and 415. (v) "Service" and "Years of Service" have the meanings specified in Code Section 411(a)(4) and (5)(A) and the regulations thereunder. (w) "Termination of Employment" refers to an Employee's (i) separation from service with the Company before normal retirement age, or (ii) separation from service on or after normal retirement age with the company for cause including, but not limited to, job performance issues. (x) "Trust" refers to a rabbi trust intended to satisfy the requirements of Revenue Procedures 92-64 and 92-65 of which a financial institution selected by the Company serves as 4 5 trustee. The term "Trustee" shall include such financial institution and any successor Trustee under the Trust instrument. 3. ELIGIBILITY The Committee may, from time to time, designate by name those Employees of the Company who are eligible to participate in the Plan for one or more Plan Years and the date upon which each such Employee's participation may commence. All designated Employees shall be notified by the Board or the Committee of their eligibility to participate. The committee may, at its sole discretion, notify a plan participant that he or she is no longer eligible to participate in the Plan for one or more Plan years. An Employee shall not be eligible to participate in the Plan during the Plan Year immediately following the Plan Year in which the Employee takes a Hardship withdrawal from the Plan. The effective date of any such ineligibility under the preceding two sentences shall be the first day of the Plan Year coinciding with or next following the date on which the Board or Committee provides the Employee with written notice of revocation of eligibility. An Employee's eligibility to participate in the Plan does not confer upon the Employee any right to any award, bonus or other remuneration of any kind. 4. DEFERRAL OF COMPENSATION 4.1 Election to Defer An Employee who is eligible to participate in the Plan may elect to defer the receipt of Compensation by completing an Election of Deferral in the form set forth in Exhibit A, Part 1, Page 1 or otherwise approved by the Committee. Pursuant to the Election of Deferral form, an eligible Employee may elect to defer any whole percentage or fixed dollar amount of his or her Compensation. An Employee who elects to participate in the Plan must defer at least one percent (1%) but no more than one hundred percent (100%) of total Compensation for each Plan Year in which he or she remains eligible to participate. Such election shall be for the deferral of Compensation for payment to the Employee commencing at the earlier of the Employee's Termination of Employment, Disability, Death, Retirement, or if the Employee elects, the earlier date specified in Exhibit A, Part 2. Such election for the deferral of Compensation to the earlier specified date shall be irrevocable as to the amounts deferred while such election is in place and may be modified only prospectively under a subsequent annual election as permitted in Section 4.4. Amounts of Compensation deferred to such an earlier specified date shall be credited separately from all other amounts deferred hereunder and deemed investment gains or losses or interest thereon shall also be credited separately. 4.2 Date of Deferral 5 6 An eligible Employee must submit his or her deferral election form to the Committee no later than the last day of the deferral election period. The last day of the deferral election period shall be (a) the last day preceding the calendar year in which the eligible Employee will render the services for which he or she will receive any part of the Compensation payable to the Employee during that year or (b) in the first year in which the Company implements the Plan or in which an Employee first becomes eligible to participate, the Employee may make his or her election within the first 30 days after the later of (i) the date the Plan becomes effective or (ii) the date the Employee becomes eligible to participate. 4.3 Multiple Elections An election to defer Compensation shall be effective on the date an eligible Employee delivers a completed deferral election form to the Committee; provided, however, that, if the eligible Employee delivers another properly completed Election of Deferral form to the Committee prior to the close of the deferral election period described in Section 4.2, the deferral election on the form bearing the latest date shall control. After the last day of the election period, the controlling election made prior to the close of the period shall be irrevocable. 4.4 Annual Elections In order to defer any portion of Compensation earned in any calendar year, an eligible Employee must submit at least one completed Election of Deferral form during the one-month period immediately preceding the start of that calendar year, except as permitted in 4.2(b). If an Employee fails to make such a submission, the Employee will be deemed to have elected to continue deferring the same percentage of Compensation that the Employee deferred in the preceding calendar year. The employee also will be considered to have selected the same method of distribution chosen the preceding calendar year. 4.5 No Hardship Adjustments After an annual election has taken effect for any Plan Year, a Participant may not increase or decrease the percentage or amount of Compensation to be deferred during that Plan Year; except that an Employee has the option to cease all deferrals under the Plan during the Plan Year if such cessation would relieve the Employee of one or more Hardships without any withdrawals under this Plan. 5. DEFERRED COMPENSATION ACCOUNTS 5.1 Maintenance of Accounts The Plan Administrator shall maintain one or more Accounts with respect to any Compensation deferred by an eligible 6 7 Employee under Section 4 above. The Plan Administrator shall credit the Account with the full amount of Compensation deferred in any monthly period. If the Compensation deferred is subject to federal or state employment taxes (e.g. taxes under the Federal Insurance Contributions Act or Federal Unemployment Tax Act), said taxes shall be withheld and deducted from a portion of the Employee's Compensation not deferred under this Plan. A Participant or Inactive Participant shall be fully vested at all times in amounts deferred under Section 4 above, as adjusted for any earnings, losses, interest accruals, administrative expenses or distributions as described below. 5.2 Investment Elections In accordance with rules, procedures and options established by the Committee, a Participant shall have the right to suggest the investment of his or her Account, except for any period of time during which the Company limits Account earnings to interest accruals under Section 5.4 below. Although the Company shall give due consideration to Participant's investment suggestions and desires, the Company may invest assets which are deemed allocable to the Participant's Accounts in any manner, in any amount and for any period of time which the Company in its sole discretion may select; but the Company will to the extent reasonably practicable credit or charge the Participant's Accounts with the same earnings, gains or losses that the Participant would have incurred if the Company had invested such assets in the specific investments, in the specific amounts and for the specific periods suggested by the Participant. In accordance with procedures established by the Plan Administrator, a Participant may change his or her investment suggestions effective as of the first day of any calendar quarter. Such changes may be made in a writing delivered to the Company or the Committee no fewer than 15 days preceding the effective date of the change. If the Participant fails to provide any investment suggestions, the Participant's Account will be credited with interest deemed earned on the Participant's Account in the manner provided for in Section 5.4. If this Plan is determined to be subject to the fiduciary provisions of Part 4 of Title I of ERISA, this Plan shall be treated as a Plan described in Section 404(c) of ERISA and Title 29 of the Code of Federal Regulations Section 2550.404c-1, in which Plan fiduciaries may be relieved of liability for any losses which are the direct and necessary result of investment instructions given by a Participant or Beneficiary. 5.3 Investment Earnings or Losses Except for any period of time during which the Company limits Account earnings to interest accruals under Section 5.4 below, any amounts credited to the Account of a Participant or Inactive Participant as a result of the deferral of all or part of his or her Compensation may increase or decrease as a result of the Company's deemed investment of such amounts during the Plan Year, as described in Section 5.2 above. A ratable share of Plan investment earnings or losses under this Section 5.3 shall be credited to the Account of a Participant or Inactive Participant, 7 8 as determined in good faith by the Committee. At the sole discretion of the Committee, for any Plan Year, the Committee may allocate to the Participant's Account either (i) the full amount of the Participant's share of deemed Plan investment earnings or losses or (ii) the full amount of such share adjusted for any federal, state or local income or employment tax consequences attributable to such earnings or losses. If the full amount of such investment earnings or losses are allocated to a Participant's Account, any federal, state or local income or employment tax consequences attributable to such earnings or losses under this Section 5.3 shall be borne by or inure to the benefit of the Company. The Participant and his or her Beneficiary understand and agree that they assume all risk in connection with any decrease in the value of the Compensation deferred under the Plan and deemed invested in accordance with these Sections 5.2 and 5.3. 5.4 Interest Accruals Prior to the start of any Plan Year, the Company may inform Participants and Inactive Participants in writing that, during the Plan Year, the balance reflected in the Employee's account not be deemed invested as described in Sections 5.2 and 5.3 above. Rather, any amounts credited to the Account of a Participant or Inactive Participant as a result of the deferral of all or part of his or her Compensation and Matching Contributions shall be credited as if it accrued interest compounded annually, as consideration for the use or forbearance of money. The deemed accrual of interest begins and the compounding of interest occurs on the first day of each Plan Year or, if later, the date on which an eligible Employee first defers Compensation under the Plan. The rate at which interest is deemed to accrue shall equal the prime rate, plus one percent, offered to borrowers by a commercial bank in California on the last day of the preceding Plan Year. The Committee shall select the commercial bank before the first day of the Plan Year during which the accrual occurs. At the sole discretion of the Company, for any Plan Year (i) the full amount of such accrued deemed interest may be allocated to a Participant's Account or (ii) adjusted for any federal, state or local income or employment tax consequences attributable to such deemed interest, prior to allocating such deemed interest to a Participant's Account. If the full amount of such deemed interest accruals are allocated to a Participant's Account, any federal, state or local income or employment tax consequences attributable to deemed interest accruals under this Section 5.4 shall be borne by or inure to the benefit of the Company. 5.5 Investment of Unpaid Balances The unpaid balance of all Accounts payable under the Plan shall continue to be credited with the deemed investment earnings or losses described in Sections 5.2 and 5.3 above or, at the election of the Company or Committee, continued deemed accruals of interest as described in Section 5.4 above. 5.6 Company Contributions 8 9 a. Company Discretionary Contributions Apart from Compensation deferrals, the Company shall retain the right to make discretionary contributions for any Participant under this Plan. b. Adjustments to Company Contributions Once credited to an Employee's Accounts under this Plan, the amounts described in Section 5.6 shall accrue the interest or investment return described in Section 5.2, 5.3, 5.4 and 5.5 above, and shall be paid in accord with Section 7 below. c. Vesting in Company Contributions Subject to the provisions of Section 5.6(d) below, an Employee shall vest in amounts allocated to his or her Account as described in Section 5.6 above. The below vesting percentage shall apply to each Company Contribution and shall be initiated beginning with the date of full-time employment with the Company.
Years of Service Vested Percentage ---------------- ----------------- 1 but fewer than 2 20% 2 but fewer than 3 40% 3 but fewer than 4 60% 4 but fewer than 5 80% 5 or more 100%
Additionally, except as provided in Section 5.6(d) below, an Employee shall be 100% vested if, prior to his or her Termination of Employment, the Employee attains Normal Retirement Age, dies, becomes Disabled, or a Change in Control occurs. d. Forfeitures for Misconduct Without regard to the number of Years of Service an Employee has completed with the Company and without regard to an Employee's age, Disability or death, if an Employee separates from service with the Company as a result of the Employee's gross misconduct, within the meaning of Part 6 of Title I of ERISA, regarding group health continuation coverage, or if the Employee engages in unlawful business competition with the Company, the Employee shall forfeit all amounts allocated to his or her Accounts under Section 5.6(a) and 5.6(c) above. Such forfeitures shall be retained by the Company. 5.7 Company's General Assets Participant understands and agrees that all Compensation deferred under the Plan and all amounts credited to a 9 10 Participant's Account under the Plan (a) are the general assets of the Company, (b) may be used in the operation of the Company's business or in any other manner permitted by law, and (c) remain subject to the claims of the Company's general unsecured creditors. Participant agrees, on behalf of Participant and his or her Beneficiary, that (i) title to any amounts deferred under the Plan or credited to a Participant's Account remains in the Company and (ii) neither Participant nor his or her Beneficiary has any property interests whatsoever in said amounts, except as general creditors of the Company. 6. EFFECT ON EMPLOYEE BENEFITS Amounts deferred under this Plan or distributed pursuant to the terms of this Plan are not taken into account in the calculation of an Employee's benefits under any employee pension or welfare benefit program or under any other compensation practice maintained by the Company, except to the extent provided in such program or practice. 7. PAYMENT OF DEFERRED COMPENSATION ACCOUNTS 7.1 Income Tax Obligations If an Employee is assessed federal, state or local income taxes by reason of, and computed on the basis of, his or her undistributed deferred Compensation or undistributed interest accrued on his or her Account, the Employee shall notify the Committee in writing of such assessment and there shall be distributed from the Employee's Account deferred Compensation or accrued interest in an amount equal to such tax assessment, together with any interest due and penalties assessed thereupon within 30 days following such notice; provided however, that if the Committee determines that such assessment is improper, it may request that the Employee contest the assessment, at the expense of the Company (which expense shall include all costs of appeal and litigation, including legal and accounting fees, and any additional interest assessed on the deficiency from and after the date of the Employee's notice to the Committee); and during the period such contest is pending, the sums otherwise distributable pursuant to this Section 7.1 shall not be distributed. 7.2 Hardship Withdrawals If at any time following the first anniversary of initial participation in the Plan, an Employee incurs a Hardship, as described in Section 2(n) above, the Employee may, by written notice to the Committee, request that all or any specified part of his or her Account but not less than $1,000 per withdrawal be paid to the Employee; and such distribution, if approved by the Company, shall be made in a lump sum within 30 days following the Company's receipt of such notice. The Committee shall determine the amount, if any, reasonably necessary to 10 11 satisfy such Hardship and shall not distribute an amount to the Employee greater than that necessary to satisfy such Hardship. The Company shall have exclusive authority to determine whether to make a Hardship distribution from an Employee's Account and the amount thereof but shall not unreasonably deny a request for such a distribution. The Company's decision shall be final and binding on all parties. Any Hardship withdrawals from an Account shall reduce the amount available for subsequent distributions from the Account, as the Company in good faith may determine. 7.3 Termination of Employment Upon Termination of employment of a Participant or Inactive Participant, the Committee shall distribute his or her Account under the Plan in a lump sum. The payment from the Account shall occur or commence within 90 days following the date in which the termination of employment occurs. 7.4 Disability Upon the Disability of a Participant or Inactive Participant prior to termination of employment, the Committee shall distribute his or her Account under the Plan, as elected by the Participant or Inactive Participant in the form set forth in Exhibit A, Part 1, Page 2, in a lump sum or in 60 or more (but not more than 180) substantially equal monthly installments. In the absence of such election, the Participant or Inactive Participant shall be distributed his or her Account under the plan in 180 substantially equal monthly installments. The payment from the Account shall occur or commence on the first day of the second month following the date in which the Disability results in the Employee's termination of employment. Prior to the death of the Participant or Inactive Participant, during any period in which a Participant or Inactive Participant remains Disabled, he or she (or his or her legal representative) may request Hardship withdrawals from any undistributed portion of his or her Account. Any such Hardship withdrawals shall reduce the amount available for subsequent distributions from the Account, as the Company in good faith may determine. 7.5 Retirement Upon the Participant or Inactive Participant reaching Norma Retirement Age, and terminating employment, the Committee shall distribute his or her Account under the Plan, as elected by the Participant or Inactive Participant in the form set forth in Exhibit A, Part 1, Page 2, in a lump sum or in 60 or more (but not more than 180) substantially equal monthly installments. In the absence of such election, the Participant or Inactive Participant shall be distributed his or her Account under the plan in 180 substantially equal monthly installments such that the Account depletes. The initial payment from the Account shall occur or commence on the first day of the second month following the date 11 12 in which the Retirement results in the Employee's termination of employment. 7.6 Death Prior to Commencement of Distributions Upon the death of a Participant or Inactive Participant prior to the commencement of any distribution under Sections 7.4 or 7.5 above, the greater of (i) the vested Account balance of such Participant or Inactive Participant, or (ii) the stated Survivor Benefit, as determined by the committee, shall be distributed to his or her Beneficiary, in a lump sum. The payment from the Account shall occur or commence on the first day of the month following the date in which the death of the Participant or Inactive Participant occurs. During the period between the death of the Participant or Inactive Participant and the commencement of distributions to the Beneficiary, the Beneficiary may request Hardship withdrawals from any undistributed portion of his or her Account. Any such Hardship withdrawals shall reduce the amount available for subsequent distributions from the Plan, as the Company in good faith may determine. 7.7 Death After Commencement of Distributions Upon the death of a Participant or Inactive Participant after the commencement of any distribution in accordance with Sections 7.4 or 7.5 above, the balance remaining in the Account of such Participant or Inactive Participant shall be distributed to his or her Beneficiary in accordance with the terms elected by the Participant or Inactive Participant under Sections 7.4 or 7.5. 7.8 Payments of Deferrals Elected to a Specified Date Unless payments shall have commenced to be paid to the Participant or Inactive Participant pursuant to Section 7.3, 7.4, 7.5, 7.6 or 7.7, in the event that the Participant or Inactive Participant elected to defer Compensation to a specified date as provided in Exhibit A, Part 3 and pursuant to Section 4.1, the Committee shall distribute in a lump sum all amounts of his or her Account relating to the amounts covered by such election to defer to the specified date, including any deemed investment gains, earnings or interest and less any deemed investment losses thereon. The payment to the Participant or Inactive Participant shall commence within 90 days following the date to which he or she elected to have his or her Compensation deferred. 7.9 Withholding and Other Tax Consequences From any payments made under this Plan, the Company shall withhold any taxes or other amounts which federal, state or local law requires the Company to deduct, withhold and deposit. The Company's determination of the type and amount of taxes to be 12 13 withheld from any payment shall be final and binding on all persons having or claiming to have an interest in this Plan or in any Account under this Plan. 8. FUNDING All amounts deferred under this Plan remain or become general assets of the Company. All payments under this Plan shall come from the general assets of the Company. The amounts credited to an Employee's Account are not secured by any specific assets of the Company. This Plan shall not be construed to require the Company to fund any of the benefits provided hereunder or to establish a trust or purchase an insurance policy or other product for such purpose. The Company may make such arrangements as it desires to provide for the payment of benefits. Neither an Employee, Participant or Inactive Participant nor his or her Beneficiary or estate shall have any rights against the Company with respect to any portion of any Account under the Plan except as general unsecured creditors. No Employee, Participant, Inactive Participant, Beneficiary or estate has an interest in any Account under this Plan until the Employee, Participant, Inactive Participant, Beneficiary or estate actually receives payment from the Account. 9. SUSPENSION OF PAYMENTS UPON COMPANY'S INSOLVENCY At all times during the continuance of any trust established in connection with this Plan ("Trust"), if the Plan Administrator determines that the Company's financial condition is likely to result in the suspension of benefit payments from the Trust, the Plan Administrator shall advise Participants, Inactive Participants and Beneficiaries that payments from the Trust shall be suspended during the Company's insolvency. If the Trustee subsequently resumes such payments, the Administrator shall advise Participants, Inactive Participants and Beneficiaries that, if Trust assets are sufficient, the first payment following such discontinuance shall include the aggregate amount of all payments due to Participants, Inactive Participants and Beneficiaries under the terms of the Plan for the period of such discontinuance, less the aggregate amount of any payments made directly by the Company during any period of discontinuance. No insufficiency of Trust assets shall relieve the Company of its obligation to make payments when due under the Plan. 10. NON-ALIENATION OF BENEFITS The interest of any Employee, Participant, Inactive Participant or Beneficiary shall not be subject to sale, assignment, transfer, conveyance, hypothecation, encumbrance, garnishment, attachment, anticipation, pledge, alienation or other disposition prior to actual distribution from the Plan; and any attempt to effect such disposition shall be void. No portion of 13 14 any Account shall, prior to receipt thereof, be subject to the debts, contracts, liabilities, or engagements of any Employee, Participant, Inactive Participant or Beneficiary. Nothing in the preceding sentence shall prohibit the Company from recovering from an Employee, Participant, Inactive Participant or Beneficiary any payments to which he or she was not entitled under the Plan. 11. LIMITATION OF RIGHTS Nothing in this Plan document or in any related instrument shall cause this Plan to be treated as a contract of employment within the meaning of the Federal Arbitration Act, 9 U.S.C. 1 et seq., or shall be construed as evidence of any agreement or understanding, express or implied, that the Company (a) will employ any person in any particular position or level of Compensation, (b) will offer any person initial or continued participation or awards in any commission, bonus or other compensation program, or (c) will continue any person's employment with the Company. Any participant's employment by the company continues to be at will. 12. BEST PAYMENTS (a) If the gross amount of any payment or benefit under this Plan, either separately or in combination with any other payment or benefit payable by the Company or any of its affiliates or pursuant to a plan of the Company or an affiliate, would constitute a parachute payment within the meaning of the Code Section 280G, then the total payments and benefits accrued and payable under this Plan shall not exceed the amount necessary to maximize the amount receivable by the Employee after payment of all employment, income and excise taxes imposed on the Employee with respect to such payments or benefits. (b) The Employee may elect by written notice which items of compensation, if any, shall be reduced so as to meet the requirements of Section 12(a) above. If there is a dispute between the Company and the Employee regarding (i) the extent, if any, to which any payments or benefits to the Employee are parachute payments or excess parachute payments, under Code Section 280G, or (ii) the base amount of such Employee's Compensation under Code Section 280G, or (iii) the status of such Employee as a disqualified individual, under Code Section 280G, such dispute shall be resolved in the same manner as a claim for benefits under this Plan. (c) Within 60 days of a Change in Control or, if later, within 30 days of the Employee's receiving notice of termination of employment from the Company or the Company's receiving notice of termination of employment from the Employee, either the Employee or the Company may request (i) a determination of the amount of any parachute payment, excess parachute payment, or base amount of compensation, or (ii) a determination of the reduction necessary to 14 15 maximize the net receipts of the Employee as described in Section 12(a) above. Any fees, costs or expenses incurred by the Employee in connection with such determinations shall be paid equally by the Employee and the Company. 13. NOTICE UNDER WARN (a) Any amounts paid (i) to any Employee under the Worker Adjustment and Retraining Notification Act of 1988 ("WARN") or under any other laws regarding termination of employment, or (ii) to any third party for the benefit of said Employee or for the benefit of his or her dependents shall not be offset or reduced by any amounts paid or determined to be payable by the Company to said Employee or to his or her dependents under this Plan. (b) Subsequent to a Change in Control, the Company may amend, modify or terminate the Plan; provided, however, that no such amendment, modification or termination of the Plan will affect the right of a Participant or Beneficiary with respect to his or her Account as of the day prior to the date of the amendment, modification or termination. Such Account will continue to be subject to and governed by the terms of the Plan as set forth in the Plan document on the day prior to the date of the amendment, modification or termination. In addition, subsequent to a Change in Control, no change may be made to: (i) the investment options that were available to Participants and Beneficiaries under Section 5.2 of the Plan on the day prior to the Change in Control or (ii) the method of allocation selected by the Company pursuant to the third sentence of Section 5.3 of the Plan, as of the day prior to the Change in Control. Notwithstanding the foregoing, subsequent to a Change in Control, the Company may distribute the entire value of all Accounts in lump sum payments to all Participants and Beneficiaries. 14. AMENDMENT OR TERMINATION OF PLAN (a) Prior to a Change in Control, the Committee may modify, suspend or terminate the Plan in any manner that does not (i) reduce any benefits accrued under this Plan or (ii) constitute a forfeiture of any benefits vested under this Plan. (b) In modifying, suspending or terminating the Plan, or in taking any other action with respect to the implementation, operation, maintenance or administration of the Plan, the Board of Directors may act by a resolution of the full Board or by a resolution of the Compensation Committee of the Board. (c) This Plan shall terminate immediately if a court of competent jurisdiction determines that this Plan is not exempt from the fiduciary provisions of Part 4 of Title I of ERISA. The Plan shall terminate as of the date it ceased to be exempt. 15 16 (d) Upon termination of the Plan, the Plan Administrator shall distribute all Accounts, as determined by the Plan Administrator (i) in a lump sum to all Participants or (ii) in accordance with the method designated by Participants at the time of their deferrals. 15. ADMINISTRATIVE PROCEDURES AND DISPUTE RESOLUTION 15.1 Plan Administrator The Plan Administrator shall be the Company. The Advisory Committee, as defined in Section 2(f), shall, to the extent determined by the Board of Directors of the Company, administer the Plan and discharge the duties of the Company in connection therewith. No Advisory Committee member who is a full-time officer or employee of the Company shall receive compensation with respect to his or her service on the Advisory Committee. 15.2 Committee Organization and Procedures (a) The Chief Financial Officer of the Company ("CFO") or related officer of the Company may designate a chairperson from the members of the Advisory Committee. The Advisory Committee may appoint a secretary, who may or may not be a member of the Advisory Committee. The secretary shall have the primary responsibility for keeping a record of all meetings and acts of the Advisory Committee and shall have custody of all documents, the preservation of which shall be necessary or convenient to the efficient functioning of the Advisory Committee. All reports required by law may be signed by the Chairperson or another member of the Advisory Committee, as designated by the Chairperson, on behalf of the Company. (b) The Advisory Committee shall act by a majority of its members in office and may adopt such rules and regulations as it deems desirable for the conduct of its affairs. If the Company, the Plan, any Participant or Inactive Participant is or becomes subject to any rules of the Securities and Exchange Commission or any national or regional securities exchange, the Company and the members of the Advisory Committee shall take any actions which are necessary or desirable for the maintenance, modification or operation of the Plan in accordance with those rules. 15.3 Administrative Authority The Company and the Committee have discretionary authority to perform all functions necessary or appropriate to the operation of the Plan, including without limitation authority to 16 17 (a) construe and interpret the provisions of the Plan document and any related instrument and determine any question arising under the Plan document or related instrument, or in connection with the administration or operation thereof; (b) determine in its sole discretion all facts and relevant considerations affecting the eligibility of any Employee to be or become a Participant; (c) decide eligibility for, and the amount of, benefits for any Participant, Inactive Participant or Beneficiary; (d) authorize and direct all disbursements under the Plan; and (e) employ and engage such persons, counsel and agents and to obtain such administrative, clerical, medical, legal, audit and actuarial services as it may deem necessary in carrying out the provisions of the Plan. The Company shall be the "administrator" as defined in Section 3(16)(A) of ERISA for purposes of the reporting and disclosure requirements of ERISA and the Code. The CFO or related officer of the Company shall be the agent for service of process on the Plan. 15.4 Expenses All reasonable expenses which are necessary to operate and administer the Plan shall be paid directly by the Company. All reasonable costs incurred by a Committee member in the discharge of the Company's or his or her duties under the Plan shall be paid or reimbursed by the Company. Such costs shall include fees or expenses arising from the Committee's retention, with the consent of the Company, of any attorneys, accountants, actuaries, consultants or recordkeepers required by the Committee to discharge its duties under the Plan. Nothing in the preceding two sentences or in any other provisions of the Plan shall require the Company to pay or reimburse any Committee member or any other person for any cost, liability, loss, fee or expense incurred by the Committee member or other person in any dispute with the Company; nor may any Committee member or other person reimburse himself, herself or itself from any Plan contributions or from the principal or income of investment or funding vehicle for the Plan for any such cost, liability, loss, fee or expense. 15.5 Insurance The Company may, but need not, obtain liability insurance to protect its directors, officers, employees or representatives against loss in the discharge of their responsibility in the operation of the Plan. 15.6 Claims Procedure (a) A claim for benefits shall be considered filed only when actually received by the Plan Administrator. (b) Any time a claim for benefits is wholly or partially denied, the Participant, Inactive Participant or Beneficiary (hereinafter "Claimant") shall be given written notice 17 18 of such denial within 30 days after the claim is filed, unless special circumstances require an extension of time for processing the claim. If there is an extension, the Claimant shall be notified of the extension and the reason for the extension within the initial 30 day period. The extension shall expire within 60 days after the claim is filed. Such notice will indicate the reason for denial, the pertinent provisions of the Plan on which the denial is based, an explanation of the claims appeal procedure set forth herein, and a description of any additional material or information necessary to perfect the claim and an explanation of why such material or information is necessary. 15.7 Appeal Procedures (a) Any person who has had a claim for benefits denied by the Plan Administrator, or is otherwise adversely affected by the action or inaction of the Plan Administrator, shall have the right to request review by the Plan Administrator. Such request must be in writing, and must be received by the Plan Administrator within 60 days after such person receives notice of the Plan Administrator's action. If written request for review is not made within such 60-day period, the Claimant shall forfeit his or her right to review. The Claimant or a duly authorized representative of the Claimant may review all pertinent documents and submit issues and comments in writing. (b) The Plan Administrator shall then review the claim. The Plan Administrator may issue a written decision reaffirming, modifying or setting aside its former action within 30 days after receipt of the written request for review, or 60 days if special circumstances require an extension. The Claimant shall be notified in writing of any such extension within 30 days following the request for review. An original or copy of the decision shall be furnished to the Claimant. The decision shall set forth the reasons and pertinent plan provisions or relevant laws on which the decision rests. The decision shall be final and binding upon the Claimant and the Plan Administrator and all other persons having or claiming to have an interest in the Plan or in any Account established under the Plan. 15.8 Arbitration (a) Any Participant's, Inactive Participant's or Beneficiary's claim remaining unresolved after exhaustion of the procedures in Section 15.6 and 15.7 (and to the extent permitted by law any dispute concerning any breach or claimed breach of duty regarding the Plan) shall be settled solely by binding arbitration at the Employer's principal place of business at the time of the arbitration, in accordance with the Employment Claims Rules of the American Arbitration Association. Judgment on any award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Each party to any dispute regarding the Plan shall pay the fees and costs of presenting his, her or its case in arbitration. All other costs of arbitration, including the costs 18 19 of any transcript of the proceedings, administrative fees, and the arbitrator's fees shall be borne equally by the parties. (b) Except as otherwise specifically provided in this Plan, the provisions of this Section 15.8 shall be absolutely exclusive for any and all purposes and fully applicable to each and every dispute regarding the Plan including any claim which, if pursued through any state or federal court or administrative proceeding, would arise at law, in equity or pursuant to statutory, regulatory or common law rules, regardless of whether such claim would arise in contract, tort or under any other legal or equitable theory or basis. The arbitrator who hears or decides any claim under the Plan shall have jurisdiction and authority to award only Plan benefits and prejudgment interest; and apart from such benefits and interest, the arbitrator shall not have any authority or jurisdiction to make any award of any kind including, without limitation, compensatory damages, punitive damages, foreseeable or unforeseeable economic damages, damages for pain and suffering or emotional distress, adverse tax consequences or any other kind or form of damages. The remedy, if any, awarded by such arbitrator shall be the sole and exclusive remedy for each and every claim which is subject to arbitration pursuant to this Section 15.8. Any limitations on the relief that can be awarded by the arbitrator are in no way intended (i) to create rights or claims that can be asserted outside arbitration or (ii) in any other way to reduce the exclusivity of arbitration as the sole dispute resolution mechanism with respect to this Plan. (c) The Plan and the Company will be the necessary parties to any action or proceeding involving the Plan. No person employed by the Company, no Participant, Inactive Participant or Beneficiary or any other person having or claiming to have an interest in the Plan will be entitled to any notice or process, unless such person is a named party to the action or proceeding. In any arbitration proceeding all relevant statutes of limitation shall apply. Any final judgment or decision that may be entered in any such action or proceeding will be binding and conclusive on all persons having or claiming to have any interest in the Plan. 15.9 Notices Any notice from the Company or the Committee to an Employee, Participant, Inactive Participant or Beneficiary regarding this Plan may be addressed to the last known residence of said person as indicated in the records of the Company. Any notice to, or any service of process upon, the Company or the Committee with respect to this Plan may addressed as follows: Chief Financial Officer Maxwell Technologies, Inc. 9275 Sky Park Court San Diego, CA 92123 19 20 15.10 Indemnification To the extent permitted by law, the Company shall, and hereby does, indemnify and hold harmless any director, officer or employee of the Company who is or may be deemed to be responsible for the operation of the Plan, from and against any and all losses, claims, damages or liabilities (including attorneys' fees and amounts paid, with the approval of the Board, in settlement of any claim) arising out of or resulting from a duty, act, omission or decision with respect to the Plan, so long as such duty, act, omission or decision does not involve gross negligence or willful misconduct on the part of such director, officer or employee. Any individual so indemnified shall, within 10 days after receipt of notice of any action, suit or proceeding, notify the CFO of the Company and offer in writing to the CFO the opportunity, at the Company's expense, to handle and defend such action, suit or proceeding, and the Company shall have the right, but not the obligation, to conduct the defense in any such action, suit or proceeding. An individual's failure to give the CFO such notice and opportunity shall relieve the Company of any liability to said individual under this Section 15.10. The Company may satisfy its obligations under this provision (in whole or in part) by the purchase of insurance. Any payment by an insurance carrier to or on behalf of such individual shall, to the extent of such payment, discharge any obligation of the Company to the individual under this indemnification. 16. MISCELLANEOUS 16.1 Alternative Acts and Times If it becomes impossible or burdensome for the Company or the Committee to perform a specific act at a specific time required by this Plan, the Company or Committee may perform such alternative act which most nearly carries out the intent and purpose of this Plan and may perform such required or alternative act at a time as close as administratively feasible to the time specified in this Plan for such performance. Nothing in the preceding sentence shall allow the Company or Committee to accelerate or defer any payments to Participants or Inactive Participants under this Plan, except as otherwise expressly permitted herein. 16.2 Masculine and Feminine, Singular and Plural Whenever used herein, pronouns shall include both genders, and the singular shall include the plural, and the plural shall include the singular, whenever the context shall plainly so require. 16.3 Governing Law and Severability This Plan shall be construed in accordance with the laws of the State of California (exclusive of its rules 20 21 repgarding conflicts of law) to the extent that such laws are not preempted by ERISA or other federal laws. If any provision of this Plan shall be held illegal or invalid for any reason, such determination shall not affect the remaining provisions of this Plan which shall be construed as if said illegal or invalid provision had never been included. 16.4 Facility of Payment If the Plan Administrator, in its sole discretion, determines that any Employee, Participant, Inactive Participant or Beneficiary by reason of infirmity, minority or other disability, is physically, mentally or legally incapable of giving a valid receipt for any payment due him or her or is incapable of handling his or her own affairs and if the Plan Administrator is not aware, after appropriate due diligence, of any legal representative appointed on his or her behalf, then the Plan Administrator, in its sole discretion, may direct (a) payment to or for the benefit of the Employee, Participant, Inactive Participant or Beneficiary; (b) payment to any person or institution maintaining custody of the Employee, Participant, Inactive Participant or Beneficiary; or (c) payment to any other person selected by the Plan Administrator to receive, manage and disburse such payment for the benefit of the Employee, Participant, Inactive Participant or Beneficiary. The receipt by any such person of any such payment shall be a complete acquittance therefor; and any such payment, to the extent thereof, shall discharge the liability of the Company, the Committee, and the Plan for any amounts owed to the Employee, Participant, Inactive Participant or Beneficiary hereunder. In the event of any controversy or uncertainty regarding who should receive or whom the Plan Administrator should select to receive any payment under this Plan, the Plan Administrator may seek instruction from a court of proper jurisdiction or may place the payment (or entire Account) into such court with final distribution to be determined by such court. 16.5 Correction of Errors Any crediting of Compensation or interest accruals to the Account of any Employee, Participant, Inactive Participant or Beneficiary under a mistake of fact or law shall be returned to the Company. If an Employee, Participant, Inactive Participant or Beneficiary in an application for a benefit or in response to any request by the Company or the Plan Administrator for information, makes any erroneous statement, omits any material fact, or fails to correct any information previously furnished incorrectly to the Company or the Plan Administrator, or if the Plan Administrator makes an error in determining the amount payable to an Employee, Participant, Inactive Participant or Beneficiary, the Company or the Plan Administrator may correct its error and adjust any payment on the basis of correct facts. The amount of any overpayment or underpayment may be deducted from or added to the next succeeding payments, as directed by the Plan Administrator. The Plan Administrator and the Company reserve the right to maintain any 21 22 action, suit or proceeding to recover any amounts improperly or incorrectly paid to any person under the Plan or in settlement of a claim or satisfaction of a judgment involving the Plan. 16.6 Missing Persons In the event a distribution of part or all of an Account is required to be made from the Plan to an Employee, Participant, Inactive Participant or Beneficiary, and such person cannot be located, the relevant portion of the Account shall escheat in accordance with the laws of the State of California. If the affected Employee, Participant, Inactive Participant or Beneficiary later contacts the Company, his or her portion of the Account shall be reinstated and distributed as soon as administratively feasible. The Company shall reinstate the amount forfeited by reclaiming such amount from the State of California, and allocating it to the Account of the affected Employee, Participant, Inactive Participant or Beneficiary. Prior to forfeiting any Account, the Company shall attempt to contact the Employee, Participant, Inactive Participant or Beneficiary by return receipt mail (or other carrier) at his or her last known address according to the Company's records, and, where practical, by letter-forwarding services offered through the Internal Revenue Service, or the Social Security Administration, or such other means as the Plan Administrator deems appropriate. 16.7 Status of Participants In accordance with Revenue Procedure 92-65 Section 3.01(d), this Plan hereby provides: a. Employees, Participants and Inactive Participants under this Plan shall have the status of general unsecured creditors of the Company; b. This Plan constitutes a mere promise by the Company to make benefit payments in the future; c. Any trust to which this Plan refers (i.e. any trust created by the Company and any assets held by the trust to assist the Company in meeting its obligations under the Plan) shall conform to the terms of the model trust described in Revenue Procedure 92-64; and d. It is the intention of the parties that the arrangements under this Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA. 16.8 Employee and Spouse Acknowledgment By executing this Plan document or related enrollment or election form, the undersigned Employee and, if Employee is married, Employee's spouse hereby acknowledge that each of them has read and understood this Plan document. Employee and his or her spouse also acknowledge that they knowingly and 22 23 voluntarily agree to be bound by the provisions of the Plan, as amended from time to time, including those Plan provisions which require the resolution of disputes by binding out-of-court arbitration. Employee and his or her spouse further acknowledge that they have had the opportunity to consult with counsel of their own choosing with respect to all of the financial, tax and legal consequences of participating in this Plan, including in particular the effects of participation on any community property or other interest which the Employee's spouse may have in the Compensation deferred under this Executive Deferred Compensation Plan. 23 24 IN WITNESS WHEREOF, each of the undersigned has executed this document on the date set forth adjacent to his or her signature below. MAXWELL TECHNOLOGIES, INC. A Delaware corporation Dated: By -------------- ------------------------------------------ Title_________________________________________ EMPLOYEE Dated: -------------- ---------------------------------------------- Employee's Signature ---------------------------------------------- Employee's Printed Name EMPLOYEE'S SPOUSE Dated: -------------- ---------------------------------------------- Spouse's Signature ---------------------------------------------- Spouse's Printed Name 24 25 MAXWELL TECHNOLOGIES, INC. EXECUTIVE DEFERRED COMPENSATION PLAN
TABLE OF CONTENTS Page ---- 1. PURPOSE................................................................1 2. DEFINITIONS AND CAPITALIZED TERMS......................................1 3. ELIGIBILITY............................................................5 4. DEFERRAL OF COMPENSATION...............................................5 4.1 Election to Defer...............................................5 4.2 Date of Deferral................................................5 4.3 Multiple Elections..............................................6 4.4 Annual Elections................................................6 4.5 No Hardship Adjustments.........................................6 5. DEFERRED COMPENSATION ACCOUNTS.........................................6 5.1 Maintenance of Accounts.........................................6 5.2 Investment Elections............................................7 5.3 Investment Earnings or Losses...................................7 5.4 Interest Accruals...............................................8 5.5 Investment of Unpaid Balances...................................8 5.6 Company Contributions...........................................8 5.7 Company's General Assets........................................9 6. EFFECT ON EMPLOYEE BENEFITS...........................................10 7. PAYMENT OF DEFERRED COMPENSATION ACCOUNTS.............................10 7.1 Income Tax Obligations.........................................10 7.2 In-Service Withdrawals.........................................10 7.3 Termination of Employment......................................11 7.4 Disability.....................................................11 7.5 Retirement.....................................................11 7.6 Death Prior to Commencement of Distributions...................12 7.7 Death After Commencement of Distributions......................12 7.8 Payments of Deferrals Elected to a Specified Date..............12 7.9 Withholding and Other Tax Consequences.........................15 8. FUNDING...............................................................13 9. SUSPENSION OF PAYMENTS UPON COMPANY'S INSOLVENCY......................13 10. NON-ALIENATION OF BENEFITS...........................................13
26
11. LIMITATION OF RIGHTS.................................................14 12. BEST PAYMENTS........................................................14 13. NOTICE UNDER WARN....................................................15 14. AMENDMENT OR TERMINATION OF PLAN.....................................15 15. ADMINISTRATIVE PROCEDURES AND DISPUTE RESOLUTION.....................16 15.1 Plan Administrator............................................16 15.2 Committee Organization and Procedures.........................16 15.3 Administrative Authority......................................16 15.4 Expenses......................................................17 15.5 Insurance.....................................................17 15.6 Claims Procedure..............................................17 15.7 Appeal Procedures.............................................18 15.8 Arbitration...................................................18 15.9 Notices.......................................................19 15.10 Indemnification..............................................20 16. MISCELLANEOUS........................................................20 16.1 Alternative Acts and Times....................................20 16.2 Masculine and Feminine, Singular and Plural...................20 16.3 Governing Law and Severability................................20 16.4 Facility of Payment...........................................21 16.5 Correction of Errors..........................................21 16.6 Missing Persons...............................................22 16.7 Status of Participants........................................22 16.8 Employee and Spouse Acknowledgment............................22 EXECUTION...........................................................27
27 MAXWELL TECHNOLOGIES, INC. EXECUTIVE DEFERRED COMPENSATION PLAN ---------------------------------- Effective September 1, 1998 28 MAXWELL TECHNOLOGIES, INC. EXECUTIVE DEFERRED COMPENSATION PLAN SCHEDULE 1, CALCULATION ASSETS - ------------------------------------------------------------------------------ The Company agrees that it will credit deferred Compensation and Company Contributions in the Employee's Account with earnings or losses from and after dates deferred amounts are credited to the Employee's Account. In determining the interest calculation under the Plan, the Company will utilize the following Calculation Assets, subject to the terms of the Plan.
--------------------------------------------------------------- FUND PERCENTAGE --------------------------------------------------------------- Neuberger & Berman Growth Portfolio --------------------------------------------------------------- Neuberger & Berman Partners' Portfolio % --------------------------------------------------------------- Van Eck Worldwide Bond Fund % --------------------------------------------------------------- Van Eck Worldwide Emerging Markets Fund % --------------------------------------------------------------- Van Eck Worldwide Real Estate Fund % --------------------------------------------------------------- Investco Industrial Income Portfolio % --------------------------------------------------------------- Investco High Yield Portfolio % --------------------------------------------------------------- Investco Total Return Portfolio % --------------------------------------------------------------- Investco Utilities Portfolio % --------------------------------------------------------------- Investco Small Company Growth Portfolio % --------------------------------------------------------------- Alger American Growth Portfolio % --------------------------------------------------------------- Alger American Mid-Cap Growth Portfolio % --------------------------------------------------------------- Fidelity Money Market Portfolio % --------------------------------------------------------------- Fidelity Investment Grade Bond Portfolio % --------------------------------------------------------------- Fidelity Index 500 Portfolio % --------------------------------------------------------------- Fidelity Growth Opportunities Portfolio % --------------------------------------------------------------- Fidelity Balanced Portfolio % --------------------------------------------------------------- Fidelity Overseas Portfolio % --------------------------------------------------------------- 100% ----------
PARTICIPANT(PRINT NAME)____________________________ SIGNATURE______________________________ DATE____________________ 29 - ------------------------------------------------------------------------------ MAXWELL TECHNOLOGIES, INC. EXECUTIVE DEFERRED COMPENSATION PLAN EXHIBIT A (PART 1, PAGE 1 OF 2) - ELECTION OF DEFERRAL - ------------------------------------------------------------------------------ 1. I acknowledge that the terms and conditions of the Maxwell Technologies, Inc. EXECUTIVE DEFERRED COMPENSATION PLAN have been explained to me, including the tax consequences of my decision to participate in the Plan. 2. I agree to defer a portion of my current compensation, and to have that income paid to me at a later date pursuant to the terms and conditions of the Plan, which is incorporated by reference, in its entirety, in this Election of Deferral Form. 3. I understand that this Election Form is not an employment agreement, does not guarantee that I will receive any predetermined amount of compensation, and does not guarantee that I will receive any bonus, or incentive compensation. 4. I understand that any compensation I defer will be held as an asset of Maxwell Technologies, Inc., and will remain subject to the claims of the general creditors of Maxwell Technologies, Inc. ELECTION TO DEFER COMPENSATION I hereby elect to defer the following amount from each of my paychecks: _____% and/or $_______ of my salary paid in calendar year 19____. _____% and/or $_______ of my bonus paid in calendar year 19____. I understand that I may discontinue deferral of future compensation at any time during the Plan Year. I also understand that if I discontinue deferral of future compensation during the year, I cannot restart deferral until the beginning of the succeeding calendar year. The foregoing Election is voluntarily made by me after reviewing the terms of the Plan and with knowledge that this Election is irrevocable until changed in accordance with the terms of the Plan. 30 - ------------------------------------------------------------------------------ MAXWELL TECHNOLOGIES, INC. EXHIBIT A (PART 1, PAGE 2 OF 2) - ELECTION OF DEFERRAL - ------------------------------------------------------------------------------ RETIREMENT BENEFIT DISTRIBUTION REQUEST The following supersedes any previous distribution request and applies to all amounts deferred and Company Discretionary Contributions during the current and future calendar years, adjusted for earnings, losses, and administrative expenses credited to or charged against the Employee's Account. This election cannot be changed retroactively as to prior deferrals, without the consent of the Corporation which may be withheld at its sole discretion. In the event of either: 1. Retirement at the Normal Retirement Age, or 2. Disability. I wish to receive my current and future deferrals in the following form: IF YOU CHECK (ii), YOU MUST INDICATE THE NUMBER OF YEARS OVER WHICH INSTALLMENT DISTRIBUTIONS SHOULD CONTINUE. IF NONE OF THE FOLLOWING TWO REQUESTS APPLY, THE RETIREMENT BENEFIT WILL BE PAYABLE, AS DESCRIBED AT PARAGRAPH 7.4 OR 7.5, IN 180 MONTHLY INSTALLMENTS BEGINNING UPON THE LATER OF THE RETIREMENT DATE OR ACTUAL TERMINATION OF EMPLOYMENT. ____ (i) lump sum; ____ (ii) in _______ substantially equal monthly installments. (at least 60 but not to exceed 180 months) This Election of Deferral is executed and Agreed: __________________________________ _________________________(Election Date) (Signature) (Date) - --------------------------------- (Print Name) - ---------------------------------- (Social Security Number) AGREED: MAXWELL TECHNOLOGIES, INC. By:__________________________ - --------------- (Date) 31 MAXWELL TECHNOLOGIES, INC. EXHIBIT A (PART 2) - DEFERRAL TO SPECIFIED DATE In lieu of the deferral of my Compensation elected on Exhibit A, Page 1, to such later date permitted by the Plan (i.e. the date of my Termination of Employment, Disability or Death), I hereby elect to defer such Compensation to the following distribution date unless the amount of my Compensation so deferred would under the terms of the Plan become payable to me at an earlier date: DISTRIBUTION DATE:__________________ (At least 12 months after the date hereof). I understand that the amount of Compensation deferred by me to the Distribution Date, plus deemed investment gains, earnings or interest and less deemed investment losses thereon, which remains undistributed as of such Distribution Date, shall be distributed to me in a lump sum within 90 days after such Distribution Date. Dated: _________________________ - -------------------------------- ------------------------ Signature of Employee Witness 32 MAXWELL TECHNOLOGIES, INC. EXECUTIVE DEFERRED COMPENSATION PLAN EXHIBIT B - BENEFICIARY DESIGNATION I. _________________________ (Insert Employee's name as it appears in the Agreement.) ============================================================================== II. The above-named Employee's Revocable Beneficiary under the EXECUTIVE DEFERRED COMPENSATION PLAN is set forth below: Primary Beneficiary(ies): ____________________ ____________________ Relationship: ____________________ ____________________ Address: ____________________ ____________________ -------------------- -------------------- Social Security Number: ____________________ ____________________ Contingent Beneficiary(ies): ____________________ ____________________ Relationship: ____________________ ____________________ Address: ____________________ ____________________ -------------------- -------------------- Social Security Number: ____________________ ____________________
============================================================================== III. If no individual beneficiary named is living at the Employee's death, the Beneficiary shall be the executor(s) or administrator(s) of the Employee. IV. This Designation of Beneficiary revokes all prior designations and shall be effective as of the date it is filed with the Company. The Employee retains the right to revoke this Designation of Beneficiary. Dated at _______________, State of _______________, on _______________, 19__. - ------------------------- ------------------------ Signature of Employee Witness 33 CONSENT OF SPOUSE (Required in Community Property States) I hereby consent to the designation of the above beneficiary (ies) to receive the benefits payable under the MAXWELL TECHNOLOGIES, INC., EXECUTIVE DEFERRED COMPENSATION PLAN as the result of the death of the above Employee and waive any and all rights necessary to provide the payment of such benefits to such beneficiary (ies). Dated at ____________, State of__________, on _______________, 19____. - ----------------------------- (Signature of Spouse) Witness: - ----------------------------- FILING ACKNOWLEDGMENT Filed with the records of the Company this ___ day of _______________, 19____. By___________________________ - ------------------------------ Title EX-10.26 5 EXHIBIT 10.26 1 EXHIBIT 10.26 LINE OF CREDIT AGREEMENT THIS LINE OF CREDIT AGREEMENT (the "Agreement") is made and entered into as of this 4th day of March, 1998 by and between SANWA BANK CALIFORNIA (the "Bank") and MAXWELL TECHNOLOGIES, INC. (the "Borrower"). SECTION I AGREEMENT TO LEND 1.01 COMMITMENT TO LEND. Subject to the terms and conditions of this Agreement and so long as no Event of Default occurs, the Bank agrees to extend to the Borrower the credit accommodations that follow. 1.02 LINE OF CREDIT. The Bank agrees to make loans and advances ("Advances") to the Borrower, upon the Borrower's request therefor made prior to the Expiration Date, up to a total principal amount from time to time outstanding not more than $20,000,000 (the "Line of Credit"); provided that any sums repaid under the Line of Credit may be reborrowed. A. PURPOSE. Advances made under the Line of Credit shall be used for general corporate purposes. B. INTEREST. Interest shall accrue from the date of each Advance under the Line of Credit at one of the following rates, as quoted by the Bank and as elected by the Borrower below: 1. A variable rate per annum equivalent to an index for a variable interest rate which is quoted, published or announced from time to time by the Bank as its reference rate (the "Reference Rate") and as to which loans may be made by the Bank at, below or above such Reference Rate (the "Variable Rate"). Interest shall be adjusted concurrently with any change in the Reference Rate. An Advance based upon the Variable Rate is hereinafter referred to as a "Variable Rate Advance". 2. A fixed rate quoted by the Bank for 14 to 180 days or for such other period of time that the Bank may quote and offer (provided that any such period of time does not extend beyond the Expiration Date) [the "Interest Period"] for Advances in the minimum amount of $100,000. Such interest rate shall be a percentage approximately equivalent to 1.25% in excess of the rate which the Bank's Treasury Desk determines as being the approximate rate at which the Bank could purchase offshore U.S. dollar deposits (adjusted for any and all assessments, surcharges and reserve requirements pertaining to the purchase by the Bank of such U.S. dollar deposits) in an amount approximately equal to the amount of the relevant Advance and for a period of time approximately equal to the relevant Eurodollar Interest Period [the "Eurodollar Rate"]. An Advance based upon the Eurodollar Rate is hereinafter referred to as a "Eurodollar Advance". 3. A fixed rate quoted by the Bank for 1, 2, 3, or 6 months or for such other period of time that the Bank may quote and offer (provided that any such period of time does not extend beyond the Expiration Date) [the "LIBOR Interest Period"] for Advances in the minimum amount of $100,000. Such interest rate shall be a percentage approximately equivalent to 1.25% in excess of the Bank's LIBOR Rate which is that rate determined by the Bank's Treasury Desk as being the arithmetic mean (rounded upwards, if necessary, to the nearest whole multiple of one-sixteenth of one percent (1/16%)) of the U.S. dollar London Interbank Offered Rates for such period appearing on page 3750 (or such other page as may replace page 3750 of the Telerate screen at or about 11:00 a.m. (London time) on the second Business Day prior to the first days of such period (adjusted for any and all assessments, surcharges and reserve requirements) [the "LIBOR Rate"]. An Advance based upon the LIBOR Rate is hereinafter referred to as a "LIBOR Advance". Interest on any Advance shall be computed on the basis of 360 days per year, but charged on the actual number of days elapsed. Interest on Variable Rate Advances shall be paid in monthly installments commencing on the last day of the month following the date of the first such Advance and continuing on the last day of each month thereafter. Interest on any Eurodollar Advance or LIBOR Advance with an Interest Period or LIBOR Interest Period of 90 days or less on the last day of the relevant Interest Period or LIBOR Interest Period. The Borrower further -1- 2 promises and agrees to pay the Bank interest on any Eurodollar Advance or LIBOR Advance with an Interest Period or LIBOR Interest Period in excess of 90 days on a quarterly basis (i.e., on the last day of each 90-day period occurring in such Interest Period or LIBOR Interest Period) and on the last day of the relevant Interest Period or LIBOR Interest Period. If interest is not paid as and when it is due, it shall be added to the principal, become and be treated as a part thereof, and shall thereafter bear like interest. C. NOTICE OF BORROWING: Upon telephonic notice which shall be received by the Bank at or before 2:00 p.m. (California time) on a business day, the Borrower may borrow under the Line of Credit by requesting: 1. A Variable Rate Advance. A Variable Rate Advance may be made on the day notice is received by the Bank; provided, however, that if the Bank shall not have received notice at or before 2:00 p.m. on the day such Advance is requested to be made, such Variable Rate Advance may, at the Bank's option, be made on the next business day. 2. A Eurodollar Advance or LIBOR Advance. Notice of any Eurodollar Advance or LIBOR Advance shall be received by the Bank no later than two business days prior to the day (which shall be a Business Day) on which the Borrower requests such Advance to be made. D. NOTICE OF ELECTION TO ADJUST INTEREST RATE: Upon telephonic notice which shall be received by the Bank at or before 2:00 p.m. (California time) on a business day, the Borrower may elect: 1. That interest on a Variable Rate Advance shall be adjusted to accrue at the Eurodollar Rate or LIBOR Rate; provided, however, that such notice shall be received by the Bank no later than two business days prior to the day (which shall be a business day) on which the Borrower requests that interest be adjusted to accrue at the Eurodollar Rate or LIBOR Rate. 2. That interest on a Eurodollar Advance or LIBOR Advance shall continue to accrue at a newly quoted Eurodollar Rate or LIBOR Rate or shall be adjusted to commerce to accrue at the Variable Rate; provided, however, that such notice shall be received by the Bank no later than two business days prior to the last day of the Eurodollar Interest Period pertaining to such Eurodollar Advance or LIBOR Advance. If the Bank shall not have received notice (as prescribed herein) of the Borrower's election that interest on any Eurodollar Advance or LIBOR Advance shall continue to accrue at the newly quoted Eurodollar Rate or LIBOR Rate, the Borrower shall be deemed to have elected that interest thereon shall be adjusted to accrue at the Variable Rate upon the expiration of the relevant Interest Period pertaining to such Advance. E. PREPAYMENT: The Borrower may prepay any Advance in whole or in part, at any time and without penalty, provided, however, that: (i) any partial prepayment shall first be applied, at the Bank's option, to accrued and unpaid interest and next to the outstanding principal balance; and (ii) during any period of time in which the interest is accruing on any Advance on the basis of the Eurodollar Rate or LIBOR Rate, no prepayment shall be made on any Advance bearing interest at the Eurodollar Rate or LIBOR Rate except on a day which is the last day of the relevant Interest Period pertaining thereto. If the whole or any part of any Eurodollar Advance or LIBOR Advance is prepaid by reason of acceleration or otherwise, the Borrower shall, upon the Bank's request, promptly pay to and indemnify the Bank for all costs, expenses and any loss (including loss of future interest income) actually incurred by the Bank and any loss (including loss of profit resulting from the re-employment of funds) deemed sustained by the Bank as a consequence of such prepayment. The Bank shall be entitled to fund all or any portion of its Advance in any manner it may determine in its sole discretion, but all calculations and transactions hereunder shall be conducted as though the Bank actually funded all Advances through the purchase of dollar deposits in the Eurodollar Interbank Market in the amount of the relevant Advance and in maturities corresponding to the then applicable Interest Period. F. INDEMNIFICATION FOR EURODOLLAR RATE OR LIBOR RATE COSTS: During any period of time in which interest on any Advance is accruing on the basis of the Eurodollar Rate or LIBOR Rate, the Borrower shall, upon the Bank's request, promptly pay to and reimburse the Bank for all costs incurred and payments made by the Bank by reason of any future assessment, reserve, deposit or similar requirement or any surcharge, tax or fee imposed upon the Bank or as a result of the Bank's compliance with any directive or requirement of any regulatory authority pertaining to funds used by the Bank in quoting and determining the Eurodollar rate or LIBOR Rate. G. CONVERSION FROM EURODOLLAR RATE OR LIBOR RATE TO VARIABLE RATE: In the event that the Bank shall at -2- 3 any time determine that the accrual of interest on the basis of the Eurodollar Rate or LIBOR rate (i) is infeasible because the Bank is unable to determine the Eurodollar Rate or LIBOR Rate due to the unavailability of U.S. dollar deposits, contracts of certificates of deposit in an amount approximately equal to the amount of the relevant Advance and for a period of time approximately equal to relevant Interest Period or (ii) is or has become unlawful or infeasible by reason of the Bank's compliance with any new law, rule, regulation, guideline or order, or any new interpretation of any present law, rule, regulation, guideline or order, then the Bank shall give telephonic notice thereof (confirmed in writing) to the Borrower, in which event the Advance bearing interest at the Eurodollar Rate or LIBOR Rate shall be deemed to be a Variable Rate Advance and interest shall thereupon immediately accrue at the Variable Rate. H. PRINCIPAL. Unless sooner due in accordance with the terms of this Agreement, on the Expiration Date, the Borrower hereby promises and agrees to pay to the Bank in full the aggregate unpaid principal amount of all Advances then outstanding, together with all accrued and unpaid interest thereon. I. EXPIRATION OF LINE OF CREDIT. Unless earlier terminated in accordance with the terms of this Agreement, the Bank's commitment to make Advances to the Borrower hereunder shall automatically expire on January 31, 2000 (the "Expiration Date"). J. COMMITMENT FEE. Borrower agrees to pay to Bank a commitment fee of .125% per annum on the unused portion of the Line of Credit, payable quarterly in arrears on the last day of each January, April, July and October and computed on a year of 360 days for actual days elapsed. K. LINE ACCOUNT: 1. The Bank shall maintain on its books a record of account in which the Bank shall make entries for each Advance and such other debts and credits as shall be appropriate in connection with the Line of Credit (the "Line Account"). The Bank shall provide the Borrower with a monthly statement of the Borrower's Line Account upon the Borrower's request therefor from time to time, which statement shall be considered to be correct and conclusively binding on the Borrower unless the Borrower notifies the Bank to the contrary within 30 days after the Borrower's receipt of any such statement which it deems to be incorrect. 2. The Borrower hereby authorizes the Bank, if and to the extent payment owed to the Bank under this Agreement is not made when due, to charge, from time to time, against any or all of the Borrower's deposit accounts with the Bank any amount so due. 3. If any payment required to be made by the Borrower hereunder becomes due and payable on a day other than a Business Day, the due date thereof shall be extended to the next succeeding Business Day and interest thereon shall be payable at the then applicable rate during such extension. All payments required to be made hereunder shall be made to the office of the Bank designated for the receipt of notices herein or such other office as Bank shall from time to time designate. L. LATE PAYMENT. In addition to any other rights the Bank may have hereunder, if any payment of principal (other than a principal payment due pursuant to Section 1.02H.) or interest, or any portion thereof, under this Agreement is not paid when due, a late payment charge equal to five percent (5%) of such past due payment may be assessed and shall be immediately payable. M. DISBURSEMENT OF PROCEEDS FROM ADVANCES. Any Advance made hereunder shall be conclusively presumed to have been made to and for the Borrower's benefit when the proceeds of such Advance are disbursed in accordance with the Borrower's instructions or deposited into a checking account of the Borrower maintained at the Bank. 1.03 LETTER OF CREDIT SUB-FACILITY: Subject to the terms of the Agreement and those contained herein, the Bank agrees to issue commercial letters of credit of up to $5,000,000 and standby letters of credit of up to $20,000,000 (each a "Letter of Credit") on behalf of the Borrower for general corporate purposes. At no time, however, shall the total face amount of all standby Letters of Credit outstanding and 50% of all commercial Letters of Credit outstanding, less any partial draws paid by the Bank, exceed the sum of $20,000,000 and, together with the total principal amount of all Advances exceed the Line of Credit. A. Upon the Bank's request, the Borrower shall promptly pay to the Bank issuance fees of 1.50% per annum -3- 4 for standby letters of credit and standard fees as quoted by the Bank in its sole discretion from time to time for commercial letters of credit and such other fees, commissions, costs and any out-of-pocket expenses charged or incurred by the Bank with respect to any Letter of Credit. B. The commitment by the Bank to issue Letters of Credit shall, unless earlier terminated in accordance with the terms of the Agreement, automatically terminate on the Expiration Date and no standby Letter of Credit shall expire on a date which is 365 days after the Expiration Date and no commercial Letter of Credit shall expire on a date which is 90 days after the Expiration Date. C. Each Letter of Credit shall be in form and substance satisfactory to the Bank and in favor of beneficiaries satisfactory to the Bank, provided that the Bank may refuse to issue a Letter of Credit due to the nature of the transaction or its terms or in connection with any transaction where the Bank, due to the beneficiary or the nationality or residence of the beneficiary, would be prohibited by any applicable law, regulation or order from issuing such Letter of Credit. D. Prior to the issuance of each Letter of Credit, but in no event later than 10:00 a.m. (California time) on the day such Letter of Credit is to be issued (which shall be a Business Day), the Borrower shall deliver to the Bank a duly executed form of the Bank's standard form of application for issuance of a Letter of Credit with proper insertions. E. The Borrower shall, upon the Bank's request, promptly pay to and reimburse the Bank for all costs incurred and payments made by the Bank by reason of any future assessment, reserve, deposit or similar requirement or any surcharge, tax or fee imposed upon the Bank or as a result of the Bank's compliance with any directive or requirement of any regulatory authority pertaining or relating to any Letter of Credit. In the event that Borrower fails to pay any drawing under any Letter of Credit or the balances in the depository account or accounts maintained by the Borrower with Bank are insufficient to pay such drawing, without limiting the rights of Bank hereunder or waiving any Event of Default caused thereby, Bank may, and Borrower hereby authorizes Bank to create an Advance bearing interest at the rate provided in Section 1.02 hereof to pay such drawing. 1.04 FOREIGN EXCHANGE FACILITY. Borrower may from time to time request Bank to purchase or sell foreign currency in a specified amount, at a fixed price, and for delivery at a future date no greater than 365 days from the date of purchase (each a "Foreign Exchange Contract"). At no time, however, shall 15% of the aggregate settlement price of all Foreign Exchange Contracts outstanding exceed $750,000 as determined by Bank at the time of entering into each Foreign Exchange Contract. A. REQUESTS FOR FOREIGN EXCHANGE CONTRACTS. Each request for a Foreign Exchange Contract shall be made by telephone or rapifax, confirmed in writing (each a "Request"). Each Request shall be delivered or communicated to the Bank no later than 3:00 p.m. (California time) on the day (which shall be a Business Day) on which the Foreign Exchange Contract is requested. By making any such Request, Borrower agrees that all matters relating to each such Foreign Exchange Contract shall be governed by this Agreement and Borrower restates all warranties and representations made by Borrower herein as if made on the date the Foreign Exchange Contract is entered into. B. EXPIRATION DATE. The commitment by the Bank to enter into Foreign Exchange Contracts shall, unless earlier terminated in accordance with this Agreement, automatically terminate on the Expiration Date and no Foreign Exchange Contract shall expire on a date which is more than 365 days after the Expiration Date. C. AVAILABILITY. Bank may refuse to enter into a Foreign Exchange Contract with the Borrower where the Bank, in its sole discretion, determines that such foreign currency is unavailable, or where Bank would be prohibited by any applicable law, regulation or order from purchasing such foreign currency. D. PURPOSE. The Foreign Exchange Contract shall be used to hedge foreign exchange exposure and/or risk. E. PAYMENT. Payment is due on the settlement date of any Foreign Exchange Contract (the "Payment Date"). Bank is hereby authorized by Borrower to charge the full settlement price of any Foreign Exchange Contract against the depository account or accounts maintained by the Borrower with Bank on the Payment Date. -4- 5 F. ASSESSMENTS. Borrower shall, upon the Bank's request, promptly pay to and reimburse the Bank for all costs incurred and payments made by the Bank by reason of any assessment, reserve, deposit, capital maintenance or similar requirement or any surcharge, tax or fee imposed upon the Bank or as a result of the Bank's compliance with any directive or requirement of any regulatory authority pertaining or relating to any Foreign Exchange Contract. 1.05 EXISTING TERM LOANS. The Borrower is presently indebted to the Bank under a certain promissory note dated May 28, 1992 in the original principal sum of $2,000,000.00 (the "Existing Term Notes"). It is hereby understood and agreed that the Existing Term Notes shall be and are subject to the terms and conditions of this Agreement. SECTION II CONDITIONS PRECEDENT 2.01 CONDITIONS PRECEDENT TO FIRST ADVANCE. Prior to the first Advance or disbursement of the Term Loan hereunder, the Borrower shall deliver or cause to be delivered to the Bank, in form and substance satisfactory to the Bank: A. AUTHORITY TO BORROW. Evidence relating to the duly given approval and authorization of the execution, delivery and performance of this Agreement, all other documents, instruments and agreements required under this Agreement and all other actions to be taken by the Borrower hereunder or thereunder. B. LOAN DOCUMENTS. All other documents, instruments and agreements required or necessary to consummate the transactions contemplated under this Agreement (collectively the "Loan Documents"), all fully executed. C. GUARANTIES. Continuing guaranty(ies) in favor of the Bank executed by I-Bus, Inc., Maxwell Federal Division, Inc., Maxwell Information Systems, Inc., Maxwell Business Systems, Inc., Maxwell Energy Products, Inc., and PurePulse Technologies, Inc., together with evidence that the execution, delivery and performance by an guarantor has been duly authorized. D. MISCELLANEOUS DOCUMENTS. Such other documents and opinions as the Bank may require with respect to the transactions described in this Agreement. 2.02 CONDITIONS PRECEDENT TO ALL ADVANCES. The obligation of the Bank to make each Advance (including the first Advance) is subject to the further conditions precedent that, as of the date of each Advance and after the making of such Advance: A. REPRESENTATIONS AND WARRANTIES. The representations and warranties set forth in Section IV hereof and in any other document, instrument, agreement or certificate delivered to the Bank hereunder are true and correct. B. EVENT OF DEFAULT. No event has occurred and is continuing which constitutes, or, with the lapse of time or giving of notice or both, would constitute an Event of Default as defined in Section VI hereof. For the purposes hereof, the Borrower's acceptance of the proceeds of any Advance shall be deemed to constitute the Borrower's representation and warranty that the statements set forth in sections 3.02 A and 3.02 B above are true and correct. SECTION III REPRESENTATIONS AND WARRANTIES The Borrower hereby makes the following representations and warranties to the Bank, which representations and warranties are continuing: 3.01 STATUS. The Borrower is a corporation duly organized and validly existing under the laws of the State of Delaware and is properly licensed, qualified to do business and in good standing in, and, where necessary to maintain the Borrower's rights and privileges, has complied with the fictitious name statute of every jurisdiction in which the Borrower is doing business. 3.02 AUTHORITY. The execution, delivery and performance by the Borrower of this Agreement and the Loan -5- 6 Documents have been duly authorized and do not and will not: (i) violate any provision of any law, rule, regulation, writ, judgment or injunction presently in effect affecting the Borrower, (ii) result in a breach of or constitute a default under any material agreement to which the Borrower is a party or by which it or its properties may be bound of affected; (iii) require any consent or approval of its stockholders or violate any provision of its articles of incorporation or by-laws. 3.03 LEGAL EFFECT. This Agreement constitutes, and any document, instrument or agreement required hereunder when delivered will constitute, legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms. 3.04 FICTITIOUS TRADE STYLES. There are no fictitious trade styles used by the Borrower in connection with its business operations. The Borrower shall notify the Bank not less than 30 days prior to effecting any change in the matters described herein or prior to using any other fictitious trade style at any future date, indicating the trade style and state(s) of its use. 3.05 FINANCIAL STATEMENTS. All financial statements, information and other data which may have been or which may hereafter be submitted by the Borrower to the Bank are true, accurate and correct and have been or will be prepared in accordance with generally accepted accounting principles consistently applied and accurately represent the Borrower's financial condition or, as applicable, the other information disclosed therein. Since the most recent submission of any such financial statement, information or other data to the Bank, the Borrower represents and warrants that no material adverse change in the Borrower's financial condition or operations has occurred which has not been fully disclosed to the Bank in writing. 3.06 LITIGATION. Except as have been disclosed to the Bank in writing, there are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or the Borrower's properties before any court or administrative agency which, if determined adversely to the Borrower, would have a material adverse effect on the Borrower's financial condition or operations. 3.07 TITLE TO ASSETS; PERMITTED LIENS. The Borrower has good and marketable title to all of its assets and the same are not subject to any security interest, encumbrance, lien or claim of any third person other than: (i) liens for taxes, assessments or similar charges either not yet due or being duly contested in good faith; (ii) liens of mechanics, materialmen, warehousemen or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (iii) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Bank in writing; (iv) purchase money liens or purchase money security interests upon or in any property acquired or held by the Borrower in the ordinary course of business to secure indebtedness outstanding on the date hereof or permitted to be incurred hereunder; and (v) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of the Borrower's assets (collectively "Permitted Liens"). 3.08 ERISA. If the Borrower has a pension, profit sharing or retirement plan subject to the Employee Retirement Income Security Act of 1974, as amended from time to time, including any rules and regulations promulgated thereunder ("ERISA"), such plan has been and will continue to be funded in accordance with its terms and otherwise complies with and continues to comply with the requirements of ERISA. 3.09 TAXES. The Borrower has filed all tax returns required to be filed and paid all taxes shown thereon to be due, including interest and penalties, other than taxes which are currently payable without penalty or interest or those which are being duly contested in good faith. 3.10 ENVIRONMENTAL COMPLIANCE. The Borrower has implemented and complied in all material respects with all applicable federal, state and local laws, ordinances, statutes and regulations with respect to hazardous or toxic wastes, substances or related materials, industrial hygiene or environmental conditions. There are no suits, proceedings, claims or disputes pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or its property claiming violations of any federal, state or local law, ordinance, statute or regulation relating to hazardous or toxic wastes, substances or related materials. SECTION IV COVENANTS The Borrower covenants and agrees that, during the term of this Agreement, and so long thereafter as the Borrower -6- 7 is indebted to the Bank under this Agreement, the Borrower shall, unless the Bank otherwise consents in writing: 4.01 PRESERVATION OF EXISTENCE; COMPLIANCE WITH APPLICABLE LAWS. Maintain and preserve its existence and all rights and privileges now enjoyed; not liquidate or dissolve, merge or consolidate with or into, or acquire any other business organization other than acquisitions of up to $5,000,000 per acquisition and $15,000,000 in the aggregate and acquisitions of companies that are payable solely in stock issued by the Borrower or a combination of stock and up to 30% cash per acquisition but in no event more than $15,000,000 cash in the aggregate, provided however that cash acquisitions may not be made with borrowed funds; and conduct its business in accordance with all applicable laws, rules and regulations. 4.02 MAINTENANCE OF INSURANCE. Maintain insurance in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower operates and maintain such other insurance and coverages as may be required by the Bank. 4.03 PAYMENT OF OBLIGATIONS AND TAXES. Make timely payment of all assessments and taxes and all of its liabilities and obligations unless the same are being contested in good faith. 4.04 INSPECTION RIGHTS. At any reasonable time and from time to time permit the Bank or any representative thereof to examine and make copies of the records and visit the properties of the Borrower and to discuss the business and operations of the Borrower with any employee or representative thereof. If the Borrower now or at any time hereafter maintains any records (including, but not limited to, computer generated records and computer programs for the generation of such records) in the possession of a third party, the Borrower hereby agrees to notify such third party to permit the Bank free access to such records at all reasonable times and to provide the Bank with copies of any records it may request, all at the Borrower's expense, the amount of which shall be payable immediately upon demand. 4.05 REPORTING REQUIREMENTS. Deliver or cause to be delivered to the Bank in form and detail satisfactory to the Bank: A. ANNUAL STATEMENTS. Not later than 120 days after the end of each of the Borrower's fiscal years, a copy of the annual audited financial report, the annual consolidating financial report and Securities Exchange Commission Form 10-K of the Borrower for such year, which report shall be prepared by a firm of certified public accountants acceptable to Bank and not later than 60 days after the end of each of the Borrower's fiscal years, a copy of the Borrower's financial projections for the succeeding year. B. INTERIM STATEMENTS. Not later than 45 days after the end of each fiscal quarter, the Borrower's financial statement and Securities Exchange Commission Form 10-Q as of the end of such quarter. C. SEMI-ANNUAL REPORTS. Not later than 60 days after the end of each January and July of each year, a copy of the Borrower's status report on its fixed price contracts in excess of $500,000.00 and on its existing and new reserves established by Borrower in connection with Borrower's business operations and/or financial performance, such listing and summary to contain such additional information as may be required by Bank from time to time. D. COMPLIANCE CERTIFICATE. Concurrently with the delivery of the financial reports required hereunder, a compliance certificate stating that the Borrower is in compliance with all covenants contained herein and that no Event of Default or potential Event of Default has occurred or is continuing, and certified to by the chief financial officer of the Borrower. E. OTHER INFORMATION. Promptly upon the Bank's request, such other information pertaining to the Borrower or any Guarantor as the Bank may reasonably request, including but not limited to all public documents and notices filed with any federal or state agency. 4.06 REDEMPTION OR REPURCHASE OF STOCK. Not redeem or repurchase any class of the Borrower's stock now or hereafter outstanding; except up to $25,000,000 of repurchased stock in the aggregate during calendar year 1998 and 1999. 4.07 PAYMENT OF DIVIDENDS: Not declare or pay any dividends on any class of stock now or hereafter outstanding except dividends payable solely in the Borrower's capital stock. 4.08 ADDITIONAL INDEBTEDNESS. Without prior Bank approval, not, after the date hereof, create, incur or assume, directly or indirectly, any liability or indebtedness other than (i) indebtedness owed or to be owed to the Bank or (ii) -7- 8 indebtedness to trade creditors incurred in the ordinary course of the Borrower's business or (iii) indebtedness incurred in the ordinary course of business as purchase money financing for the purchase of equipment or subordinated debt of up to $3,000,000 in the aggregate. 4.09 LOANS. Not make any loans or advances or extend credit to any third person, including, but not limited to, directors, officers, shareholders, partners, employees, affiliated entities or subsidiaries of the Borrower other than the guarantors hereunder, except for credit extended in the ordinary course of the Borrower's business as presently conducted and except loans of up to $250,000 per transaction and $1,000,000 in the aggregate. 4.10 LIENS AND ENCUMBRANCES. Not create, assume or permit to exist any security interest, encumbrance, mortgage, deed of trust or other lien including, but not limited to, a lien of attachment, judgment or execution) affecting any of the Borrower's properties, or execute or allow to be filed any financing statement or continuation thereof affecting any such properties, except for Permitted Liens and as otherwise provided in this Agreement and except for purchase money security interests securing indebtedness of up to $3,000,000. 4.11 TRANSFER ASSETS. Not sell, contract for sale, transfer, convey, assign, lease or sublet any of its assets except for the sale of the Borrower's real property and except in the ordinary course of business as presently conducted by the Borrower, and then, only for full, fair and reasonable consideration. 4.12 CHANGE IN THE NATURE OF BUSINESS. Not make any material change in its financial structure or in the nature of its business as existing or conducted as of the date of this Agreement. 4.13 FINANCIAL CONDITION. Maintain at all times: A. NET WORTH. A minimum effective tangible net worth of not less than $73,000,000.00 as such amount may be reduced by (i) stock repurchases as provided for in Section 4.06 hereof and (ii) non-cash charges in connection with acquisitions. B. DEBT TO NET WORTH RATIO. A debt to effective tangible net worth ratio of not more than 1.5 to 1. C. PROFITABILITY. A minimum net profit after tax of at least $1.00 at the end of each fiscal quarter. D. CURRENT RATIO. A ratio of current assets to current liabilities of not less than 1.5 to 1. For purposes of the foregoing, the term "effective tangible net worth" shall mean the Borrower's stated net worth less all its intangible assets (i.e., goodwill, trademarks, patents, copyrights, organization expense and similar intangible items) but including leaseholds and leasehold improvements and plus indebtedness subordinated (by its terms or by written agreement) to indebtedness owed by the Borrower to the Bank and plus non-majority-owned equity investments and the term "debt" shall mean all of the Borrower's direct or contingent liabilities excluding indebtedness subordinated (by its terms or by written agreement) to indebtedness owed by the Borrower to the Bank. 4.14 NOTICES. Give prompt written notice to the Bank of any and all (i) Events of Default, (ii) litigation, arbitration or administrative proceedings to which the Borrower is a party and in which the claim or liability exceeds $1,000,000.00. 4.15 CAPITAL EXPENSE. Without prior Bank approval, not make any fixed capital expenditure or any commitment therefor, including, but not limited to, incurring liability for leases which would be, in accordance with generally accepted accounting principles, reported as capital leases, or purchase any real or personal property in an aggregate amount exceeding $10,000,000 in any one fiscal year. 4.16 ENVIRONMENTAL COMPLIANCE. The Borrower shall: A. Implement and comply in all material respects with all applicable federal, state and local laws, ordinances, statutes and regulations with respect to hazardous or toxic wastes, substances or related materials, industrial hygiene or to environmental conditions. B. Give prompt written notice of any discovery of or suit, proceeding, claim, dispute, threat, inquiry or filing respecting hazardous or toxic wastes, substances or related materials. -8- 9 C. At all times indemnify and old harmless Bank from and against any and all liability arising out of the use, generation, manufacture, storage, handling, treatment, disposal or presence of hazardous or toxic wastes, substances or related materials. SECTION V EVENTS OF DEFAULT Any one or more of the following described events shall constitute an event of default (an "Event of Default") under this Agreement. 5.01 NON-PAYMENT. The Borrower shall fail to pay any payment of principal or interest or any other sum referred to in this Agreement within 5 days of when due. 5.02 PERFORMANCE UNDER THIS AGREEMENT. The Borrower shall fail in any material respect to perform or observe any term, covenant or agreement contained in this Agreement or in any document, instrument or agreement relating to this Agreement and any such failure shall continue unremedied for more than 30 days after the occurrence thereof. 5.03 OTHER AGREEMENTS. If there is a default under any agreement to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness. 5.04 REPRESENTATIONS AND WARRANTIES; FINANCIAL STATEMENTS. Any representation or warranty made by the Borrower under or in connection with this Agreement or any financial statement given by the Borrower or any Guarantor shall prove to have been incorrect in any material respect when made or given or when deemed to have been made or given. 5.05 INSOLVENCY. The Borrower or any Guarantor shall: (i) become insolvent or be unable to pay its debts as they mature; (ii) make an assignment for the benefit of creditors or to an agent authorized to liquidate any substantial amount of its properties or assets; (iii) file a voluntary petition in bankruptcy or seeking reorganization or to effect a plan or other arrangement with creditors; (iv) file an answer admitting the material allegations of an involuntary petition relating to bankruptcy or reorganization or join in any such petition; (v) become or be adjudicated a bankrupt; (vi) apply for or consent to the appointment of, or consent that an order be made, appointing any receiver, custodian or trustee for itself or any of its properties, assets or businesses; or (vii) any receiver, custodian or trustee shall have been appointed for all or a substantial part of its properties, assets or businesses and shall not be discharged within 30 days after the date of such appointment. 5.06. EXECUTION. Any writ of execution or attachment or any judgment lien shall be issued against any property of the Borrower and shall not be discharged or bonded against or released within 30 days after the issuance or attachment of such writ or lien. 5.07 REVOCATION OR LIMITATION OF GUARANTY. Any Guaranty shall be revoked or limited or its enforceability or validity shall be contested by any Guarantor, by operation of law, legal proceeding or otherwise or any Guarantor who is a natural person shall die. 5.08 SUSPENSION. The Borrower shall voluntarily suspend the transaction of business or allow to be suspended, terminated, revoked or expired any permit, license or approval of any governmental body necessary to conduct the Borrower's business as now conducted. 5.09 CHANGE IN OWNERSHIP. There shall occur a sale, transfer, disposition or encumbrance (whether voluntary or involuntary), or an agreement shall be entered into to do so, with respect to more than 20% of the issued and outstanding capital stock of the Borrower. -9- 10 SECTION VI REMEDIES ON DEFAULT Upon the occurrence of any Event of Default, the Bank may, at its sole election, without demand and upon only such notice as may be required by law; 6.01 ACCELERATION. Declare any or all of the Borrower's indebtedness owing to the Bank, whether under this Agreement or under any other document, instrument or agreement, immediately due and payable, whether or not otherwise due and payable. 6.02 CEASE EXTENDING CREDIT. Cease making Advances or otherwise extending credit to or for the account of the Borrower under this Agreement or under any other agreement now existing or hereafter entered into between the Borrower and the Bank. 6.03 TERMINATION. Terminate this Agreement as to any future obligation of the Bank without affecting the Borrower's obligations to the Bank or the Bank's rights and remedies under this Agreement or under any other document, instrument or agreement. 6.04 LETTERS OF CREDIT. Require the Borrower to pay immediately to the Bank, for application against drawings under any outstanding Letters of Credit, the outstanding principal amount of any such Letters of Credit which have not expired. Any portion of the amount so paid to the Bank which is not applied to satisfy draws under any such Letters of Credit or any other obligations of the Borrower to the Bank shall be repaid to the Borrower without interest. 6.05 FOREIGN EXCHANGE CONTRACTS. Require the Borrower to pay immediately to the Bank, for application against the future settlement price under any outstanding Foreign Exchange Contracts, the outstanding face amount of any such Foreign Exchange Contracts which have not matured or settled and Borrower hereby grants to Bank a security interest in and to such funds. Any portion of the amount so paid to the Bank which is not subsequently applied to satisfy repayment on any such matured Foreign Exchange Contracts or any other obligations of the Borrower to the Bank shall be repaid to the Borrower without interest. 6.06 NON-EXCLUSIVITY OF REMEDIES. Exercise one or more of the Bank's rights set forth herein or seek such other rights or pursue such other remedies as may be provided by law, in equity or in any other agreement now existing or hereafter entered into between the Borrower and the Bank, or otherwise. SECTION VII MISCELLANEOUS PROVISIONS 7.01 AMOUNTS PAYABLE ON DEMAND. If the Borrower fails to pay on demand any amount so payable under this Agreement, the Bank may, at its option and without any obligation to do so and without waiving any default occasioned by the Borrower's failure to pay such amount, create an Advance in an amount equal to the amount so payable, which Advance shall thereafter bear interest as provided under the Line of Credit. 7.02 DEFAULT INTEREST RATE: If an Event of Default, or an event which, with notice or passage of time could become an event of Default, has occurred or is continuing, the Borrower shall pay to the Bank interest on any Indebtedness or amount payable under this Agreement at a rate which is 3% in excess of the rate or rates then in effect under this Agreement. 7.03 DISPUTE RESOLUTION. It is understood and agreed that upon the request of any party to this agreement any dispute, claim, or controversy of any kind, whether in contract or in tort, statutory or common law, legal or equitable now existing or hereinafter arising between the parties in any way arising out of, pertaining to or in connection with: (1) this Agreement, or any related agreements, documents, or instruments, (2) all past and present loans, credits, accounts, deposit accounts (whether demand deposits or time deposits), safe deposit boxes, safekeeping agreements, guarantees, letters of credit, goods or services, or other transactions, contracts or agreements of any kind, (3) any incidents, omissions, acts, practices, or occurrences causing injury to either party whereby the other party or its agents, employees or representatives may be liable, in whole or in part, or (4) any aspect of the past or present relationships of the parties, shall be resolved through a two-step dispute resolution process administered by Judicial Arbitration & Mediation Services, Inc. ("J*A*M*S") as follows: a) Step 1 -- Mediation: At the request of any party to the dispute, claim or controversy of the matter shall be -10- 11 referred to the nearest office of J*A*M*S for mediation, that is, an informal, non-binding conference or conferences between the parties in which a retired judge or justice for the J*A*M*S panel will seek to guide the parties to a resolution of the case. b) Step ll - Unsecured Contracts - Arbitration: Should any dispute, claim or controversy remain unresolved at the conclusion of the Step l Mediation Phase then all such remaining matters shall be resolved by final and binding arbitration before a different judicial panelist, unless the parties shall agree to have the mediator panelist act as arbitrator. The hearing shall be conducted at a location determined by the arbitrator in San Diego County and shall be administered by and in accordance with the then existing Rules of Practice and Procedure of Judicial Arbitration & Mediation Services, Inc., and judgement upon any award rendered by the arbitrator may be entered by any State or Federal Court having jurisdiction thereof. The arbitrator shall determine which is the prevailing party and shall include in the award that party's reasonable attorneys fees and costs. This subparagraph (b) shall apply only if, at the time of the submission of the matter to J*A*M*S, the dispute(s) or issue(s) do(es) not arise out of a transaction(s) which is/are secured by real property collateral or, if so secured, all parties consent to such submission. As soon as practicable after selection of the arbitrator, the arbitrator or his/her designated representative shall determine a reasonable estimate of anticipated fees and costs of the Arbitrator, and render a statement to each party setting forth that party's pro-rata share of said fees and costs. Thereafter each party shall, within 10 days of receipt of said statement, deposit said sum with the Arbitrator. Failure of any party to make such a deposit shall result in a forfeiture by the non-depositing party of the right to prosecute or defend the claim which is the subject of the arbitration, but shall not otherwise serve to abate, stay or suspend the arbitration proceedings. c) Step ll - Contracts Secured By Real Estate - Trial by Court Reference [Section 638 (1)] Code of Civil Procedure): If the dispute, claim or controversy is not one required or agreed to be submitted to arbitration as provided by subparagraph (b) and has not been resolved by Step l mediation, them any remaining dispute, claim or controversy shall be submitted for determination by a trial on Order of Reference conducted by a retired judge or justice from the panel of J*A*M*S appointed pursuant to the provisions of California Code of Civil Procedure Section 638(1) or any amendment, addition or successor section thereto to hear the case and report a statement of decision thereon. The parties intend this general reference agreement to be specifically enforceable in accordance with said section. If this parties are unable to agree upon a member of the J*A*M*S panel to act as referee then one shall be appointed by the Presiding Judge of the county wherein the hearing is to be held. The parties shall pay in advance, to the referee, the estimated reasonable fees and costs of the reference, as may be specified in advance by the referee. The parties shall initially share equally, by paying their proportionate amount of the estimated fees and costs of the reference. Failure of any party to make such a fee deposit shall result in a forfeiture by the non-depositing party of the right to prosecute or defend the cause(s) of action which is(are) the subject of the reference, but shall not otherwise serve to abate, stay or suspend the reference proceeding. d) Provisional Remedies. Self Help and Foreclosure: No provision of, or the exercise of any right(s) under subparagraph (b), nor any other provision of this Dispute Resolution Provision, shall limit the right of any party to exercise self help remedies such as set off, to foreclose against any real or personal property collateral, or obtain provisional or ancillary remedies such as injunctive relief or the appointment of a receiver from any court having jurisdiction before, during or after the pendency of any arbitration. At Bank's option, foreclosure under a deed of trust or mortgage may be accomplished either by exercise of power of sale under the deed of trust or mortgage, or by judicial foreclosure. The institution and maintenance of an action for provisional remedies pursuit of provisional or ancillary remedies or exercise of self help remedies shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration. 7.04 WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE BORROWER AND THE BANK EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, -11- 12 TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 7.05 ACCOUNTING AND OTHER TERMS. All references to financial statements, assets, liabilities and similar accounting terms not specifically defined in this Agreement shall mean such financial statements prepared and such terms determined in accordance with generally accepted accounting principles consistently applied. Except where otherwise specified in this Agreement, all financial data submitted or to be submitted to the Bank pursuant to this Agreement shall be prepared in accordance with generally accepted accounting principles consistently applied. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the California Uniform Commercial Code. 7.06 RELIANCE. Each warranty, representation, covenant and agreement contained in this Agreement shall be conclusively presumed to have been relied upon by the Bank regardless of any investigation made or information possessed by the Bank and shall be cumulative and in addition to any other warranties, representations, covenants or agreements which the Borrower shall now or hereafter give, or cause to be given, to the Bank. 7.07 ATTORNEYS' FEES. Borrower shall pay to the Bank all costs and expenses, including but not limited to reasonable attorneys fees, incurred by Bank in connection with the administration, enforcement, including any bankruptcy, appeal or the enforcement of any judgment or any refinancing or restructuring of this Agreement or any document, instrument or agreement executed with respect to, evidencing or securing the indebtedness hereunder. 7.08 NOTICES. All notices, payments, requests, information and demands which either party hereto may desire, or may be required to give or make to the other party shall be given or made to such party by hand delivery or through deposit in the United States mail, postage prepaid, or by Western Union telegram, addressed to the address set forth below such party's signature to this Agreement or to such other address as may be specified from time to time in writing by either party to the other. 7.09 WAIVER. Neither the failure nor delay by the Bank in exercising any right hereunder or under any document, instrument or agreement mentioned herein shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder or under any document, instrument or agreement mentioned herein preclude other or further exercise thereof or the exercise of any other right; nor shall any waiver of any right or default hereunder or under any other document, instrument or agreement mentioned herein constitute a waiver of any other right or default or constitute a waiver of any other default of the same or any other term or provision. 7.10 CONFLICTING PROVISIONS. To the extent that any of the terms or provisions contained in this Agreement are inconsistent with those contained in any other document, instrument or agreement executed pursuant hereto, the terms and provisions contained herein shall control. Otherwise, such provisions shall be considered cumulative. 7.11 BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Borrower and the Bank and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the Bank's prior written consent. The Bank may sell, assign or grant participations in all or any portion of its rights and benefits hereunder. The Borrower agrees that, in connection with any such sale, grant or assignment, the Bank may deliver to the prospective buyer, participant or assignee financial statements and other relevant information relating to the Borrower. 7.12 JURISDICTION. This Agreement, any notes issued hereunder, and any documents, instruments or agreements mentioned or deferred to herein shall be governed by and construed according to the laws of the State of California, to the jurisdiction of whose courts the parties hereby submit. 7.13 HEADINGS. The headings set forth herein are solely for the purpose of identification and have no legal significance. 7.14 ENTIRE AGREEMENT. This Agreement and the Loan Documents shall constitute the entire and complete understanding of the parties with respect to the transactions contemplated hereunder. All previous conversations, memoranda and writings between the parties or pertaining to the transactions contemplated hereunder that are not incorporate or referenced in this Agreement or the Loan Documents are superseded hereby. -12- 13 IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto as of the date first hereinabove written. BANK: BORROWER: SANWA BANK CALIFORNIA MAXWELL TECHNOLOGIES, INC. By: By: /s/ GARY DAVIDSON ------------------------------ ----------------------------------- VP Finance & Admin./CFO - --------------------------------- -------------------------------------- (Name/Title) (Name/Title) Address: By: ------------------------- --------------------------------------- - --------------------------------- --------------------------------------- (Name/Title) - --------------------------------- Address: ------------------------------- --------------------------------------- --------------------------------------- -13- 14 FIRST AMENDMENT TO LINE OF CREDIT AGREEMENT This First Amendment to Line of Credit Agreement (the "Amendment") is made and entered into this 29th day of May, 1998, by and between SANWA BANK CALIFORNIA (the "Bank") and MAXWELL TECHNOLOGIES, INC. (the "Borrower") with respect to the following: This Amendment shall be deemed to be a part of and subject to that certain Line of Credit Agreement dated as of March 4, 1998, as it may be amended from time to time, and any and all addenda and riders thereto (collectively the "Agreement"). Unless otherwise defined herein, all terms used in this Amendment shall have the same meanings as in the Agreement. To the extent that any of the terms or provisions of this Amendment conflict with those contained in the Agreement, the terms and provisions contained herein shall control. WHEREAS, the Borrower and the Bank mutually desire to extend and/or modify the Agreement. NOW THEREFORE, for value received and hereby acknowledged, the Borrower and the Bank agree as follows: 1. MODIFICATION OF PROFITABILITY. Section 4.13C. of the Agreement is deleted in its entirety and the following is substituted in lieu thereof: C. PROFITABILITY. A minimum net profit after tax of at least $1.00 at the end of each fiscal quarter, to be determined without regard to non-cash charges as the result of corporate acquisitions. 2. REPRESENTATIONS AND WARRANTIES. The Borrower hereby reaffirms the representations and warranties contained in the Agreement and represents that no event, which with notice or lapse of time, could become an Event of Default, has occurred or is continuing. 3. CONFIRMATION OF OTHER TERMS AND CONDITIONS OF THE AGREEMENT. Except as specifically provided in this Amendment all other terms, conditions and covenants of the Agreement [and the Deed of Trust] unaffected by this Amendment shall remain unchanged and shall continue in full force and effect and the Borrower hereby covenants and agrees to perform and observe all terms, covenants and agreements provided for in this Agreement, as hereby amended. 4. GOVERNING LAW. This Amendment shall be governed and construed in accordance with the laws of the State of California to which jurisdiction the parties hereto hereby consent and submit. 5. COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, this Amendment has been executed by the parties hereto as of the date first hereinabove written. BANK: BORROWER: SANWA BANK CALIFORNIA MAXWELL TECHNOLOGIES, INC. By: /s/ RICK YOUNG /s/ JOSEPH C. STUMPS ------------------ ---------------------------------- Vice President Vice President, Financial Planning - ---------------------- ---------------------------------- Name/Title Name/Title By: /s/ GARY DAVIDSON ------------------ ---------------------------------- CFO - ---------------------- ---------------------------------- Name/Title Name/Title -1- 15 May 22, 1998 Mr. Gary Davidson Chief Financial Officer MAXWELL TECHNOLOGIES, INC. 9275 Sky Park Court San Diego, CA 92123 RE: Loan Agreement Amendment dated May 29, 1998. Dear Mr. Davidson: In reviewing your financial statements each quarter, additional information will be required in order to monitor compliance with the proposed change to section 4.13C of the loan agreement as it relates to maintaining "A minimum net profit after tax of at least $1.00 at the end of each fiscal quarter, to be determined without regard to non-cash charges as the result of corporate acquisitions." Therefore, the Bank would like to request (as stipulated under section 4.05E. Other Information) that you provide a quarterly report, not later than 45 days after the end of each fiscal quarter, detailing 1) all non-recurring charges for the quarter, including but not limited to, the dollar amount of the charge and the reason for the charge and 2) non-cash charges for the quarter as the result of acquisition(s), including but not limited to, the company name(s) of the acquisition(s), the dollar amount of the charge(s) and the reason for the charge(s). This information will be extremely helpful to us and insure strong communication as it relates to the financial performance of the company. If you agree to the above, please sign below as evidence of your acknowledgment and acceptance. Sincerely, /s/ Rick Young - ----------------- Rick Young Vice President Acknowledged and Accepted this 29th of May, 1998. /s/ Gary Davidson ----------------------- Gary Davidson Chief Financial Officer EX-10.30 6 EXHIBIT 10.30 1 Exhibit 10.30 Maxwell Technologies, Inc. Executive Bonus Plan FY99 2 Objective - - To drive the maximization of company-wide growth, financial performance and shareholder value. 3 Eligibility - - The CEO recommends participants and their participation levels (ie: Target Bonus) - - Participants must be actively employed on the last day of the performance period to be eligible for any award. - - Participants who do not complete a full plan year will have pro-rated eligibility. 4 Bonus Opportunity - - The bonus opportunity is based on a participant's assigned target, and expressed as a percent of base salary at the time of the payout. - - Participants will have targets that vary from 20% to 50% of base salary as set by the CEO. 5 Bonus Calculation - - Two weighted factors; Sales and EPS Up to 100% Target - 50% Sales - 50% EPS - - Above 100% - 1/3 Sales - 2/3 EPS 6 Bonus Calculation - - EPS is calculated after Profit Sharing payments and Bonus expense. - - The exact percentage for each participant is determined by the CEO and is based on each individual's goal achievement and leadership performance. 7 Bonus Calculation - - Minimum requirement of $135M revenue and $.96 EPS - - Between minimum level and formula threshold, target bonus would be discretionary in the 25% to 75% range.
Revenues EPS Target Bonus Factor ----------- ----- ------------ 135 0.96 25.00% 145 1.01 50.00% 150 1.05 100.00% 165 1.19 162.00% 175 1.27 200.00%
* Appropriate adjustments to the bonus plan will be made for extraordinary events. 8 Timing and Form of Bonus Payment - - The bonus will be paid to participants in cash, following the year end results. - - $ 0.96 EPS must be achieved for any payout to occur. EX-10.37 7 EXHIBIT 10.37 1 EXHIBIT 10.37 [LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET (DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS) 1. BASIC PROVISIONS ("BASIC PROVISIONS") 1.1 PARTIES: This Lease ("Lease"), dated for reference purposes only, March 1, 1998, is made by and between Hassan Y. Yarpezeshkan and Maryam Yarpezeshkan ("Lessor") and Maxwell Technologies, Inc., a Delaware corporation ("Lessee"), (collectively the "Parties," or individually a "Party"). 1.2 PREMISES: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known as 10547 Viper Way, San Diego, located in the County of San Diego, State of California, and generally described as (describe briefly the nature of the property and, if applicable, the "Project", if the property is located within a Project) that approximate 32,184 square foot building located at the address referenced herein ("PREMISES"). (See also Paragraph 2). 1.3 TERM: Five (5) years and 0 months ("ORIGINAL TERM") commencing March 1, 1998 ("COMMENCEMENT DATE") and ending February 28, 2003 ("EXPIRATION DATE"). (See also Paragraph 3) Lessee shall have the right to terminate the Lease ("TERMINATION RIGHT") upon providing one hundred twenty (120) days' prior notice of its intent to exercise such Termination Right. In no event, however, may Lessee terminate the Lease prior to the thirty seventh (37th) month of the Lease Term. 1.4 EARLY POSSESSION: N/A ("EARLY POSSESSION DATE"). (See also Paragraphs 3.2 and 3.3) 1.5 BASE RENT: $24,138.00 per month ("BASE RENT"), payable on the first (1st) day of each month commencing March 1, 1998 (See also Paragraph 4) [X] If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 BASE RENT PAID UPON EXECUTION: $24,138.00 as Base Rent for the period March 1, 1998 - March 31, 1998. 1.7 SECURITY DEPOSIT: $24,138.00 ("SECURITY DEPOSIT"). (See also Paragraph 5) 1.8 AGREED USE: Administrative offices and manufacturing facility and related uses. (See also Paragraph 6) 1.9 INSURING PARTY. Lessor is the "INSURING PARTY" unless otherwise stated herein. (See also Paragraph 8) 1.10 REAL ESTATE BROKERS: (See also Paragraph 15) (a) REPRESENTATION: The following real estate brokers (collectively, the "BROKERS") and brokerage relationships exist in this transaction (check applicable boxes): [ ] N/A represents Lessor exclusively ("LESSOR'S BROKER"); [ ] N/A represents Lessee exclusively ("LESSEE'S BROKER"); or [ ] N/A represents both Lessor and Lessee ("DUAL AGENCY") (b) PAYMENT TO BROKERS: Upon execution and delivery of this Lease by both Parties, Lessor shall pay to the Broker the fee agreed to in their separate written agreement (or if there is no such agreement, the sum of N/A% of the total Base Rent for the brokerage services rendered by said Broker). 1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be guaranteed by ("GUARANTOR"). (See also Paragraph 37) 1.12 ADDENDS AND EXHIBITS. Attached hereto is an Addendum or Addenda consisting of Paragraphs 50 through 51 and Exhibits N/A, all of which constitute a part of this Lease. 2. PREMISES. 2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of size set forth in this Lease, or that may have been used in calculating rental, is an approximation which the Parties agree is reasonable and the rental based thereon is not subject to revision whether or not the actual size is more or less. 2.2 CONDITION. Lessor shall deliver the Premises to Lessee broom clean and free of debris on the Commencement Date or the Early Possession Date, whichever first occurs ("START DATE"), and, so long as the required service contracts described in Paragraph 7.1(b) below are obtained by Lessee within thirty (30) days following the Start Date, warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems ("HVAC"), loading doors, if any, and all other such elements in the Premises, other than those constructed by Lessee, shall be in good operating condition on said date and that the structural elements of the roof, bearing walls and foundation of any buildings on the Premises (the "BUILDING") shall be free of material defects. If a non-compliance with said warranty exists as of the Start Date, Lessor shall, as Lessor's sole obligation with respect to such matter, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. 2.3 COMPLIANCE. Lessor warrants that the improvements on the Premises comply with all applicable laws, covenants or restrictions of record, building codes, regulations and ordinances and all applicable laws ("APPLICABLE REQUIREMENTS") in effect on the Start Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for determining whether or not the zoning is appropriate for Lessee's intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If the Applicable Requirements are hereafter changed (as opposed to being in existence at the Start Date, which is addressed in Paragraph 6.2(e) below) so as to require during the term of this Lease the construction of an addition to or an alteration of the Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Building ("CAPITAL EXPENDITURE"), Lessor and Lessee shall allocate the cost of such work as follows: Initials______ PAGE 1 (R)1996 - American Industrial Real Estate Association 2 (a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Leases shall be fully responsible for the cost thereof, provided, however that if such Capital Expenditure is required during the last two (2) years of this Lease and the cost thereof exceeds six (6) months' Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within ten (10) days after receipt of Lessee's termination notice that Lessor has elected to pay the difference between the actual cost thereof and the amount equal to six (6) months' Base Rent. If Lessee elects termination, Lessee shall immediately cease the use of the Premises which require such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least ninety (90) days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure. (b) If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as, governmentally mandated seismic modifications), then Lessor and Lessee shall allocate the obligation to pay for such costs pursuant to the provisions of Paragraph 7.1(o); provided, however, that if such Capital Expenditure is required during the last two years of this Lease or if Lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the option to terminate this Lease upon ninety (90) days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within ten (10) days after receipt of Lessor's termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure, Lessee may advance such funds and deduct same, with interest, from Rent until Lessor's share of such costs have been fully paid. If Lessee is unable to finance Lessor's share, or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessee on an offset basis, Lessee shall have the right to terminate this Lease upon thirty (30) days written notice to Lessor. (c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event, Lessee shall be fully responsible for the cost thereof, and Lessee shall not have any right to terminate this Lease. 2.4 ACKNOWLEDGEMENTS. Lessee acknowledges that: (a) it has been advised by Lessor and/or Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements), and their suitability for Lessee's intended use, (b) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, and (c) neither Lessor, Lessor's agents, nor any Broker has made any oral or written representations or warrants with respect to said matters other than as set forth in this Lease. In addition, Lessor acknowledges that: (a) Broker has made no representations, promises or warranties concerning Lessee's ability to honor the Lease or suitability to occupy the Premises, and (b) it is Lessor's sole responsibility to investigate the financial capability and/or suitability of all proposed tenants. 2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in Paragraph 2 shall be of no force or effect if immediately prior to the Start Date Lessee was the owner or occupant of the Premises. In such event, Lessee shall be responsible for any necessary corrective work. 3. TERM. 3.1 TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 EARLY POSSESSION. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall, however, be in effect during such period. Any such early possession shall not affect the Expiration Date. 3.3 DELAY IN POSSESSION. Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor is unable to deliver possession as agreed, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease. Lessee shall not, however, be obligated to pay Rent or perform its other obligations until it receives possession of the Premises. If possession is not delivered within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing within ten (10) days after the end of such sixty (60) day period, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder. If such written notice is not received by Lessor within said ten (10) day period, Lessee's right to cancel shall terminate. Except as otherwise provided, if possession is not tendered to Lessee when required and Lessee does not terminate this Lease, as aforesaid, any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Lessee. If possession of the Premises is not delivered within four (4) months after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing. 3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender possession of the Premises to Lessee until Lessee complies with its obligations to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor's election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied. 4. RENT. 4.1 RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of Lease (except for the Security Deposit) are deemed to be rent ("RENT"). 4.2 PAYMENT. Lessees shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due. Rent for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount than due shall not be a waiver of Lessors rights to the balance of such Rent, regardless of Lessor's endorsement of any check so stating. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee's faithful performance of its obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessor's reasonable judgment, to account for any increased wear and tear that the Premises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor's reasonable judgment, significantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on said change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within fourteen (14) days after the expiration or termination of this Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise within thirty (30) days after the Premises have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease. 6. USE. 6.1 USE. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to neighboring properties. Lessor shall not unreasonably withhold PAGE 2 Initials___ ___ 3 or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements on the Premises or the mechanical or electrical systems therein, is not significantly more burdensome to the Premises. If Lessor elects to withhold consent, Lessor shall within the five (5) business days after such request give written notification of same, which notice shall include an explanation of Lessor's objections to the change in use. 6.2 HAZARDOUS SUBSTANCES. (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises, which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee's expense) with all Applicable Requirements. "REPORTABLE USE" shall mean (i) the installation of use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit. (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Reportable Use has come to be in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance. (c) LESSEE REMEDIATION. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party. (d) LESSEE INDEMNIFICATION. Except for claims arising out of the negligence or the acts or omissions of Lessor or its agents, Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from adjacent properties). Lessee's obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. NO TERMINATION, CANCELLATION OR RELEASE AGREEMENT ENTERED INTO BY LESSOR AND LESSEE SHALL RELEASE LESSEE FROM ITS OBLIGATIONS UNDER THIS LEASE WITH RESPECT TO HAZARDOUS SUBSTANCES, UNLESS SPECIFICALLY SO AGREED BY LESSOR IN WRITING AT THE TIME OF SUCH AGREEMENT. (e) LESSOR INDEMNIFICATION. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages which existed as a result of Hazardous Substances on the Premises prior to the Start Date or which are caused by the gross negligence, or intentional acts of Lessor, its agents or employees. Lessor's obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. (f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to the Start Date. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor's agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor's investigative and remedial responsibilities. (g) LANDLORD TERMINATION OPTION. If a Hazardous Substance Condition occurs during the term of this Lease, unless Lessee is legally responsible therefore (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within ten (10) days thereafter, give written notice to Lessor of Lessee's commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor's notice of termination. 6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as otherwise provided in this Lease, Lessee, shall, at Lessee's sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants which relate in any manner to Lessee's specific use of the Premises, without regard to whether said requirements are now in effect or become effective after the Start Date. Lessee shall, within ten (10) days after receipt of Lessor's written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the premises to comply with any Applicable Requirements. 6.4 INSPECTION COMPLIANCE. Lessor and Lessor's Lender and consultants shall have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times and upon 24 hours prior written notice, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a contamination is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspections, so long as such inspection is reasonably related to the violation or contamination. 7. MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS 7.1 LESSEE'S OBLIGATIONS (a) IN GENERAL. Subject to the provisions of Paragraph 2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole expense, keep Page 3 Initials___ ___ 4 the non-structural portions of the Premises. Utility installations, and Alterations in good order, condition and repair, ordinary wear and tear and damage by casualty excepted whether or not the portion of the Premises requiring repairs or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises) including, but not limited to, all equipment or facilities, such as plumbing, HVAC, electrical, lighting facilities boilers, pressure vessels, fire protection system, fixtures, walls (interior), ceilings, roofs, floors, windows, doors, plate glass, skylights in the Premises. Lessee, in keeping the Premises in good order, condition and repair shall exercise and perform good maintenance practices, specifically including the procurement and maintenance of the service contracts required by Paragraph 7.1(b) below. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair, ordinary wear and tear and damage by casualty excepted. Lessee shall, during the term of this Lease, keep the exterior appearance of the Building in a first-class condition consistent with the exterior appearance of other similar facilities of comparable age and size in the vicinity, including, when necessary, the exterior repainting at the Building. (b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in the maintenance of the following equipment and improvements. ("BASIC ELEMENTS"), if any, as and when installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure vessels, (iii) fire protection systems, (iv) roof covering and drains, and (v) clarifiers and (vi) any other equipment, if reasonably required by Lessor. (c) REPLACEMENT. Subject to Lessee's indemnification of Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of liability resulting from Lessee's failure to exercise and perform good maintenance practices, if the Basic Elements described in Paragraph 7.1(b) cannot be repaired other than at a cost which is in excess of 50% of the cost of replacing such Basic Elements, then such Basic Elements shall be replaced by Lessor, and the cost thereof shall be prorated between the Parties and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is due, an amount equal to the product of multiplying the cost of such replacement by a fraction, the numerator of which is one, and the denominator of which is the number of months of the useful life of such replacement as such useful life is specified pursuant to Federal income tax regulations or guidelines for depreciation thereof (including interest on the unamortized balance as is then commercially reasonable in the judgment of Lessor's accountants), with Lessee reserving the right to prepay its obligation at any time. 7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, or the equipment therein, all of which obligations are intended to be that of the Lessee; provided, however, Lessor shall be required to maintain all portions of the Premises which are not the obligation of Lessee under this Lease and Lessor shall also be responsible for the repair of any damage which arises as a result of the negligence or the acts or omissions of Lessor or its agents. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises, and they expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease. 7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. (a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" refers to all floor and window coverings, air lines, power panels, electrical distribution, security and fire protection systems, communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term "TRADE FIXTURES" shall mean LESSEE'S machinery and equipment that can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during this Lease as extended does not exceed $50,000 in the aggregate or $10,000 in per alteration. (b) CONSENT. Any Alteration or Utility Installations the Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee's: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which costs and amount equal to the greater of one month's Base Rent, or $10,000, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor. (c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement or any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to one and one-half times the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action, Lessee shall pay Lessor's attorneys' fees and costs. 7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION. (a) OWNERSHIP. Subject to Lessor's right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. All Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises. (b) REMOVAL. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Alterations or Utility Installations made without the required consent. (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or groundwater contaminated by Lessee. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute ??? holdover under the provisions of Paragraph 26 below. 8. INSURANCE; INDEMNITY. 8.1 PAYMENT FOR INSURANCE. Lessee shall pay for all insurance required under Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor under Paragraph 8.2(b) in excess of $2,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice. 8.2 LIABILITY INSURANCE. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force a Commercial General Liability Policy of Insurance protecting Lessee Initials ____ ____ PAGE 4 5 and Lessor against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $2,000,000 per occurrence with an "ADDITIONAL INSURED-MANAGERS OR LESSORS OF PREMISES ENDORSEMENT" and contain the "AMENDMENT OF THE POLLUTION EXCLUSION ENDORSEMENT" for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) CARRIED BY LESSOR. Lessor shall maintain liability insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE. (a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor, with loss payable to Lessor and to any Lender insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by any Lenders, but in no event more than the commercially reasonable and available insurable value thereof. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's personal property shall be insured by Lessee Under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood, including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $10,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss. (b) RENTAL VALUE. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one (1) year. Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of Rent from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next twelve (12) month period. (c) ADJACENT PREMISES. If the Premises are part of a larger building, or of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. 8.4 LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE. (a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance coverage on all of Lessee's personal property. Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $10,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force. (b) BUSINESS INTERRUPTION. If reasonably available, and if Lessor requests Lessee to do so in writing, Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils. (c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no representations that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee's property, business operations or obligations under this Lease. 8.5 INSURANCE POLICIES. Insurance required herein shall be by companies duly licensed or admitted to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, as set forth in the most current issued of "Best's Insurance Guide", or such other ratings may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and change the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, which is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same. 8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7 INDEMNITY. Except for Lessor's sole negligence, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified. Except for Lessee's sole negligence, Lessor shall indemnify, protect, defend and hold harmless Lessee and its agents, partners and lenders, from and against any and all claims and/or damages, liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with the negligence, acts or omissions by Lessor and/or in connection with any conditions existing at the Building or the Premises. If any action or proceeding is brought against Lessee by reason of any of the foregoing matters, Lessor shall upon notice defend the same at Lessor's expense by counsel reasonably satisfactory to Lessee and Lessee shall cooperate with Lessor in such defense. Lessee need not have first paid any such claim in order to be defended or indemnified. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Except for claims arising out of the negligence or the acts or omissions of Lessor or its agents, Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which Premises are a part, or from other sources or places. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. DAMAGE OR DESTRUCTION 9.1 DEFINITIONS. (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in six (6) months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (c) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations, which cannot reasonably be repaired in six (6) months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total. PAGES 5 Initials ___ ___ 6 (c) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements and without deduction for depreciation. (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence of discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 PARTIAL DAMAGE -- INSURED LOSS. If a Premises partial Damage that is an Insured Loss occurs, than Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to: (i) make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect, or have this Lease terminate thirty (30) days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 PARTIAL DAMAGE -- UNINSURED LOSS. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense) Lessor may either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) terminate this Lease by giving written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective sixty (60) days following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within ten (10) days after receipt of the termination notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice. 9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate sixty (60) days following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as provided in Paragraph 8.5. Notwithstanding anything to the contrary in this Lease, if any damage or destruction to the Premises cannot be, or is not, repaired within ninety (90) days of the date of such damage or destruction, then Lessee shall have the right to terminate this Lease upon written notice to Lessor. 9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, either party may terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving a written termination notice to the other party with in thirty (30) days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option on or before the earlier of (i) the date which is ten days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period to cover any shortage in insurance proceeds, Lessor shall, at Lessor's commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option during such period, then this Lease shall terminate on the date specified in the termination notice and Lessee's option shall be extinguished. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES (a) ABATEMENT. In the event of any condition described in Paragraph 9 for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein. (b) REMEDIES. If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within thirty (30) days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within said thirty (30) days, this Lease shall continue in full force and effect. "COMMENCE" shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor. 9.8 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. REAL PROPERTY TAXES. 10.1 DEFINITION OF "REAL PROPERTY TAXES." As used herein the term "REAL PROPERTY TAXES" shall include any form of assessment: real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Premises, Lessor's right to other income therefrom, and/or Lessor's business of leasing, by any authority having the direct or indirect power to tax and where the funds are generated with reference to the Building address and where the proceeds so generated are to applied by the city, county or other local taxing authority of a jurisdiction within which the Premises are located. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring during the term of this Lease, but shall include a change in the ownership of the Premises. 10.2 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes applicable to the Premises during the term of this Lease. Subject to Paragraph 10.2(b), all such payments shall be made at least ten (10) days prior to any delinquency date. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes shall cover any period of time prior to or after the expiration or PAGE 6 Initials ______ ______ 7 termination of this Lease, Lessee's share of such taxes shall be prorated to cover only that portion of the tax bill applicable to the period that this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment. If Lessee shall fail to pay any required Real Property Taxes, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (b) ADVANCE PAYMENT. In the event Lessee incurs a late charge on any Rent payment, Lessor may, at Lessor's option, estimate the current Real Property Taxes, and require that such taxes be paid in advance to lessor by Lessee, either: (i) in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be an amount equal to the amount of the estimated installment of taxes divided by the number of months remaining before the month in which said installment becomes delinquent. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payments shall be adjusted as required to provide the funds needed to pay the applicable taxes. If the amount collected by Lessor is insufficient to pay such Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such additional sums as are necessary to pay such obligations. All moneys paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of its obligations under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may at the option of Lessor, be treated as an additional Security Deposit. 10.3 JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be conclusively determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. 10.4 PERSONAL PROPERTY TAXES. Lessee shall pay, prior to delinquency, all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee. When possible, Lessee shall cause such property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within ten (10) days after receipt of a written statement. 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered. 12. UTILITIES. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, "assign or assignment") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent. Notwithstanding anything to the contrary contained in this Lease, Lessee shall have the right to sublet or assign all or any part of its interests in this Lease or in the Premises, to any person or entity which (i) controls, is controlled by, or is under common control with Lessor, or (ii) acquires all or substantially all of the assets of Lessee. (e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. 12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee. (b) Lessor may accept Rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for Lessee's Default or Breach. (c) Lessor's consent to an assignment or subletting shall not constitute a consent to any subsequent assignment or subletting. (d) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee's obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefore to Lessor, or any security held by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a fee of $1,000 or ten percent (10%) of the current monthly Base Rent applicable to the portion of the Premises which is the subject of the proposed assignment or sublease, whichever is greater, as consideration of Lessor's considering and processing said request. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. (f) Any assignee of, this Lease shall, by reason of accepting such assignment be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment, other than such obligations as are contrary to or inconsistent with provisions of an assignment to which Lessor has specifically consented to in writing. 12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lessee whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee's obligations, Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary. (b) In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor. Initials ______, ______. Page 7 8 (c) Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. DEFAULT; BREACH; REMEDIES. 13.1 DEFAULT; BREACH. A "Default" is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or rules under this Lease. A "Breach" is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period: (a) The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism. (b) The failure of Lessee to make any payment of Rent or any other monetary payment required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) business days following written notice to Lessee. (c) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) a Tenancy Statement, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, other than those described in subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a "DEBTOR" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its guaranty obligation on an anticipatory basis, and Lessee's failure, within sixty (60) days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease. 13.2 REMEDIES. If Lessee fails to perform any of its affirmative duties or obligations, within ten (10) days after written notice (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee upon receipt of invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made by Lessee to be by cashier's check. In the event of a Breach; Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which has been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Breach of this Lease shall not waive Lessor's right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not privately given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1, in such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in the Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession and recover the Rent as it become due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor's interests, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 INDUCEMENT RECAPTURE. Any agreement for free or abated rent or other charges, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS," shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or affect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this paragraph shall not Initials______, ______. PAGE 8 FORM 204N-R-6/98 9 be deemed a waiver by Lessor of the provisions of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a one-time late charge equal to ten percent (10%) of each such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 INTEREST. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within thirty (30) days following the date on which it was due, shall bear Interest from the thirty-first (31st) day after it was due. The interest ("INTEREST") charged shall be equal to the prime rate charged by the largest state chartered bank in the which the Premises are located plus 4%, but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4. 13.6 BREACH BY LESSOR. (a) NOTICE OF BREACH. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. (b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event that neither Lessor nor Lender cures said breach within thirty (30) days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee's expense and offset from Rent an amount equal to the greater of one month's Base Rent or the Security Deposit, and to pay an excess of such expense under protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall document the cost of said cure and supply said documentation to Lessor. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively "CONDEMNATION"), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of any building, or more than twenty-five percent (25%) of the land area not occupied by any building, is taken by Condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation for Lessee's relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation. 15. BROKERS' FEE. 15.1 ADDITIONAL COMMISSION. In addition to the payments owed pursuant to Paragraph 1.10 above, and unless Lessor and the Brokers otherwise agree in writing, Lessor agrees that: (a) if Lessee exercise any Option, (b) if Lessee acquires any rights to the Premises or other premises owned by Lessor and located within the same Project, if any, within which the Premises is located, (c) if Lessee remains in possession of the Premises, with the consent of Lessor, after the expiration of this Lease, or (d) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then, Lessor shall pay Brokers a fee in accordance with the schedule of said Brokers in effect at the time of the execution of this Lease. 15.2 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's interest in this Lease shall be deemed to have assumed Lessor's obligation hereunder. Each Broker shall be a third party beneficiary of the provisions of Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to a Broker any amounts due as and for commissions pertaining to this Lease when due, then such amounts shall accrue interest. In addition, if Lessor fails to pay any amounts to Lessee's Broker when due, Lessee's Broker may send written notice to Lessor and Lessee of such failure and if Lessor fails to pay such amounts within ten (10) days after said notice, Lessee shall pay said monies to its Broker and offset such amounts against Rent. In addition, Lessee's Broker shall be deemed to be a third party beneficiary of any commission agreement entered into by and/or between Lessor and Lessor's Broker. 15.3 REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any) in connection with this Lease, and that no one other than said named Brokers is entitled to any commission or finder's fee in connection herewith. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the Indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto. 16. TENANCY STATEMENT/ESTOPPEL CERTIFICATE. 16.1 Each Party (as "RESPONDING PARTY") shall within then (10) days after written notice from the other Party (the "REQUESTED PARTY") execute, acknowledge and deliver to the Requesting Party an estoppel certificate in writing, in form similar to the then most current "TENANCY STATEMENT" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in accordance and shall be used only for the purposes herein set forth. 17. DEFINITION OF LESSOR. The term "LESSOR" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises of this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligation and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligation and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. Notwithstanding the above, the original Lessor under this Lease, and all subsequent holders of the Lessor's interest in this Lease shall remain liable and responsible with regard to the potential duties and liabilities of Lessor pertaining to Hazardous Substances as outlined in Paragraph 6 above. 18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. PAGE 9 Initials _________, ________. 10 19. DAYS. Unless otherwise specifically indicated to the contrary, the word "days" as used in this Lease shall mean and refer to calendar days. 20. LIMITATION ON LIABILITY. Except with respect to Lessor's fraud, gross negligence or willful misconduct, the obligations of Lessor under this Lease shall not constitute personal obligations of Lessor, the individual partners of Lessor or its or their individual partners, directors, officers or shareholders, and Lessee shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against the individual partners of Lessor, or its or their individual partners, directors, officers or shareholders, or any of their personal assets for such satisfaction. 21. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective, Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. The liability (including court costs and Attorneys' fees), of any Broker with respect to negotiation, execution, delivery or performance by either Lessor or Lessee under this Lease or any amendment or modification hereto shall be limited to an amount up to the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker's liability shall not be applicable to any gross negligence or willful misconduct of such Broker. 23. NOTICES. 23.1 NOTICE REQUIREMENTS. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. Postage Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing. 23.2 DATE OF NOTICE. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantee next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt, provided a copy is also delivered via delivery of mail. If notices is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day. 24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees applicable thereto. 26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to one hundred fifty percent (150%) of the Base Rent applicable during the month immediately preceding the expiration or termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the parties, but rather according to its fair meaning as a whole, as if both parties had prepared it. 29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "SECURITY DEVICE"), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Devices shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one (1) month's rent. 30.3 NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a "NON-DISTURBANCE AGREEMENT") from the Lender which Non-Disturbance Agreement provides that Lessee's possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Further, within sixty (60) days after the execution of this Lease, Lessor shall obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said sixty (60) days, then Lessee may, at Lessee's option, directly contact Lessor's lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement. Notwithstanding anything to the contrary contained herein, no later than _________, 1998, Lessor shall obtain and deliver to Lessee a Non-Disturbance Agreement from all parties holding a Security Device as of the date hereof. 30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein. 31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursed to decision or PAGE 10 Initials ______, _______. 11 judgment. The term, "Prevailing Party" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys' fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times and upon twenty-four (24) hours written notice for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary. All such activities shall be without abatement of rent or liability to Lessee. Lessor may at any time place on the Premises any ordinary "For Sale" signs and Lessor may during the last six (6) months of the term hereof place on the Premises any ordinary "For Lease" signs. Lessee may at any time place on or about the Premises any ordinary "For Sublease" sign. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor's prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction. 34. SIGNS. Except for ordinary "For Sublease" signs, Lessee shall not place any sign upon the Premises without Lessor's prior written consent. All signs must comply with all Applicable Requirements. 35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor's failure within ten (10) days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. CONSENTS. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed, Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor's consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within ten (10) business days following such request. 37. GUARANTOR. 37.1 EXECUTION. The Guarantors, if any, shall each execute a guaranty in the form most recently published by the American industrial Real Estate Association, and each such Guarantor shall have the same obligations as Lessee under this Lease. 37.2 DEFAULT. It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor's behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof. 39. OPTIONS. 39.1 DEFINITION. "Option" shall mean: (a) the right to extend the term of or renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor; (c) the right to purchase or the right of first refusal to purchase the Premises or other property of Lessor. 39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. 39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised. 39.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given three (3) or more notices of Default, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) An Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option. If, after such exercise and prior to the commencement of the extended term, (i) Lessee fails to pay Rent for a period of thirty (30) days after such Rent becomes due (without any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee three (3) or more notices of separate Default during any twelve (12) month period, whether or not the Defaults are cured, or (iii) If Lessee commits a Breach of this Lease. 40. MULTIPLE BUILDINGS. If the Premises are a part of a group of buildings controlled by Lessor, Lessee agrees that it will observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, and care of said properties, including the care and cleanliness of the grounds and including the parking, loading and unloading of vehicles, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises. Lessee, its agents and invitees and their property from the acts of third parties. 42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay. 44. AUTHORITY. If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each party shall, within thirty (30) days after request, deliver to the other party satisfactory evidence of such authority. Initials_____________ PAGE 11 FORM 304N-R-6/96 12 45. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. OFFER. Preparation of this Lease by either Party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 47. AMENDMENTS. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises. 48. MULTIPLE PARTIES. If more than one person or entity is named herein as either Lessor or Lessee, such multiple Parties shall have joint and several responsibility to comply with the terms of this Lease. 49. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease / / IS / / IS NOT attached to this Lease. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. - -------------------------------------------------------------------------------- ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THE LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO: 1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. 2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE. WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES IS LOCATED. - -------------------------------------------------------------------------------- The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. Executed at: Executed at: ---------------------------- ---------------------- on: on: ------------------------------------- ------------------------------- by LESSOR: By LESSEE: Hassan H. Yarpezeshkan and Maxwell Technologies, Inc. - ---------------------------------------- ---------------------------------- Maryam Yarpezeshkan a Delaware corporation - ---------------------------------------- ---------------------------------- By: By: ------------------------------------- ------------------------------- Name Printed: Hassan H. Yarpezeshkan Name Printed: --------------------------- --------------------- Title: Title: ---------------------------------- ---------------------------- By: By: ------------------------------------- ------------------------------- Name Printed: Maryam Yarpezeshkan Name Printed: --------------------------- --------------------- Title: Title: ---------------------------------- ---------------------------- Address: 2810 Inverness Drive Address: -------------------------------- -------------------------- San Diego, California -------------------------------- ---------------------------------- Telephone: (619) 587-2595 Telephone: ( ) ------------------------------ ---------------------- Facsimile: ( ) Facsimile: ( ) ------------------------ ------------------ Federal ID No. Federal ID No. -------------------------- -------------------- BROKER: BROKER: - ---------------------------------------- ---------------------------------- Executed at: Executed at: ---------------------------- ---------------------- on: on: ------------------------------------- ------------------------------- By: By: ------------------------------------- ------------------------------- Name Printed: Name Printed: --------------------------- --------------------- Title: Title: ---------------------------------- ---------------------------- Address: Address: -------------------------------- -------------------------- - ---------------------------------------- ---------------------------------- Telephone: ( ) Telephone: ( ) ------------------------ ------------------ Facsimile: ( ) Facsimile: ( ) ------------------------ ------------------ Federal ID No. Federal ID No. -------------------------- -------------------- NOTE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So. Flower Street, Suite 600, Los Angeles, California 90017. (213) 687-8777. Fax No. (213) 687-8616. PAGE 12 FORM 204N-R-5/96 (c) Copyright 1996 - By American Industrial Real Estate Association. All rights reserved. No part of these works may be reproduced in any form without permission in writing. 13 RENT ADJUSTMENT(S) ADDENDUM TO STANDARD LEASE DATED March 1, 1998 ------------------------------------------------------------------ BY AND BETWEEN (LESSOR) Hassan H. Yarpezeshkan and Maryam Yarpezeshkan ------------------------------------------------ (LESSEE) Maxwell Technologies, Inc. ------------------------------------------------ PROPERTY ADDRESS: 10547 Viper Way, San Diego, California ------------------------------------------------------- Paragraph 50 ------ A. RENT ADJUSTMENTS: The monthly rent for each month of the adjustment period(s) specified below shall be increased using the method(s) indicated below: (Check Method(s) to be Used and Fill in Appropriately) [X] I. COST OF LIVING ADJUSTMENT(S) (COL) (a) On (Fill in COL Adjustment Date(s): March 1, 1999; March 1, 2000; March 1, 2001; March 1, 2002; and March 1, 2003 the monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be adjusted by the change, if any, from the Base Month specified below, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for (select one): [ ] CPIW (Urban Wage Earners and Clerical Workers) or [X] CPIU (All Urban Consumers) for (Fill in Urban Area): Los Angeles -- Anaheim -- Riverside. All items (1982-1984 = 100) herein referred to as "C.P.I." Cost of Living Adjustments shall not exceed four percent (4%) of the then existing Base Rent. (b) The monthly rent payable in accordance with Paragraph A1(a) of this Addendum shall be calculated as follows: the Base Rent set forth in paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the C.P.I. of the calendar month 2 (two) months prior to the month(s) specified in paragraph A1(a) above during which the adjustment is to take effect, and the denominator of which shall be the C.P.I. of the calendar month which is two (2) months prior to (select one): [X] the first month of the term of this Lease as set forth in paragraph 1.3 ("Base Month") or [ ] (Fill in Other "Base Month"): ____________. The sum so calculated shall constitute the new monthly rent hereunder, but in no event, shall any such new monthly rent be less than the rent payable for the month immediately preceding the date for rent adjustment. (c) In the event the compilation and/or publication of the C.P.I. shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the C.P.I. shall be used to make such calculation. In the event that Lessor and Lessee cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitrators shall be paid equally by Lessor and Lessee. [ ] II. MARKET RENTAL VALUE ADJUSTMENT(S) (MRV) (a) On (Fill in MRV Adjustment Date(s): _________________________________ _______________________________________________________________________________ the monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be adjusted to the "Market Rental Value" of the property as follows: 1) Four months prior to the Market Rental Value (MRV) Adjustment Date(s) described above, Lessor and Lessee shall meet to establish an agreed upon new MRV for the specified term. If agreement cannot be reached, then: i) Lessor and Lessee shall immediately appoint a mutually acceptable appraiser or broker to establish the new MRV within the next 30 days. Any associated costs will be split equally between the parties, or ii) Both Lessor and Lessee shall each immediately select and pay the appraiser or broker of their choice to establish a MRV within the next 30 days. If, for any reason, either one of the appraisals is not completed within the next 30 days, as stipulated, then the appraisal that is completed at that time shall automatically become the new MRV. If both appraisals are completed and the two appraisers/brokers cannot agree on a reasonable average MRV then they shall immediately select a third mutually acceptable appraiser/broker to establish a third MRV within the next 30 days. The average of the two appraisals closest in value shall then become the new MRV. The costs of the third appraisal will be split equally between the parties. Initials:____ Initials:____ ____ ____ RENT ADJUSTMENT(S) Page 1 of 2 NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: American Industrial Real Estate Association, 700 So. Flower St., Ste. 600, Los Angeles, CA 90017. (213) 687-8777. Fax No. (213) 687-8616. (c) 1991 American Industrial Real Estate Association. 14 2) In any event, the new MRV shall not be less than the rent payable for the month immediately preceding the date for rent adjustment. (b) Upon the establishment of each New Market Rental Value as described in paragraph AII: 1) the monthly rental sum so calculated for each term as specified in paragraph AII(a) will become the new "Base Rent" for the purpose of calculating any further Cost of Living Adjustments as specified in paragraph AI(a) above and 2) the first month of each Market Rental Value term as specified in paragraph AII(a) shall become the new "Base Month" for the purpose of calculating any further Cost of Living Adjustments as specified in paragraph AI(b). [ ] III. FIXED RENTAL ADJUSTMENT(S)(FRA) The monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be increased to the following amounts on the dates set forth below: On (Fill in FRA Adjustment Date(s)): The New Base Rent shall be: ____________________________________ $________________________________ ____________________________________ $________________________________ ____________________________________ $________________________________ ____________________________________ $________________________________ B. NOTICE: Unless specified otherwise herein, notice of any escalations other than Fixed Rental Adjustment(s) shall be made as specified in paragraph 23 of the attached Lease. C. BROKER'S FEE: The Real Estate Brokers specified in paragraph 1.10 of the attached Lease shall be paid a Brokerage Fee for each adjustment specified in accordance with paragraph 15 of the attached Lease. Initials: ________ Initials: ________ ________ ________ RENT ADJUSTMENT(S) PAGE 2 of 2 NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: American Industrial Real Estate Association, 700 So. Flower St., Ste. 600, Los Angeles, CA 90017. (213) 687-8777. Fax No. (213) 687-8616. (C) 1991 American Industrial Real Estate Association. 15 OPTION(S) TO EXTEND ADDENDUM TO STANDARD LEASE DATED March 1, 1998 ---------------------------------------------------------------- BY AND BETWEEN (LESSOR) Hassan H. Yarpezeshkan and Maryam Yarpezeshkan ----------------------------------------------- (LESSEE) Maxwell Technologies, Inc. ----------------------------------------------- PROPERTY ADDRESS: 10547 Viper Way, San Diego, California ----------------------------------------------------- Paragraph 51 A. OPTION(S) TO EXTEND: Lessor hereby grants to Lessee the option to extend the term of this Lease for 2 additional 36 month period(s) commencing when the prior term expires upon each and all of the following terms and conditions: (i) Lessee gives to Lessor, and Lessor actually receives on a date which is prior to the date that the option period would commence (if exercised) by at least 3 and not more than 12 months, a written notice of the exercise of the option(s) to extend this Lease for said additional term(s), time being of essence. If said notification of the exercise of said option(s) is (are) not so given and received, the option(s) shall automatically expire; said option(s) may (if more than one) only be exercised consecutively; (ii) The provisions of paragraph 39, including the provision relating to default of Lessee set forth in paragraph 39.4 of this Lease are conditions of this Option; (iii) All of the terms and conditions of this Lease except where specifically modified by this option shall apply: (iv) The monthly rent for each month of the option period shall be calculated as follows, using the method(s) indicated below: (Check Method(s) to be Used and Fill in Appropriately) / / 1. COST OF LIVING ADJUSTMENT(S) (COL) (a) On (Fill in COL Adjustment Date(s):___________________________________ _________________________________________________________________________the monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be adjusted by the change, if any, from the Base Month specified below. In the Consumer Price index of the Bureau of Labor Statistics of the U.S. Department of Labor for (select one): / / CPI W (Urban Wage Earners and Clerical Workers) or / / CPI U (All Urban Consumers), for (Fill in Urban Area):________________________. All items (1982-1984 - 100), herein referred to as "C.P.I." (b) The monthly rent payable in accordance with paragraph A1(a) of this Addendum shall be calculated as follows: the Base Rent set forth in paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the C.P.I. of the calendar month 2 (two) months prior to the month(s) specified in paragraph A1(a) above during which the adjustment is to take effect, and the denominator of which shall be the C.P.I. of the calendar month which is two (2) months prior to (select one): / / the first of the term of this Lease as set forth in paragraph 1.3 ("Base Month") or / / (Fill in Other "Base Month"): ______________________. The sum so calculated shall constitute the new monthly rent hereunder, but in no event, shall any such new monthly rent be less than the rent payable for the month immediately preceding the date for rent adjustment. (c) In the event the compilation and/or publication of the C.P.I. shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the C.P.I. shall be used to make such calculation. In the event that Lessor and Lessee cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the then rules of said association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitrators shall be paid equally by Lessor and Lessee. /X/ II. MARKET RENTAL VALUE ADJUSTMENT(S) (MRV) (a) On (Fill in MRV Adjustment Date(s): the date of commencement of each Option term.__________________________________________ the monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be adjusted to the "Market Rental Value" of the property as follows: 1) Four months prior to the Market Rental Value (MRV) Adjustment Date(s) described above, Lessor and Lessee shall meet to establish an agreed upon new MRV for the specified term. If agreement cannot be reached, then: Initials: ____________ Initials: _________ ____________ _________ OPTION(S) TO EXTEND Page 1 of 2 NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: American Industrial Real Estate Association, 865 South Figueroa Street, Suite M-1, Los Angeles, CA 90071, (213) 687-8777, Fax No. (213) 867-8618. (c) 1991 American Industrial Real Estate Association. 16 i) Lessor and Lessee shall immediately appoint a mutually acceptable appraiser or broker to establish the new MRV within the next 30 days. Any associated costs will be split equally between the parties, or ii) Both Lessor and Lessee shall each immediately select and pay the appraiser or broker of their choice to establish a MRV within the next 30 days. If, for any reason, either one of the appraisals is not completed within the next 30 days, as stipulated, then the appraisal that is completed at that time shall automatically become the new MRV. If both appraisals are completed and the two appraisers/brokers cannot agree on a reasonable average MRV then they shall immediately select a third mutually acceptable appraiser/broker to establish a third MRV within the next 30 days. The average of the two appraisals closest in value shall then become the new MRV. The costs of the third appraisal will be split equally between the parties. 2) In any event, the new MRV shall not be less than the rent payable for the month immediately preceding the date for rent adjustment. (b) Upon the establishment of each New Market Rental Value as described in paragraph AII: 1) the monthly rental sum so calculated for each term as specified in paragraph AII(a) will become the new "Base Rent" for the purpose of calculating any further Cost of Living Adjustments as specified in paragraph AI(a) above and 2) the first month of each Market Rental Value term as specified in paragraph AII(a) shall become the new "Base Month" for the purpose of calculating any further Cost of Living Adjustments as specified in paragraph AI(b). [ ] III. FIXED RENTAL ADJUSTMENT(S)(FRA) The monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be increased to the following amounts on the dates set forth below: On (Fill in FRA Adjustment Date(s)): The New Base Rent shall be: ____________________________________ $________________________________ ____________________________________ $________________________________ ____________________________________ $________________________________ ____________________________________ $________________________________ B. NOTICE: Unless specified otherwise herein, notice of any escalations other than Fixed Rental Adjustments shall be made as specified in paragraph 23 of the attached Lease. C. BROKER'S FEE: The Real Estate Brokers specified in paragraph 1.10 of the attached Lease shall be paid a Brokerage Fee for each adjustment specified in accordance with paragraph 15 of the attached Lease. Initials: ________ Initials: ________ ________ ________ OPTION(S) TO EXTEND PAGE 2 of 2 NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: American Industrial Real Estate Association, 345 South Figueroa Street, Suite M-1, Los Angeles, CA 90071. (213) 687-8777, Fax No. (213) 687-8618. (C) 1991 American Industrial Real Estate Association. EX-10.40 8 EXHIBIT 10.40 1 Exhibit 10.40 ASSIGNMENT AND ASSUMPTION - FACILITY LEASE 2 Recording requested by, and when recorded, return to: Maxwell Technologies Systems Division, Inc. 9275 Sky Park Court San Diego, CA 92123 Attention: Donald M. Roberts ASSIGNMENT AND ASSUMPTION AGREEMENT (FACILITY LEASE) This Assignment and Assumption Agreement (the "Agreement") is made and entered into this 15th day of April, 1998, by and between PRIMEX PHYSICS INTERNATIONAL COMPANY, a California corporation (formerly known as Physics International Company), hereinafter referred to as "Assignor," and MAXWELL TECHNOLOGIES SYSTEMS DIVISION, INC., a California corporation, hereinafter referred to as "Assignee," with reference to the following recitals of fact: R E C I T A L S WHEREAS, THE CONNECTICUT NATIONAL BANK, NOT INDIVIDUALLY BUT SOLELY AS TRUSTEE UNDER THAT CERTAIN TRUST AGREEMENT DATED AS OF DECEMBER 29, 1986, AMONG THE TRUSTEE AND MERCED ASSOCIATES, A MARYLAND GENERAL PARTNERSHIP, collectively are the Lessee (the "Lessee"), and D. HEBDEN PORTEUS, DAVID M. HAIG, FRED C. WEYLAND AND PAUL MULLIN GANLEY, TRUSTEES UNDER THE WILL AND OF THE ESTATE OF SAMUEL MILLS DAMON, DECEASED, collectively are the Lessor (the "Lessor"), under the certain Ground Lease dated December 29, 1986 (the "Ground Lease"), as the same may have been amended, for the that certain real property located in San Leandro, California (the "Premises"), and more particularly described in Exhibit A hereto; and WHEREAS, Lessee subleased the Premises to Assignor, under that certain Ground Sublease dated December 29, 1986 (the "Ground Sublease"), as the same may have been amended; and WHEREAS, Lessee leased the improvements situated on the Premises (the "Building") to Assignor, under that certain Facility Lease dated December 29, 1986 and Amendment No. 1 dated as of March 9, 1997 (the "Facility Lease"), as the same may have been amended; and -1- 3 WHEREAS, Assignee has entered into an agreement to acquire simultaneously from Assignor the entirety of its interests in both the Ground Sublease and the Facility Lease; and WHEREAS, Assignee has entered into that certain Sublease Agreement dated April 15, 1998 ("Sublease") with Assignor, by which it has agreed to sublease a portion of the Premises to Assignor and to construct tenant improvements thereon; and WHEREAS, effective as of the date on which Assignee acquires the Facility Lease from Assignor (the "Transfer Date"), Assignor desires to assign to Assignee, and Assignee desires to assume from Assignor, all of the rights and obligations of Assignor under the Facility Lease; and NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: AGREEMENT 1. Assignment. Effective as of the Transfer Date, except as provided herein, Assignor hereby sells, assigns, transfers and conveys to Assignee all of Assignor's right, title and interest in and to the Facility Lease, including, without limitation, any extension and renewal options. 2. Assumption. Effective as of the Transfer Date, except as provided herein, Assignee hereby assumes and agrees to perform all of the obligations of Assignor under the Facility Lease. 3. Notices of Default. Assignee agrees to promptly deliver to Assignor a copy of any notice of default given by Lessee under the Facility Lease. 4. Assignor Estoppel. Assignor is the holder of lessor's interests under the Facility Lease. Assignor confirms that the documents described above constitute the entire Facility Lease for the Premises, including any and all amendments and modifications, and that the Facility Lease is in full force and effect and is the valid legal and binding obligation of Assignor. To the actual knowledge of Assignor, no defaults or potential defaults exist with respect to the Facility Lease. 5. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which, together, shall constitute one and the same instrument. -2- 4 IN WITNESS WHEREOF, the undersigned have entered into this Agreement as of the day and year first above written. ASSIGNOR: PRIMEX PHYSICS INTERNATIONAL COMPANY, a California corporation By: [SIG] ------------------------------------ Name: [ILLEGIBLE] Its: Treasurer By: ------------------------------------ Name: Its: ASSIGNEE: MAXWELL TECHNOLOGIES SYSTEMS DIVISION, INC., a California corporation By: /s/ WALTER P. ROBERTSON ------------------------------------ Name: Walter P. Robertson Its: President By: ------------------------------------ Name: Its: -3- 5 EXHIBIT A All buildings and improvements situated on the hereinafter described lands situated in the City of San Leandro, County of Alameda, State of California which are and shall remain real property. PARCEL 1: Beginning at a point on the northwestern line of the 66.29 acre tract of land fifthly described in the Decree of Distribution in the Matter of the Estate of Georges LeRoy, deceased, in the Superior Court, Contra Costa County, Probate No. 11478, certified copy of which decree was recorded November 22, 1948, in Book 5660 OR, page 403 (AC/88342), distant thereon north 62 degrees 30' east 631.30 feet from the northeastern line of Merced Street; thence along said line of said 66.92 acre tract, north 62 degrees 30' east 315.65 feet; thence south 27 degrees 30' east 690 feet to the direct extension northeasterly of the northwestern line of the land described as Parcel III in the deed from Oakland Title Insurance Company to Southern Pacific Company, recorded March 23, 1954, in Book 7278 OR, page 297, (AJ/23953); thence along said direct extension south 62 degrees 30' west 315.65 feet to the most northern corner of said Parcel III in the last mentioned deed; and thence north 27 degrees 30' west 690 feet to the point of beginning. PARCEL 2: Portion of the 66.92 acre tract of land fifthly described in the Decree of Distribution in the Matter of the Estate of Georges LeRoy, deceased, in the Superior Court of Contra Costa County, Probate No. 11478, a certified copy of which decree was recorded November 22, 1948, in Book 5660 OR, page 403 (AC/88342), described as follows: Beginning at the intersection of the northeastern line of Merced Street, 60 feet wide, with the northwestern line of said 66.92 acre tract, thence along the northwestern line of said 66.92 acre tract north 62 degrees 30' east 631.30 feet; thence south 27 degrees 30' east 690 feet; thence south 62 degrees 30' west 631.30 feet to said line of Merced Street; thence along the last named line north 27 degrees 30' west 690 feet to the point of beginning. Excepting therefrom that portion quitclaimed to the City of San Leandro by instrument recorded October 10, 1957, Book 8490 OR, page 595, (AM/100857). -4- 6 STATE OF CALIFORNIA) ) SS. COUNTY OF SAN DIEGO) On this 15th day of April 1998, before me a Notary Public in and for ---- ----- said County and State, personally appeared Stephen C. Curley who being duly ----------------- sworn, deposes and says that he is Vice President & Treasurer of PRIMEX -------------------------- TECHNOLOGIES, INC. the corporation described in the above ASSIGNMENT and that he executed the above ASSIGNMENT as a free act on behalf of PRIMEX TECHNOLOGIES, INC. /s/ MYRNA R. JARO ------------------------------- Notary Public SEAL: MYRNA R. JARO Comm. #1141819 NOTARY PUBLIC-CALIFORNIA San Diego County My Comm. Expires June 18, 2001 7 STATE OF CALIFORNIA) ) SS. COUNTY OF SAN DIEGO) On this 15th day of April 1998, before me a Notary Public in and for ---- ----- said County and State, personally appeared Walter P. Robertson who being duly ------------------- sworn, deposes and says that he is President of MAXWELL TECHNOLOGIES SYSTEM --------- DIVISION, INC. the corporation described in the above ASSIGNMENT and that he executed the above ASSIGNMENT as a free act on behalf of MAXWELL TECHNOLOGIES SYSTEM DIVISION, INC. /s/ MYRNA R. JARO ------------------------------- Notary Public SEAL: MYRNA R. JARO Comm. #1141819 NOTARY PUBLIC - CALIFORNIA San Diego County My Comm. Expires June 18, 2001 8 FACILITY LEASE THIS FACILITY LEASE is made as of the 29th day of December, 1986, by and between THE CONNECTICUT NATIONAL BANK, not individually but solely in its capacity as Trustee (the "Landlord"), under that certain Trust Agreement dated as of December 29, 1986 (the "Trust Agreement"), between Merced Associates, a Maryland general partnership (the "Partnership"), and Connecticut National Bank (the "Trustee"), and PHYSICS INTERNATIONAL COMPANY, a California corporation (the "Tenant"). RECITALS A. Landlord is the owner of certain real property as hereafter set forth constituting the Premises as hereafter defined. B. Tenant desires to lease the Premises from the Landlord in accordance with the terms and conditions hereinafter set forth. WITNESSETH NOW, THEREFORE in consideration of the rental hereinafter agreed upon and the performance of all the conditions and covenants hereinafter set forth on the part of Tenant to be performed, Landlord does hereby lease unto Tenant, and the latter does lease from the former the existing structure containing approximately two hundred forty thousand 240,000 square feet known as 2700 Merced Street in San Leandro, California, together with improvements to the structure to be constructed in accordance with the provisions of Paragraph 20 below (the existing structure together with the contemplated improvements are referred to herein as the "Premises"). The lease of the Premises is subject to the state of Landlord's title existing as of the date of the commencement of the term hereof, including but not limited to, (i) those matters referred to in the preliminary title report dated September 30, 1986, Order No. 106576 by Western Title Insurance Company; (ii) any state of facts which an accurate survey or physical inspection of the Premises might show; (iii) the Indenture (the "Ground Lease") of even date herewith by and between Landlord and the Trustees under the Will and of the Estate of Samuel H. Damon (the "Damon Estate"); and (iv) the Ground Sublease (the "Ground Sublease") dated of even date herewith between Landlord and Tenant. This Lease specifically excludes the ground beneath and around the Premises. EXHIBIT E-2 9 1. Term. The term of this Lease shall be as follows: 1.1 Original Term. The original term of this Lease shall be for a period of twenty (20) years commencing on December 30, 1986 and ending on December 31, 2006. 1.2 Renewal Term. Tenant shall have the option to extend the original term of this lease for two (2) consecutive renewal terms of ten (10) years each on the same terms and conditions contained herein, except that the Annual Net Rent (defined below) will be as described in Paragraph 3 below. Tenant shall exercise each such option by providing written notice of its exercise of such option to Landlord not less than one hundred eighty (180) days prior to the expiration of the original term or the renewal term then in effect; provided, however, that the exercise of each such option shall be subject to the conditions that: (i) Tenant is not in Default under any provisions of this Lease (including the cross default provision contained in Paragraph 17.9 below) on the date of exercise of such option or on the date of commencement of the renewal term; (ii) Tenant shall be and shall have been in possession and occupancy of the Premises at all times since the effective date of this Lease; and (iii) Tenant simultaneously exercises its option to renew the Ground Sublease. 2. Annual Net Rent - Original Term. Tenant covenants and agrees to pay Landlord during each year of the original term of this Lease net rental (the "Annual Net Rent") in the amounts and on the dates as set forth on Exhibit A, attached hereto. Unless otherwise provided on Exhibit A, Annual Net Rental shall be due and payable in arrears on the last day of each June and December in equal semi-annual installments. 3. Annual Net Rent - Renewal Term. Annual Net Rent for each renewal term will be the annual fair market rental value of the Premises during each renewal term. In the event the Landlord and the Tenant cannot agree upon the annual fair market rental value of the Premises within ninety (90) days prior to the expiration of the original term or of any renewal term, as the case may be, then the Annual Net Rent for such renewal term shall be determined by three impartial real estate appraisers, one to be appointed by each of the parties hereto, and Landlord and Tenant shall each promptly name one such appraiser and give written notice thereof to the other party, and in case either party shall fail so to do within ten (10) days after appointment of the first appraiser, the appraiser already appointed shall name a second appraiser, and the two appraisers thus appointed in either manner shall appoint a third appraiser, and in case of their failure so to do within ten (10) days after appointment of the second appraiser, either party may have such third appraiser (who shall in this case be a member of the American Institute of Real Estate Appraisers or other similar organization, who maintains an office in the County of Alameda, Contra Costa, Santa Clara or the city or county of San Francisco) appointed by any -2- 10 person then sitting as Judge of the Superior Court of the State of California in and for the County of Alameda and the three appraisers so appointed shall thereupon proceed to determine the matter in question, and the decision of said appraisers or a majority of them shall be final, conclusive and binding upon both parties. The cost of such appraisal other than attorneys' fees shall be shared equally by the parties hereto. Until determination of such rent by agreement or appraisal as herein provided, semi-annual installments at the same rate payable for the preceding year shall be paid on account thereof. 4. Net Lease; Additional Rent. It is intended by Landlord and Tenant that this Lease be a net, net, net lease and that the Annual Net Rent payable by Tenant shall be absolutely net to the Landlord. The Tenant agrees to pay directly any and all costs and expenses in connection with the ownership or leasing of the Premises. The Tenant covenants and agrees to pay to Landlord as additional rent (the "Additional Rent"), promptly after Landlord's demand, any such costs and expenses which cannot be paid directly by Tenant, but which are paid by Landlord. The costs and expenses for which Tenant is responsible shall include, but not be limited to, the following: 4.1. Utilities. All costs of water rent and sewer service charges assessed against the Premises and all costs of electricity, gas, telephone and other utilities used or consumed in the Premises, together with all taxes, levies or other charges with respect to any such utilities. 4.2. Real Estate Taxes. All real property taxes, water, rents, footage assessments, excise taxes, general and special assessments, supplemental taxes and other governmental charges and impositions of every kind to whomsoever assessed and whether now in being or not which may be assessed upon, or payable for, or in respect of, the Premises or any part thereof for any period wholly or partly within the term of this Lease, or with respect to the use, occupancy or possession of the Premises at any time during the term hereof; provided that any imposition relating to the fiscal period of the imposing authority falling partly within and partly without the term hereof shall be apportioned from the beginning or to the end of the term, as the case may be. 4.3. Personal Property Taxes. All taxes or assessments levied or assessed during the term of this Lease against any leasehold interest of Tenant or any personal property or trade fixtures of Tenant of any kind owned by Tenant or placed in, upon or about the Premises by Tenant. 4.4. Fees, Charges and Expenses. Any and all fees, charges and expenses of every kind and nature which Tenant shall incur or Landlord shall pay or become obligated to pay because of or in connection with owning, operating, leasing, managing and maintaining of the Premises including, without limitation, the following: (i) all supplies and materials used, and labor charges -3- 11 incurred, in the operation, maintenance, decoration, repairing and cleaning of the Premises; (ii) the cost of all equipment purchased or rented which is utilized in the performance of Landlord's obligations hereunder, and the cost of maintenance and operation of any such equipment; (iii) the cost of all management, maintenance and service agreements for the Premises and the equipment therein, including, without limitation, alarm service, security service, window cleaning, and elevator maintenance; (iv) accounting costs, including the cost of audits by certified public accountants, and legal and engineering fees and expenses incurred in connection with the operation and management of the Premises; (v) wages, salaries, commissions, and related expenses of all on-site and off-site agents or employees engaged in the operation, maintenance and security in the Premises; (vi) the cost of all reasonable and necessary insurance coverage for the Premises; (vii) the cost of repairs, replacements and general maintenance to the Premises, structural or non-structural, including without limitation the mechanical, electrical and heating ventilating and air-conditioning equipment and/or systems; (viii) any and all exterior landscaping; (ix) cost of removal of trash, rubbish, garbage and other refuse from the Premises as well as removal of ice and snow from the sidewalks on or adjacent to the Premises; and (x) every other expense which would be considered as an expense of maintaining, operating, leasing, insuring, managing or repairing the Premises. 4.5 Fees and Expenses of the Trustee. All fees and expenses paid or payable to the Trustee by the Partnership (including, without limitation, all costs and expenses relating to indemnification of the Trustee) which are related to any of the transactions or matters referred to in any of the Operative Documents (defined below), but excluding, however, any such fees or expenses incurred as a result of the wrong doing or gross negligence of the Partnership. 4.6 Interpretation. Nothing contained in this Paragraph 4 shall be construed to impose any duty or obligation upon Landlord to provide any service or benefit referred to this Paragraph. Landlord is under no duty or obligation to provide any service or benefit other than as expressly required by the terms of this Lease. 5. Payment of Rental. Tenant covenants and agrees to pay the rental herein reserved and each installment thereof promptly when and as due. All rentals shall be paid to Landlord at the address specified in Paragraph 30 hereof, or at such other place or to such appointee of Landlord, as Landlord may from time to time designate in writing. All monies to be paid by Tenant to Landlord hereunder, whether or not designated as rent shall be deemed to be Additional Rent and shall be collectible as rent upon Landlord's demand. -4- 12 6. Default Charges. In the event Tenant fails to pay Landlord when due any rental payment or other charge or sum due hereunder, Landlord may at its option charge Tenant a late charge equal to eighteen percent (18%) per annum (or such lesser amount as may be permitted by law) of the payment or other charge or sum for the period the payment or other charge or sum is overdue, which late charge shall be collectible and shall be payable by Tenant to Landlord upon demand. 7. Advancements. If Tenant should fail to perform any of the obligations imposed upon it under this Lease, Landlord may, but shall not be obligated to, make advances to perform the same on behalf of Tenant and all sums so advanced shall immediately upon demand become due and payable under this Lease. Tenant will repay on demand all sums so advanced on Tenant's behalf, plus any expenses or costs incurred by Landlord, including reasonable attorneys' fees, with interest thereon at the rate of eighteen percent (18%) per annum (or such lesser amount as may be permitted by law), accruing from the date of demand. 8. Use. Tenant covenants and agrees to use and occupy the Premises solely for industrial and mercantile purposes. Tenant agrees to comply with all applicable zoning, use and other laws and regulations, and provide and install at its own expense any additional equipment or alterations required to comply with all such laws and regulations as required from time to time. 9. Compliance with Laws. Tenant covenants and agrees that it will, at its own expense, observe, comply with and execute all laws, orders, rules, directions, requirements and regulations of any and all governmental departments, bodies, bureaus, agencies and officers, and all rules, directions, requirements and recommendations of the local board of fire underwriters and the fire insurance rating organizations having jurisdiction over the area in which the Premises are situated, or other bodies or agencies now or hereafter exercising similar functions in the area in which the Premises are situated, in any way pertaining to the Premises or the use and occupancy thereof. In the event Tenant shall fail or neglect to comply with any of the aforesaid laws, orders, rules, directions, requirements or recommendations, Landlord or its agents may enter the Premises and take all such action and do all such work in or to the Premises as may be necessary in order to cause compliance with such laws, orders, rules, directions, requirements or recommendations. 10. Representations and Warranties of Tenant. Tenant represents and warrants that: (a) Tenant is a corporation duly organized and validly existing in good standing under the laws of the state of its incorporation. (b) The execution, delivery and performance of this Lease and all related instruments and documents: (i) have been duly authorized by all necessary corporate action on the part of Tenant; (ii) do not require the approval of any stockholder, trustee or holder of any obligations of Tenant except such as have been duly obtained; and (iii) do not and will -5- 13 not contravene any law, governmental rule, regulation or order now binding on Tenant, or the charter or by-laws of Tenant, or contravene the provisions of, or constitute a default under, or result in the creation of any lien or encumbrance upon the property of Tenant under any indenture, mortgage, contract or other agreement to which Tenant is a party or by which it or its property is bound; provided, however, Tenant makes no such warranty or representation as to any state or federal securities laws. (c) This Lease and all related instruments and documents, when entered into, will constitute legal, valid and binding obligations of Tenant enforceable against Tenant in accordance with the terms thereof, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or others laws or equitable principals relating to or limiting creditors rights generally, and except that the remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding may be brought. (d) Tenant is not in default under any material obligation for the payment of borrowed money, for the deferred purchase price of property or for the payment of any rent under any lease agreement which, either individually or in the aggregate, would materially adversely affect the financial condition of Tenant or the ability of Tenant to perform its obligations hereunder. (e) All of the information contained in the schedules now or hereafter attached hereto as Exhibit B is true and correct. (f) All of the representations and warranties made by Tenant in the Purchase and Assignment Agreement of even date herewith (the "Purchase and Assignment Agreement") between Landlord and Tenant were true and correct when made. 11. Assignment and Subletting. Tenant shall have the right, upon sixty (60) days prior written notice to Landlord, to assign this Lease and to sublet the Premises, for a period not to exceed the original term of this Lease, provided, however, at the time of any such assignment or subletting (1) Tenant is not in Default hereof; and (2) Tenant simultaneously assigns the Ground Sublease or subleases the property let thereunder, as the case may be, to the same person or entity as is assigned this Lease or sublet these Premises. Notwithstanding any such assignment or subletting Tenant shall not be relieved of any liability under this Lease. Additionally, no party other than Tenant may exercise the renewal options set forth in Paragraph 1.2 above, unless Olin Corporation ("Guarantor") provides Landlord with a Guaranty Agreement satisfactory to Landlord, guarantying payment and performance of such parties' obligations to Landlord during any renewal term. 12. Insurance. Tenant shall during the entire term of this Lease, and any extensions and renewals thereof, obtain and maintain at its sole cost and expense, and keep in full force and effect, with Tenant, Landlord and all mortgagees, holders of -6- 14 deeds of trust or assignees of Landlord named as insureds thereon, as their respective interests may appear, the following insurance coverages: 12.1 Casualty Insurance. Tenant will insure the Premises against loss by earthquake (if such insurance is commercially available at reasonably economical premiums determined by Tenant in good faith) theft, fire, casualty and extended coverage under insurance policies which shall be written in forms, amounts and by companies satisfactory to the Landlord, provided, however, that the amount of such insurance shall not be less than the full insurable value of the Premises (and in all events not less than the amount necessary to avoid co-insurance restrictions) as the same may increase but not decrease from time to time. All insurance proceeds shall be payable to Landlord or Landlord's designee. 12.2 Liability Insurance. Tenant shall obtain and maintain in full force and effect public liability and property damage insurance in such amounts, with such insurance companies, and upon policy forms acceptable to and approved by Landlord, but in any event in an amount of not less than Ten Million Dollars ($10,000,000) per occurrence; provided, however, that Tenant may self-insure not more than Eight Million Dollars ($8,000,000.00) of such required coverage for so long as Guarantor's tangible net worth is not less than Three Hundred Million Dollars ($300,000,000.00). As used herein, "tangible net worth" shall mean the sum of the par or stated value of all outstanding capital stock, additional paid in capital, surplus and undivided profits, less any amounts attributable to good will, patents, copyrights, mailing lists, catalogs, trademarks, bond discount and underwriting expenses, organizational expenses and other intangibles, all as determined in accordance with generally accepted accounting principles consistently applied. 13. Indemnification. Landlord shall not be liable to Tenant for any loss or damage to Tenant or to any other person or to the property of Tenant or of any other person unless such loss or damage shall be caused by or result from the willful misconduct or gross negligence of Landlord. Tenant shall defend and does hereby agree to indemnify and save harmless Landlord and the Partnership, and their successors or assigns, from all expenses, claims and demands of every kind, that may be brought against it, them or any of them for or on account of any damage, loss or injury to persons or property in or about the Premises or the land on which the Premises are situated, or on account of any damage, loss or injury resulting from or claimed to result from the presence on the Premises of any hazardous chemical, toxic waste or radioactive material, or arising from or out of Tenant's use or occupancy thereof, or occasioned wholly or in part by any act or omission of Tenant, its agents, servants, contractors, employees or invitees, and from any and all costs and expenses, counsel fees, and other charges which may be imposed upon -7- 15 Landlord and/or the Partnership, and their successors and assigns, or which it or they may be obligated to incur in consequence thereof (including, without limitation, indemnification of the Trustee pursuant to Sections 5.03 and 7.01 of the Trust Agreement). 14. Alterations. Tenant shall not make any alterations to the Premises, the total cost of which for any one project exceeds Fifty Thousand Dollars, ($50,000), without the prior written consent of Landlord, which shall not be unreasonably withheld. If Tenant shall desire to make such alterations, plans for the same shall first be submitted to and approved by Landlord, and all work and installations shall be performed by Tenant at its own expense in accordance with approved plans. Tenant agrees that all such work shall be done in a good and workmanlike manner, that the structural integrity of the Premises shall not be impaired, and that no liens shall attach to the Premises by reason thereof. Tenant agrees to obtain at Tenant's expense, all permits required for such alterations. If requested by Landlord, Tenant shall, prior to commencing construction, deposit with Landlord a completion bond in at least the estimated cost of the proposed alteration in such form and with such surety as is satisfactory to Landlord. Landlord may also make approval contingent upon compliance with such other reasonable conditions as Landlord may stipulate. 15. Ownership of Alterations. Unless Landlord shall elect that all or part or any alteration made by Tenant to the Premises shall remain on the Premises after the termination of this Lease, the Premises shall be restored to their original condition by Tenant before the expiration of this Lease at Tenant's sole expense. Upon such election by Landlord, any such alterations, improvements, betterments or mechanical equipment, including but not limited to, heating and air conditioning systems, shall become the property of Landlord as soon as they are affixed to the Premises, and all right, title and interest thereof of Tenant shall immediately cease, unless otherwise agreed to in writing by Landlord. Landlord shall have the sole right to collect any insurance for any damage of any kind to any of the improvements placed upon the Premises by Tenant. Tenant shall promptly pay any franchise, minor privilege or other tax or assessment resulting directly or indirectly from any alterations or improvements made by Tenant to the Premises. Tenant shall repair promptly, at its own expense, any damage to the Premises caused by bringing into the Premises any property for Tenant's use, or by the installation or removal of such property, regardless of fault or by whom such damage shall be caused. 16. Repairs and Maintenance. The Premises hereby leased are leased to Tenant "AS IS." Landlord shall be under no liability, nor (except as provided in Paragraph 20 below) have any obligation to do any work or make any repairs in or to the Premises, an any work which may be necessary to outfit the Premises for Tenant's occupancy or for the operation of Tenant's business -8- 16 therein is the sole responsibility of Tenant and shall be performed by Tenant at its own cost and expense. Tenant acknowledges that it has fully inspected the Premises prior to the execution of this Lease, and Tenant further acknowledges that Landlord has made no warranties or representations with respect to the condition or state of repairs of the Premises. Tenant will, during the term of this Lease, keep the Premises and appurtenances (including windows, doors, plumbing, heating and electrical facilities and installations) in good order and repair and will make all necessary repairs thereof at its own expense, including all necessary repairs to the exterior walls and roof of the Premises. Tenant shall also maintain any driveways and parking areas designated for its exclusive use. Tenant will, at the expiration of the term of this Lease, or at the sooner termination thereof by forfeiture or otherwise, deliver the Premises in good order and condition, reasonable wear and tear excepted. In the event Tenant shall not proceed promptly and diligently to make any repairs to perform any obligations imposed upon it within forty-eight (48) hours after receiving written notice from Landlord to make such repairs or perform such obligation, then and in such event, Landlord may, at its option, enter the Premises and do and perform the things specified in said notice, without liability on the part of Landlord for any loss or damage resulting from any such action by Landlord and Tenant agrees to pay promptly upon demand any cost or expense incurred by Landlord in taking such action. 17. Default. Any of the following events shall constitute default (a "Default") by Tenant: 17.1 Payment. If the rent (Annual Net Rent, or Additional Rent) shall not be paid when and as due and shall be in arrears, in whole or in part for a period of five (5) days after written notice from Landlord; or 17.2 Performance. If Tenant shall have failed to perform any other term, condition, or covenant of this Lease on its part to be performed for a period of thirty (30) days after written notice of such failure from Landlord provided, however, if such failure cannot reasonably be remedied within thirty (30) days then Tenant shall not be in default hereunder if Tenant commences cure within thirty (30) days after notice and thereafter diligently and continuously pursues cure; or 17.3 Abandonment. If the Premises are vacant, unoccupied or deserted for a continuous period of sixty (60) days or more at any time during the term of this Lease; or 17.4 Involuntary Bankruptcy. The entry of a decree or order for relief by a court having jurisdiction against or with respect to Tenant in an involuntary case under the federal bankruptcy laws or any state insolvency or similar laws ordering the liquidation of Tenant or reorganization of Tenant or of Tenant's business and affairs, or the appointment of a receiver, -9- 17 liquidator, assignee, custodian, trustee, or similar official for Tenant or any of Tenant's property, including but not limited to the Premises, and the failure to have such decree, order or appointment discharged or dismissed within a period of ninety (90) days from the date of entry; or 17.5 Voluntary Bankruptcy. The commencement by Tenant of a voluntary case under the Federal bankruptcy laws or any state insolvency or similar laws or the consent by Tenant to the appointment or taking possession by a receiver, liquidator, assignee, trustee, custodian or similar official for Tenant or any of Tenant's property, including but not limited to the Premises, or the making by Tenant of an assignment for the benefit of, creditors, or the failure by Tenant generally to pay Tenant's debts as and when they become due; 17.6 Sale or Encumbrance. If Tenant's leasehold interest under this Lease is sold under execution, attachment or decree of court to satisfy any debt of Tenant, or if any lien (including a mechanic's lien) is filed against Tenant's leasehold interest and is not discharged within ten (10) days thereafter. 17.7 Failure to Maintain Insurance. If the Tenant fails to maintain continuously in force the insurance coverages required by Paragraph 12 above, in strict conformity with the requirements of that Paragraph. 17.8 Breach of Warranty or Representation. If any warranty or representation made by Tenant herein shall have been materially false or misleading when made provided; however, that in the event that any of the warranties or representations contained in Paragraph 10(e) shall have been materially false or misleading when made, Landlord's sole remedy shall be pursuant to Paragraph 38 below. 17.9 Cross Default. If the Tenant or Guarantor is in default under the terms of any document, paper or agreement with Landlord or to which Landlord is a party, including but not limited to the following documents executed of even date herewith: the Purchase and Ground Lease Agreement among the Damon Estate, Landlord and Tenant; the Purchase and Assignment Agreement; the Agreement of Guaranty Nos. 1 and 2 between Guarantor and Landlord; and the Ground Sublease (together with the Ground Lease collectively referred to as the "Operative Documents"). 18. Remedies Upon Default. In the event of the occurrence of any Default as defined in Paragraph 17 hereof, Landlord, in addition to any and all legal and equitable remedies it may have, shall have the following remedies: 18.1 Distrain. To distrain for any rent or additional rent in default. -10- 18 18.2 Termination; Possession of Premises. At any time after Default, without notice, to declare this Lease terminated and enter the Premises with or without legal process; and in such event Landlord shall have the benefit of all provisions of law now or hereafter in force respecting the speedy recovery of possession from Tenant's holding over or proceedings in forcible entry and detainer, and Tenant waives any and all provisions for notice under such laws. 18.3 Damages. Notwithstanding such reentry and/or termination, Tenant shall immediately be liable to Landlord for the sum of the following: (i) all rent (whether Annual Net Rent or Additional Rent) then in arrears; (ii) all other liabilities of Tenant and damages sustained by Landlord as a result of Tenant's Default, including but not limited to, the reasonable costs of reletting the Premises and any broker's commissions payable as a result thereof; (iii) all of Landlord's costs and expenses (including reasonable counsel fees) in connection with such Default and recovery of possession; (iv) the difference between the rent reserved under this Lease (Net Annual Rent and Additional Rent) for the balance of the term and the fair rental value of the Premises for the balance of the term to be determined as of the date of reentry; or at Landlord's option in lieu thereof, Tenant shall pay the amount of the rent (Net Annual Rent or Additional Rent) reserved under this Lease at the times herein stipulated for payment of such rent for the balance of the term, less any amount received by Landlord during such period from others to whom the Premises may be rented on such terms and conditions and at such rentals as Landlord, in its sole discretion, shall deem proper; and (v) any other damages recoverable by law. In the event Landlord brings any action against Tenant to enforce compliance by Tenant with any covenant or condition of this Lease, including the covenant to pay rent (Net Annual Rent or Additional Rent), and it is judicially determined that Tenant has defaulted in performing or complying with any such covenant or condition, then and in such event, Tenant shall pay to Landlord all costs and expenses incurred by Landlord in bringing and prosecuting such action against Tenant, including a reasonable attorney's fee. 18.4 Liquidated Damages. In the event Landlord elects to sell the Premises then, in lieu of Landlord's damages as set forth in Paragraph 18.3 above, Landlord shall be entitled to liquidated damages as follows: Landlord may require Tenant to pay the Stipulated Loss Value determined as specified below (the "Stipulated Loss Value") plus an amount equal to all rent (whether Annual Net Rent or Additional Rent) apportioned through the date upon which the Stipulated Loss Value is paid and all of Landlord's costs and expenses (including reasonable attorney's fees) incurred by reason of Tenant's default. The Stipulated Loss Value shall be calculated as the product of (a) the Total Project Costs (defined to be the sum of all unreimbursed expenditures or obligations made or incurred by Landlord, the Partnership or Maryland National Leasing Corporation ("MNLC") in -11- 19 connection with the acquisition, financing, improvement, ownership or leasing of the Premises, all personal property or fixtures therein or thereon and the real property subject to the Ground Lease) and (b) the applicable percentage factor set forth on the Schedule of Stipulated Loss Values on Exhibit "C" attached hereto. The Stipulated Loss Value shall be payable on and determined as of the next scheduled rent payment date after the date upon which Landlord gives written notice of its election to require payment thereof. Upon payment of the liquidated damages this Lease shall terminate. At such time as Landlord closes on a sale of the Premises, Landlord shall repay to Tenant so much of the amount Landlord received from Tenant on account of the Stipulated Loss Value, pursuant to this Paragraph 18.4, as is equal to the net proceeds of sale of the Premises less any costs or expenses (including reasonable attorneys fees) Landlord incurred in connection with reacquiring possession of, holding and selling the Premises. Landlord shall use good faith efforts to maximize the net profit upon the sale of the Premises. 19. Damage or Destruction. If during the Lease term the Premises are damaged or destroyed by fire or other casualty, Tenant shall promptly cause such damage to be repaired or the Premises to be rebuilt. The Premises shall be repaired or rebuilt to its condition immediately prior to the casualty. To the extent insurance proceeds on account of such damage are made available to Landlord and are free from the superior claim of any mortgagee or holder of any deed of trust, Landlord shall, provided the tenant is not in Default hereof, make such insurance proceeds available to Tenant, as reimbursement for Tenant's expenses in connection with the repair or rebuilding. To the extent such proceeds are insufficient to pay for the repairs or rebuilding required of Tenant pursuant to this Paragraph 19, Tenant shall supply any and all additional funds necessary to complete the required work. There shall be no abatement of rent whether or not such fire or other casualty makes any portion or all of the Premises untenantable. In the event such fire or other casualty damages or destroys any of Tenant's leasehold improvements, alterations, betterments, fixtures or equipment, Tenant shall cause the same to be repaired or restored at Tenant's sole cost and expense. 20. Improvements to Premises. Landlord shall improve the Premises by the construction of an approximately fifteen thousand (15,000) square foot building. Tenant shall cause the construction of the building, as construction manager for Landlord, in strict conformity with the terms and provisions of the Purchase and Assignment Agreement. The building to be constructed shall at all times be deemed to be part of the Premises and shall be subject to all terms and conditions of this Lease. The building shall at all times be the property of Landlord subject to the Tenant's rights under this Lease. -12- 20 21. Right of Entry. Landlord and its agents, servants, employees, including any builder or contractor employed by Landlord, shall have the absolute and unconditional right, license and permission, at any and all reasonable times, to enter and inspect the Premises or any part thereof, and at the option of Landlord, to make such reasonable repairs and/or changes in the Premises as Landlord may deem necessary or proper and/or to enforce and carry out any provision of this Lease. 22. Expiration of Term. It is agreed that the term of this Lease shall expire and terminate at the end of the original term hereof or at the end of any renewal term, as the case may be, without the necessity of any notice by or to any of the parties hereto, unless otherwise provided herein. If Tenant fails to vacate the Premises when required, Tenant shall hold the Premises as a tenant from month to month, subject to all the other terms and conditions of this Lease, but shall pay rent at an amount equal to double the Annual Net Rent in effect just prior to such expiration or termination. Landlord shall, upon such expiration or termination of this Lease, be entitled to the benefit of all laws relating to the speedy recovery of possession of lands and tenements held over by tenants that may be now in force or may hereafter be enacted. 23.1 Taking of a Material Part. If during the term of this Lease all or any material part or the Premises shall be taken by or under power of eminent domain then, at Landlords option, either (1) this Lease shall terminate as of, and the rent (Annual Net Rent and Additional Rent) shall be apportioned to and abate from and after, the next rent payment date following the date of taking and the Tenant shall pay to the Landlord, on such date the Stipulated Loss Value together with rent (Annual Net Rent and Additional Rent) accrued until and including such date plus any other monies due Landlord and any monies referred to in this Paragraph 23, Tenant shall be entitled to receive any award from the condemning authority up to the amount of the Stipulated Loss Value payment, and Landlord shall use reasonable efforts to maximize any condemnation award; or (2) this Lease shall terminate and the rent (Annual Net Rent and Additional Rent) shall be apportioned to and abate from and after the date title vests in the condemning authority, and Tenant shall have no right to participate in any award or damages for such taking and hereby assigns all of its right, title and interest therein to Landlord. 23.2 Taking of Less than a Material Part. In the event less than a material part of the Premises is taken, Landlord shall receive any condemnation award and Tenant shall, at its expense, promptly make such repairs and improvements as shall be -13- 21 necessary to make the remainder of the Premises adequate to permit Tenant to carry on its business to substantially the same extent and with substantially the same efficiency as before the taking. Landlord shall make available to Tenant such condemnation proceeds as are available to Landlord and free from the superior claim of any mortgagee or holder of any deed of trust, to defray the cost of reconstruction or repair actually incurred by Tenant. In no event shall Landlord be required to expend an amount in excess of the award received by Landlord for such taking. In no event shall there be any abatement of the rent hereunder (Annual Net Rent and Additional Rent). 23.3 Definitions. For purposes of this Paragraph, "taking" shall include a negotiated sale or lease or transfer of possession of the Premises to a condemning authority under bona fide threat of condemnation for public use. For purposes of this Paragraph, "a material part of the Premises" shall mean such part that the remainder thereof is, in Landlord's sole discretion, rendered inadequate to be attractive to prospective tenants and support a rental stream sufficient to provide Landlord with its required after tax return. 23.4 Tenant's Participation in Award. Nothing herein shall be deemed to prevent Tenant from claiming and receiving from the condemning authority if legally payable, compensation for the taking of Tenant's own tangible property and such amount as may be payable by statute or ordinance toward Tenant's damages for Tenant's loss of business and relocation expenses. 24. Subordination. This Lease shall be subject and subordinate to the lien of any ground lease, mortgages and/or deeds of trust now or hereafter placed or imposed upon the Premises, unless the ground lessor, the mortgagee of such mortgage or the holder of such deed of trust elects to have Tenant's interest hereunder superior to the interest of the ground lessor, mortgagee of such mortgage or the holder of such deed of trust. This subordination provision shall be self-operative and no further instrument of subordination shall be required. Tenant agrees to execute any documents which are required to effect such subordination. Tenant further hereby constitutes and appoints Landlord as Tenant's attorney-in-fact to execute any such instrument for and on behalf of Tenant. Upon Tenant's written request, Landlord will use reasonable efforts to obtain from the holders of any mortgage or deed of Trust a non-disturbance agreement, which would provide that in the event of any foreclosure sale Tenant's possession of the Premises shall not be disturbed provided Tenant is not in Default of this Lease. 25. Certification. Tenant shall, without charge and from time to time, within ten (10) days following the written request of the Landlord, execute, acknowledge and deliver a written certificate affirming, that to the best knowledge, information and belief of the Tenant: -14- 22 (a) This Lease is unmodified and in full force and effect, or if there have been any modifications, that the Lease is in full force and effect as modified and stating the modifications. (b) Whether or not there then exists any set-offs or defenses against the enforcement of any of the agreements, terms, covenants or conditions of this Lease and any modifications thereto upon the part of the Landlord (as applicable) to be performed or complied with, and if so, specifying the same. (c) The date, if any, to which the Annual Net Rent, Additional Rent and any other charges payable hereunder has been paid in advance. (d) The amount of the Total Project Costs through a certain date are as set forth on Landlord's certificate. (e) Any such other matters and facts as are reasonably requested by Landlord. 2.6 Advertise For Rent or For Sale. During the last one hundred eighty (180) days of the final term of this Lease (being that term following which no renewal term exists or has been exercised by the Tenant), the Landlord may maintain "to rent" or "for sale" signs at reasonable locations upon the exterior of the Premises and may exhibit the Premises to any prospective tenants and purchasers following reasonable advance notice to tenant. 27. Attornment. If Landlord assigns this Lease or the rents hereunder to a creditor as security for a debt, Tenant shall, after notice of such assignment and upon demand by Landlord or the assignee, pay all sums thereafter becoming due Landlord hereunder to such assignee. Tenant shall also, upon receipt of such notice, have all policies of insurance required hereunder endorsed so as to protect the assignee's interest as it may appear and shall deliver such policies, or certificates thereof, to the assignee. In the event the Premises are sold at any foreclosure sale or sales, by virtue of any judicial proceedings or otherwise, this Lease shall continue in full force and effect and Tenant agrees, upon request, to attorn to and acknowledge the foreclosure purchaser or purchasers at such sale as the Landlord hereunder. 28. Non-Waiver of Future Enforcement. The receipt of rent by Landlord with knowledge of any breach of this Lease by Tenant, or of any default on the part of Tenant in the observance or performance of any of the conditions or covenants of this Lease, shall not be deemed to be a waiver of any provisions of this Lease. No failure on the part of Landlord to enforce any covenant or provision herein contained nor any waiver of any right hereunder by Landlord, shall discharge or invalidate such covenant or provision or affect the right of Landlord to enforce the same in the event of any subsequent default. The receipt by -15- 23 Landlord of any rent or any sum of money or any other consideration hereunder paid by Tenant after the termination, in any manner, of the term herein demised, will not destroy, or in any manner impair the efficacy of any such notice of termination as may have been given hereunder by Landlord to Tenant prior to the receipt of any such sum of money or other consideration, unless so agreed to in writing and signed by Landlord. Neither acceptance of the keys nor any other act or thing done by Landlord or any agent or employee during the term herein demised shall be deemed to be an acceptance of a surrender of said Premises, excepting only an agreement in writing signed by Landlord accepting or agreeing to accept such surrender. 29. Recordation of Lease. Tenant agrees that it will, upon Landlord's request, execute a Memorandum of this Lease in a form suitable for recording under applicable law. The parties shall divide equally all costs of recordation. 30. Notice. Any notice required or permitted by or in connection with this Lease shall be in writing and made by hand delivery or by over night delivery service or by certified mail, return receipt requested, postage prepaid, addressed to the respective parties at the appropriate address set forth below or to such other address as may be hereafter specified by written notice by any party, and shall be considered given as of the date of hand delivery or as of one (1) day after sending overnight delivery service or three (3) days after the date of mailing, independent of the date of delivery, as the case may be: If to Tenant: Physics International Company 2700 Merced Street P.O. Box 1538 San Leandro, CA 94577 Attn: J.H. Banister, Jr. Copy to: Olin Corporation 120 Long Ridge Road Stamford, Connecticut 06904 Attn: Corporate Secretary If to Landlord: The Connecticut National Bank 777 Main Street Hartford, Connecticut 06115 Attn: Bond and Trustee Administration -16- 24 Copy to: Maryland National Leasing Corporation 502 Washington Avenue Towson, Maryland 21204 Attn: Vice President-Operations Copy to: Olin Financial Services, Inc. 120 Long Ridge Road P.O. Box 1355 Stamford, Connecticut 06904 Attn: Corporate Secretary Copy to: Alan J. Mogol, Esquire Ober, Kaler, Grimes & Shriver 1600 Maryland National Bank Building 10 Light Street Baltimore, Maryland 21202 31. Severability. It is agreed that, for the purpose of any suit brought or based on this Lease, this Lease shall be construed to be a divisible contract, to the end that successive actions may be maintained thereon as successive periodic sums shall mature or be due hereunder, and it is further agreed that failure to include in any suit or action any sum or sums then matured or due shall not be a bar to the maintenance of any suit or action for the recovery of said sum or sums so omitted; and Tenant agrees that it will not in any suit or suits brought or arising under this Lease for a matured sum for which judgment has not previously been obtained or entered, plead, rely on or interpose the defenses of res judicata, former recovery, extinguishment, merger, election of remedies or other similar defense as a defense to said suit or suits. If any term, clause or provision of this Lease is declared invalid by a court of competent jurisdiction, the validity of the remainder of this Lease shall not be affected thereby but shall remain in full force and effect. 32. Non-Waiver. It is understood and agreed that nothing herein shall be construed to be a waiver of any of the terms, covenants or conditions herein contained, unless the same shall be in writing, signed by the party to be charged with such waiver and no waiver of the breach of any covenant herein shall be construed as a waiver of such covenant or any subsequent breach thereof. No mention in this Lease of any specific right or remedy shall preclude Landlord from exercising any other right or from having any other remedy or from maintaining any action to which it may be otherwise entitled either at law or in equity. -17- 25 33. Successors and Assigns. Except as otherwise herein provided, this Lease and the covenants and conditions herein contained shall inure to the benefit of and be binding upon Landlord and Tenant and their respective, successors and assigns. In the event Landlord's interest under this Lease is assigns. In the event Landlord's interest under this Lease is transferred or assigned and written notice thereof is given to Tenant, Landlord, or any subsequent assignee or transferee of Landlord's interest under this Lease who gives such notice to Tenant shall automatically be relieved and released from and after the date of such transfer or conveyance from all liability hereunder. The liability of Landlord, its successors and assigns, under this Lease shall at all times be limited solely to Landlord's interest in the land and improvements comprising the Premises and in the event the owner of Landlord's interest in this Lease is at any time an individual, partnership, joint venture or unincorporated association, Tenant agrees that such individual or the members or partners of such partnership, joint venture or unincorporated association shall not be personally or individually liable or responsible for the performance of any of Landlord's obligation hereunder. 34. Captions. The captions of the various sections of this Lease are for convenience only and are not a part of this Lease. Such captions shall not be construed to define or limit any of the provisions of this lease. 35. Final and Entire Agreement. This Lease contains the final and entire agreement between the parties hereto, and neither they nor their agents shall be bound by any terms, conditions or representations not herein written. 36. Purchase and Assignment Agreement and Ground Sublease. The covenants, duties and obligations of Tenant hereunder shall be supplemental to the covenants, duties and obligations of the Tenant under the Purchase and Assignment Agreement and Ground Sublease. No provision of this Lease shall ever be construed to restrict, limit or modify any covenant, duty or obligation of the Tenant under the Purchase and Assignment Agreement and Ground Sublease. All of Landlord's rights and remedies hereunder shall be cumulative and supplemental to Landlord's rights and remedies under the Ground Sublease and the Purchase and Assignment Agreement. In the event the Landlord's rights under the Ground Lease are terminated for any reason, then Landlord may elect to terminate this Lease simultaneously with the termination of Landlord's rights under the Ground Lease. 37. Governing Law. The laws of the State of California shall govern the rights and obligations of the parties to this Lease and the interpretation, construction and enforceability thereof and any and all issues relating to the transactions contemplated in this Lease. Tenant consents to the jurisdiction of the courts of State of Maryland, including the jurisdiction of the United States District Court for the District of Maryland to the extent a jurisdictional basis exists, and agrees that venue -18- 26 shall be proper in any county in the State of Maryland, in the City of Baltimore or in the United States District Court for the District of Maryland if suit is filed to enforce, interpret or construe this Lease. 38. Tax Indemnification. 38.1 General. Tenant's indemnification obligations hereunder shall not extend to changes in applicable corporate income tax rates. If by reason of the misrepresentation of or breach by Tenant, of the warranty and representation set forth in Section 10 (e) hereof, Landlord in computing its taxable income or liability for tax, shall either lose, or shall not have, or shall lose the right to claim, or there shall be disallowed or recaptured, for Federal and/or state income tax purposes, in whole or in part, the benefit of ACRS Deductions; hereinafter referred to as a "Loss"; then Tenant shall pay Landlord the Tax Indemnification Payment as additional rent. As used herein, "ACRS Deductions" shall mean the deductions under the Accelerated Cost Recovery System with respect to the acquisition cost of any item of the Premises in accordance with the accelerated method set forth in Section 168 (as in effect on the date such item of the Premises is first placed in service) of the Internal Revenue Code of 1986, as now or hereafter amended, for property assigned to the depreciation categories specified in Exhibit B attached hereto; and "Tax Indemnification Payment" shall mean such amount as, after consideration of (i) all taxes required to be paid by Landlord in respect of the receipt thereof under the laws of any governmental or taxing authority in the United States, and (ii) the amount of any interest or penalties which may be payable by Landlord in connection with the Loss or contesting the Loss pursuant to Paragraph 38.2 hereof, shall be required to cause Landlord's after-tax net return (the "Net Return") to be equal to, but no greater than, the Net Return contemplated consistently with current tax laws as of the date of this Lease. Landlord promptly shall notify Tenant in writing of such Loss and Tenant shall pay to Landlord the Tax Indemnification Payment within thirty (30) days of such notice unless such Loss is contested pursuant to Paragraph 38.2 hereof. For these purposes, a Loss shall occur upon the earliest of (i) the happening of any event (such as disposition or change in use of the Premises) which will cause such Loss; (ii) the payment by Landlord to the Internal Revenue Service or State taxing authority of the tax increase resulting from such Loss; (iii) the date on which the Loss is realized by Landlord; or (iv) the adjustment of the tax return of Landlord to reflect such Loss. The tax indemnification provided in this Section 38 is for the benefit of the Trustee, the Partnership, Olin Financial Services, Inc. ("OFS") and MNLC. As used in this Section 38, the -19- 27 term "Landlord" shall mean and include the Trustee, the Partnership, OFS and MNLC, and the consolidated Federal taxpayer group of which each is a member (as applicable). 38.2 Contest. If the Internal Revenue Service makes a claim against Landlord which, if successful, would require Tenant to make a Tax Indemnification Payment, Landlord agrees to contest the claim on request of Tenant subject to the following conditions: (a) Landlord agrees promptly after becoming aware thereof to notify Tenant of any such claim. Tenant agrees that, in the event it desires the claim to be contested, it shall request Landlord to contest the claim within thirty (30) days after such notice from Landlord. Landlord agrees not to make any payment of any tax which is the subject of the claim before it gives the notice and during the thirty (30) day period after it gives the notice. (b) Landlord shall consult with Tenant regarding the commencement and prosecution of any and all administrative proceedings with the Internal Revenue Service in contesting the claim. Landlord reserves the right to decline to pursue administrative proceedings. If administrative proceedings are not pursued or are not successful, Landlord shall, at the request of Tenant, contest the claim by either paying the tax claimed and suing for a refund in the appropriate court or contesting the claim in the United States Tax Court and, if necessary, bring appropriate appeals. (c) Prior to taking any such action and prior to each appeal from any adverse determination, Landlord shall have received from Tenant an opinion of outside tax counsel of recognized standing, which counsel is reasonably acceptable to Landlord, to the effect that on the basis of law and fact a meritorious defense exists to such claim or that there is a meritorious basis for such refund claim, identifying such defense or basis, as the case may be. Subject to the foregoing, in no event will Landlord compromise or settle the claim or cease to contest the claim without the written consent of Tenant (provided, however, that Landlord may so compromise, settle or cease to contest if it waives in writing its right to an indemnity for any Loss resulting from such claim). Tenant agrees to reimburse Landlord for all reasonable costs incurred by Landlord as a result of contesting the claim and to pay all reasonable costs and expenses which Landlord may incur in contesting the claim. These costs and expenses shall include, without limitation, reasonable attorneys' and accountants' fees and disbursements. If Tenant elects to pay the tax claimed and sue for a refund, Tenant shall provide Landlord with sufficient funds (as an interest free loan) to pay the tax. -20- 28 (d) If any such claim referred to above shall be made by the Internal Revenue Service and Tenant shall have requested Landlord to contest such claim and otherwise has complied with its obligations under this sub-part, Tenant's liability for indemnification hereunder shall become fixed upon final determination of the liability of Landlord. At such time, Tenant shall become obligated for the payment of any indemnification hereunder resulting from the outcome of such contest. If Tenant has provided funds to Landlord (as an interest free loan) to pay the tax pursuant to the foregoing paragraph) and Landlord subsequently receives a refund of tax in connection with such final determination (or would have received a refund had any payment made from funds provided by Tenant not been applied in payment of a tax liability determined to be owing by Landlord for which Tenant is not required to make a Tax Indemnification Payment), such refund or an amount equal to such amount so applied, together with any interest also received (or which would have been received) by Landlord and fairly attributable to such refund of tax or amount so applied, will be paid over to Tenant, to the extent of Tenant's payment to Landlord. 39. Tenant's Option to Terminate. 39.1 Exercise. So long as Tenant is not in default hereof, then in the event Tenant in good faith determines that it is uneconomic for Tenant to continue leasing the Premises, Tenant may terminate this Lease effective upon any date on which the next installment of Annual Net Rent is due after December 31, 1988 (the "Tenant's Termination Date"), provided (i) Tenant gives Landlord at least one hundred eighty (180) days' prior written notice, and (ii) Tenant pays Landlord the Stipulated Loss Value calculated pursuant to Paragraph 39.2 hereof), plus all rent (Annual Net Rent and Additional Rent) due as of that date and any other monies then owed Landlord by Tenant. Landlord may (at its sole discretion) elect to sell the Premises to a third party or to determine the fair value of the Premises and notify Tenant thereof in writing. 39.2 Adjustment for Fair Market Value. If Landlord elects to determine the fair market value of the Premises and notify Tenant thereof in writing and (a) if Tenant accepts Landlord's determination of fair market value, on the Tenant's Termination Date, Tenant shall pay Landlord the amount (if any) by which the Stipulated Loss Value exceeds the agreed fair market value, or (b) if Tenant does not accept Landlord's determination of fair market value, on the Tenant's Termination Date, Landlord shall convey to Tenant all right, title and interest of Landlord in and to the Premises by grant deed upon receipt by Landlord from Tenant of all sums due pursuant to Paragraph 39.1 hereof. 39.3 Subsequent Sale. If Landlord does not elect to determine the fair market value and Landlord sells the Premises within two (2) years after the Tenant's Termination Date, then at -21- 29 such time as Landlord closes on a sale of the Premises, Landlord shall apply the net proceeds of sale of the Premises (less any costs or expenses, including reasonable attorneys' fees, incurred by Landlord in connection with reacquiring possession, holding and selling the Premises) to reimburse Tenant for the amount paid by Tenant to Landlord as Stipulated Loss Value under Paragraph 39.1; solely to the extent of such Stipulated Loss Value actually received by Landlord from Tenant. Landlord shall use its good faith efforts to maximize the net proceeds upon any sale of the Premises. 40. Landlord's Option to Terminate. 40.1 Exercise. In the event there shall be any change in the ownership of the capital stock or voting power of Guarantor and as a result thereof any one or more of Guarantor's senior lenders shall call any senior loan indebtedness, then Landlord may, upon thirty (30) days' prior written notice, terminate this Lease and cause Tenant to pay to Landlord the Stipulated Loss Value (or the alternative amount required pursuant to Paragraph 40.2 hereof), determined and payable as of the date upon which the next installment of Annual Net Rent is due, plus all rent (Annual Net Rent and Additional Rent) prorated through the date of termination (the "Landlord's Termination Date") and any other monies then due Landlord from Tenant. Notwithstanding the payment of the Stipulated Loss Value, Tenant shall be permitted to remain in possession of the Premises for up to one hundred fifty (150) days from Landlord's notice, subject to all the terms and conditions of this Lease but Tenant shall continue to pay Annual Net Rent in the amount last due prior to Landlord's notice. Landlord may (at its sole discretion) elect to sell the Premises to a third party or to determine the fair market value of the Premises and notify Tenant thereof in writing. 40.2 Adjustment for Fair Market Value. If Landlord elects to determine the fair market value of the Premises and notify Tenant thereof in writing and (a) if Tenant accepts Landlord's determination of fair market value, on the Landlord's Termination Date, Tenant shall pay Landlord the amount (if any) by which the Stipulated Loss Value exceeds the agreed fair market value, or (b) if Tenant does not accept Landlord's determination of fair market value, on the Landlord's Termination Date, Landlord shall convey to Tenant all right, title and interest of Landlord in and to the Premises by grant deed upon receipt by Landlord from Tenant of all sums due pursuant to Paragraph 40.1 hereof. 40.3 Subsequent Sale. If Landlord does not elect to determine the fair market value and Landlord sells the Premises within two (2) years after the Landlord's Termination Date, then at such time as Landlord closes on a sale of the Premises, Landlord shall apply the net proceeds of sale of the Premises (less any costs or expenses, including reasonable attorneys' -22- 30 fees, incurred by Landlord in connection with reacquiring possession, holding and selling the Premises) to reimburse Tenant for the amount paid by Tenant to Landlord as Stipulated Loss Value under Paragraph 40.1, solely to the extent of such Stipulated Loss Value actually received by Landlord from Tenant. Landlord shall use its good faith efforts to maximize the net proceeds upon any sale of the Premises. 41. Quiet Enjoyment. Landlord covenants that, upon the payment of the rent (Annual Net Rent and Additional Rent) herein, Tenant shall have and hold the Premises, free from any interference from the Landlord, but subject to the terms of this Lease, of any mortgage, deed of trust, or other security instrument now existing or hereafter placed on the Premises or any portion thereof. 42. Survival of Obligations. All of Tenant's duties and obligations which accrue during the term of this Lease shall survive the expiration of earlier termination of this Lease. IN WITNESS WHEREOF, the parties hereto have executed this Lease under seal as of the day and year above written with the specific intention that this Lease constitute an instrument under seal. WITNESS/ATTEST: LANDLORD: THE CONNECTICUT NATIONAL BANK, not individually but solely in its capacity as Trustee By: [SEAL] - ------------------------------- -------------------------- TENANT: PHYSICS INTERNATIONAL COMPANY [SIG] By: [SIG] [SEAL] - ------------------------------- -------------------------- -23- 31 ACKNOWLEDGMENTS STATE OF ______________, CITY OF ________________, TO WIT: I HEREBY CERTIFY that on this ___________ day of December, 1986, before me the subscriber, a Notary Public of the State and subdivision aforesaid, personally appeared _________________________, who acknowledged ______self to be the _______________________ of THE CONNECTICUT NATIONAL BANK, not individually but solely in its capacity as trustee, and that __he as such ____________________________, being so authorized to do, executed the foregoing instrument for the purposes therein contained by signing the name of the Trustee by _____self as __________________________ in my presence. IN WITNESS WHEREOF, I have hereunto set my hand and official seal. ------------------------------------- NOTARY PUBLIC My Commission Expires: STATE OF CALIF., COUNTY OF ALAMEDA TO WIT: I HEREBY CERTIFY that on this 29th day of December, 1986, before me the subscriber, a Notary Public of the State and subdivision aforesaid, personally appeared JAMES BANISTER, JR., who acknowledged himself to be the Senior Vice President of PHYSICS' INTERNATIONAL COMPANY, a California corporation and that he as such Senior Vice President, being so authorized to do, executed the foregoing instrument for the purpose therein contained by signing in my presence the name of the corporation by himself as Senior Vice President. IN WITNESS WHEREOF, I have hereunto set my hand and official seal. /s/ JENNIFER TRUJILLO ------------------------------------- NOTARY PUBLIC My Commission Expires: April 7, 1987 [NOTARY PUBLIC SEAL] -24- 32 EXHIBIT "A" TO FACILITY LEASE I. GENERAL NARRATIVE As a condition of entering into this Facility Lease, Landlord and Tenant have agreed that Landlord will acquire the Facility and make certain improvements to the Facility which are required by the Tenant. Landlord and Tenant have further agreed that the rentals to be charged for the Facility will be established at a reasonable level at the commencement of the Facility Lease and will be increased on a periodic basis to reflect the increased investment in the Facility by the Landlord as the improvements are being completed. For portions of the facility purchased and leased in 1987, the Initial Rentals described below will be increased based upon the cost of 1987 improvements to the Facility as described in the table below.
Base Lease Term Construction Period ---------------------------------------------- -------------------------------- Daily Rent Payment as a Percentage of Year Property Semi-Annual Rent Payment Acquisition Cost is Placed Type of as a Percentage of (Due on 6/30/87 & Construction in Service Property Acquisition Cost Base Lease Period 12/31/87) Period - -------------- -------- --------------------------- ----------------- ------------------ ------------ Payments Lease Rate Factor -------- ----------------- 1987 Land Improve- 1 - 19 5.991629% December 31, 1987 0.036111% Date of Acquisition ments 20 - 38 7.323102 through December 31, 2006 through December 31, 1987 1987 Real Estate 1 - 19 6.602842% December 31, 1987 0.036111% Date of Acquisition 70 - 38 8.070140 through December 31, 2006 through December 31, 1987
Landlord and Tenant have further agreed that additional rental adjustments will be made in order to minimize Tenant's rents. Landlord in good faith will calculate rental adjustments periodically and in calculating this adjustment Landlord will consider: 1. The cost or projected costs of improvements to the Facility. 2. The dates that improvements are paid for or anticipated to be paid for and placed in service. 3. The tax benefits to be realized by the Landlord on the Facility and on the improvements. 4. Actual rates of return available in the market to Landlord on similar investments. 5. Transaction expenses incurred by Landlord related to the ownership or leasing of the property. Smith Barney will in good faith review the calculations performed by the Landlord, and will certify to the Tenant that the adjusted rent is a "fair market rent" based upon the costs, dates, tax benefits and market rates of return available to Landlords on similar investments. II. INITIAL RENTALS The Facility rents to be paid by Tenant, prior to the adjustments referred to above are: For the first ten years: 20 semi-annual payments each at $240,432.73 For the second ten years: 20 semi-annual payments each at $293,862.22 III. LIMITATION OF RENTS Landlord and Tenant further agree that in no event will net present value of the Annual Net Rents for the Facility be greater than $10 million, discounting the Annual Net Rents at an annual discount factor of 10%. 33 EXHIBIT "B" TO FACILITY LEASE
DEPRECIATION ACQUISITION CATEGORY AND DATE PLACED DESCRIPTION COST ACRS CLASS LIFE IN SERVICE - ----------------------------------------------------------------------------------------------------- 1. All buildings and improvements $1,850,000 "Real Estate" 12/29/86 situated on lands hereinafter 19 Years described in Exhibit B-1 attached hereto, which lands are situated in the City of San Leandro, County of Alameda, State of California which are and shall remain real property. 2. Improvements made to the buildings $2,078,300 "Real Estate" 12/29/86 referred to above, described more 19 Years completely in Exhibit B-2, attached hereto. 3. Improvements made to the buildings To be determined "Real Estate" To be determined referred to above, to be made after and reported in 31.5 Years and reported in 1986. Such improvements are generally later attachments later attachments described in Exhibit B-3, attached. to this Exhibit B. to this Exhibit B. 4. Improvements made to the land To be determined "Land To be determined referred to above, to be made after and reported in Improvements" and reported in 1986. Such improvements are generally later attachments 15 Years later attachments described in Exhibit B-3, attached. to this Exhibit B. to this Exhibit B.
34 EXHIBIT B-1 (Page 1 of 3) All buildings and improvements situated on the hereinafter described lands situated in the City of San Leandro, County of Alameda, State of California which are and shall remain real property. PARCEL 1: Beginning at a point on the northwestern line of the 66.29 acre tract of land fifthly described in the Decree of Distribution in the Matter of the Estate of Georges LeRoy, deceased, in the Superior Court, Contra Costa County, Probate No. 11478, certified copy of which decree was recorded November 22, 1948, in Book 5660 OR, page 403 (AC/88342), distant thereon north 62 degrees 30' east 631.30 feet from the northeastern line of Merced Street; thence along said line of said 66.92 acre tract, north 62 degrees 30' east 315.65 feet; thence south 27 degrees 30' east 690 feet to the direct extension northeasterly of the northwestern line of the land described as Parcel III in the deed from Oakland Title Insurance Company to Southern Pacific Company, recorded March 23, 1954, in Book 7278 OR, page 297, (AJ/23953); thence along said direct extension south 62 degrees 30' west 315.65 feet to the most northern corner of said Parcel III in the last mentioned deed; and thence north 27 degrees 30' west 690 feet to the point of beginning. PARCEL 2: Portion of the 66.92 acre tract of land fifthly described in the Decree of Distribution in the Matter of the Estate of Georges LeRoy, deceased, in the Superior Court of Contra Costa County, Probate No. 11478, a certified copy of which decree was recorded November 22, 1948, in Book 5660 OR, page 403 (AC/88342), described as follows: Beginning at the intersection of the northeastern line of Merced Street, 60 feet wide, with the northwestern line of said 66.92 acre tract, thence along the northwestern line of said 66.92 acre tract north 62 degrees 30' east 631.30 feet; thence south 27 degrees 30' east 690 feet; thence south 62 degrees 30' west 631.30 feet to said line of Merced Street; thence along the last named line north 27 degrees 30' west 690 feet to the point of beginning. Excepting therefrom that portion quitclaimed to the City of San Leandro by instrument recorded October 10, 1957, Book 8490 OR, page 595, (AM/100857). 35 EXHIBIT B-1 (Page 2 of 3) [EXISTING SITE PLAN AND ANALYSIS] 36 EXHIBIT B-1 (Page 3 of 3) STRUCTURAL PLAN - MAIN BUILDING 37 EXHIBIT B-3 FACILITY RENOVATION PLAN MAJOR COST CONSTRUCTION ELEMENTS
ELEMENT COST 1. Roofing Repair/Replacement $ 40,700 2. Seismic/Structural Improvements $ 71,500 3. HVAC System Repairs/Replacements $1,500,000 4. Interior Remodeling & Renovation $1,820,000 5. Exterior Bldg. Repairs/Modifications $ 213,500 6. Site Preparation, Landscaping Paving, Utilities $ 710,700 7. New Building (Complete) $ 975,000 8. "Soft Costs" incl., A&E, Project Management, Fees/Permits, etc. $ 740,300 ---------- TOTAL $6,071,700
38 FACILITY LEASE SCHEDULE OF STIPULATED LOSS VALUES
Stipulated Loss Value as a Percentage of Original Acquisition Cost ------------------------------------------- Rental Payment 1986 Real 1987 Land 1987 Real Date Estate Improvements Estate - -------------- --------- ------------ --------- Prior to First Payment 105.73% 106.02% 106.02% June 30, 1987 109.96 106.02 106.02 December 31, 1987 110.48 106.02 106.02 June 30, 1988 109.58 106.20 105.83 December 31, 1988 109.89 106.74 105.75 June 30, 1989 110.13 107.20 105.64 December 31, 1989 110.28 107.57 105.49 June 30, 1990 110.37 107.85 105.31 December 31, 1990 110.38 108.05 105.09 June 30, 1991 110.32 108.17 104.84 December 31, 1991 110.18 108.22 104.84 June 30, 1992 109.98 108.19 104.23 December 31, 1992 109.71 108.09 103.86 June 30, 1993 109.38 107.92 103.46 December 31, 1993 108.98 107.67 103.02 June 30, 1994 108.53 107.37 102.53 December 31, 1994 108.00 106.97 102.01 June 30, 1995 107.42 106.51 101.44 December 31, 1995 106.78 105.96 100.83 June 30, 1996 106.08 105.33 100.17 December 31, 1996 105.32 104.62 99.48 June 30, 1997 103.38 103.82 98.75 December 31, 1997 101.35 101.85 96.73 June 30, 1998 99.24 99.75 94.63 December 31, 1998 97.03 97.53 92.45 June 30, 1999 94.73 95.19 90.20 December 31, 1999 92.34 92.74 87.89 June 30, 2000 89.86 90.16 85.50 December 31, 2000 87.28 87.46 83.06 June 30, 2001 84.63 84.63 80.55 December 31, 2001 81.85 81.69 77.99 June 30, 2002 79.00 78.62 75.37 December 31, 2002 76.06 75.47 72.70 June 30, 2003 73.02 72.25 69.98 December 31, 2003 69.91 69.01 67.22 June 30, 2004 66.69 65.73 64.42 December 31, 2004 63.40 62.46 61.60 June 30, 2005 60.01 59.17 58.75 December 31, 2005 56.56 55.90 55.90 June 30, 2006 53.09 52.70 53.01 December 31, 2006 50.00 50.00 50.00 If renewed, any Payment period after December 31, 2006 50.00 50.00 50.00
If, as contemplated in Exhibit A to the Lease, the Annual Net Rents are adjusted, then Landlord may adjust the above stipulated loss values to reflect such adjustments. In addition, any prepayment fees required on any debt used to finance the facility shall be added to the stated stipulated loss values. (Assuming Tenant is not in default. It is understood that Tenant has no liability for the Stipulated Loss Values after expiration of 39 FACILITY LEASE Amendment No. 3 40 IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 3 to Facility Lease under seal as of the day and year first above written with specific intention that this Amendment No. 3 to Facility Lease constitute an instrument under seal. WITNESS/ATTEST: LANDLORD: THE CONNECTICUT NATIONAL BANK, not individually but solely in its capacity as Trustee ________________________ By:__________ _____________ (SEAL) TENANT: PHYSICS INTERNATIONAL COMPANY ________________________ By:__________ _____________ (SEAL) Pursuant to Section 6(b) of that certain Assignment of Lease and Agreements from The Connecticut National Bank, not individually but solely as trustee under the Trust Agreement with Merced Associates, to the undersigned, dated as of March 9, 1987, the undersigned consent to the foregoing amendment to the Facility Lease. WITNESS/ATTEST: THE FIRST NATIONAL BANK OF BOSTON, not individually but solely as Trustee ________________________ By:__________ _____________ (SEAL) ________________________ ____________________________ Philip G. Kane, Jr., not individually but solely as Trustee 41 TABLE TO EXHIBIT A Page One
1987 1986 Real Estate --------------------------------------------------- --------------------------- Land Improvements Real Estate % of ----------------------- ---------------------- Capitalized % of % of Date Cost Amount Cap. Cost Amount Cap. Cost Amount - ----------------- ----------- ----------- --------- ---------- --------- --------- June 30, 1987 5.47000 $214,878.01 Interim rent at .028305% per day December 31, 1987 4.18500 $164,399.35 Interim rent at 0.28305% per day June 30, 1988 5.47000 $214,878.01 4.384820% $24,360.44 7.291380% $111,074.72 December 31, 1988 4.18500 164,399.35 7.245606 40,253.90 5.512579 83,976.98 June 30, 1989 5.47000 214,878.01 5.143938 28,577.81 7.764448 118,281.29 December 31, 1989 4.18500 164,399.35 6.486488 36,036.53 5.039511 76,770.41 June 30, 1990 5.47000 214,878.01 5.081503 28,230.95 7.764448 118,281.29 December 31, 1990 4.18500 164,399.35 6.548910 36,383.32 5.039511 76,770.41 June 30, 1991 4.26393 167,499.96 5.013276 27,851.91 7.764448 118,281.29 December 31, 1991 5.39107 211,777.40 6.617150 36,762.43 5.039511 76,770.41 June 30, 1992 4.12892 162,196.36 4.938699 27,437.58 7.764448 118,281.29 December 31, 1992 5.52609 217,081.39 6.691727 37,176.76 5.039511 76,770.41 June 30, 1993 4.06395 159,644.15 4.857176 26,948.67 7.764448 118,281.29 December 31, 1993 5.59105 219,633.22 6.773237 37,629.60 5.039511 76,770.41 June 30, 1994 3.99294 156,854.66 4.768076 26,489.66 5.039511 76,770.41 December 31, 1994 5.66207 222,423.10 6.862338 38,124.61 7.764448 118,281.29 June 30, 1995 3.91532 153,805.52 7.887850 43,821.97 4.912807 74,840.24 December 31, 1995 6.81246 267,613.87 3.742576 20,792.37 7.891164 120,211.65 June 30, 1996 8.22670 323,169.46 8.750517 48,614.64 4.774314 72,730.47 December 31, 1996 3.57386 140,391.94 4.172178 23,179.07 8.029657 122,321.41 June 30, 1997 8.45360 332,082.77 10.329078 57,384.53 4.622936 70,424.43 December 31, 1997 3.34696 131,478.63 3.885875 21,588.48 9.603689 146,299.74 June 30, 1998 8.70264 341,865.81 10.643299 59,130.23 11.540986 175,811.95 December 31, 1998 3.09792 121,695.59 3.571654 19,842.79 4.108291 62,584.49 June 30, 1999 8.97597 352,603.03 10.988167 61,046.19 11.903470 181,333.92 December 31, 1999 2.82459 110,958.37 3.226786 17,926.83 3.745820 57,062.71 June 30, 2000 9.27596 364,387.54 11.366671 63,149.02 12.301296 187,394.29 December 31, 2000 2.52460 99,173.86 2.848281 15,824.00 3.347993 51,002.34 June 30, 2001 9.60521 377,321.46 11.782098 65,456.97 12.737933 194.045.89 December 31, 2001 2.19535 86,239.93 2.432855 13,516.04 2.911356 44,350.74 June 30, 2002 9.96657 391,516.77 12.238044 67,990.04 13.217151 201,346.14 December 31, 2002 1.83399 72,044.63 1.976921 10,983.04 2.432139 37,050.48 June 30, 2003 10.36318 407,096.80 12.738454 70,770.13 13.743102 209,358.33 December 31, 2003 1.34738 56,464.60 1.476511 8,202.95 1.906176 29,038.11 June 30, 2004 10.79847 424,196.30 13.287668 73,821.37 14.320364 218,152.17 December 31, 2004 1.00209 39,365.10 0.927284 5,151.65 1.328926 20,244.46 June 30, 2005 11.27622 442,963.75 13.890437 77,170.13 14.953933 227,803.78 December 31, 2005 0.52434 20,597.65 0.324503 1,802.82 0.695356 10,592.85 June 30, 2006 11.80056 463,561.40 7.303004 40,572.79 15.649290 238,396.63 December 31, 2006 0.00000 .00 6.911948 38,400.23 0.000000 0.00
42 TABLE TO EXHIBIT A Page Two
1988 ---------------------------------------------------------- Land Real Improvements Estate -------------------------- -------------------------- Total % of % of Rent Date Cap. Cost. Amount Cap. Cost Amount Payments - ------------- ---------- ---------- --------- ---------- ----------- June 30, 1988 Interim Rent at .028305% per day December 31, 1988 4.185000 $29,984.73 4.185000 $132,928.42 $451,543.38 June 30, 1989 4.860804 34,826,73 5.663903 179,902.92 576,466.76 December 31, 1989 4.185000 29,984.73 4.467571 141,903.76 449,094.78 June 30, 1990 5.547380 39,745.92 5.663903 179,902.92 581,039.09 December 31, 1990 4.142180 29,677.93 4.485429 142,470.98 449,701.99 June 30, 1991 5.590200 40,052.71 5.663903 179,902.92 533,588.79 December 31, 1991 4.074850 29,195,52 4.501168 142,970.88 497,476.64 June 30, 1992 5.657530 40,535.12 5.663903 179,902.92 528,353.27 December 31, 1992 4.001250 28,668.19 4.562589 144,921.80 504,618.55 June 30, 1993 5.731130 41,062.45 5.663903 179,902.92 525,875.48 December 31, 1993 3.920810 28,091.85 4.562589 144,921.80 507,046.88 June 30, 1994 5.811570 41,638.79 5.663903 179,902.92 481,656.44 December 31, 1994 3.832890 27,461.92 6.293226 199,892.14 606,183.06 June 30, 1995 5.899490 42,268.72 5.506573 174,905.62 489,642.07 December 31, 1995 3.736790 26,773.39 5.821234 184,900.23 620,291.51 June 30, 1996 8.158340 58,452.95 5.349242 169,908.32 672,875.84 December 31, 1996 3.531190 25,300.30 5.821234 184,900.23 496,092.95 June 30, 1997 8.363940 59,926.03 5.663903 179,902.92 699,720.68 December 31, 1997 3.306470 23,690.23 5.917619 187,961.71 511,018.79 June 30, 1998 8.588660 61,536.11 9.754500 309,832.81 948,176.91 December 31, 1998 3.060850 21,930.41 3.618605 114,937.98 340,991.26 June 30, 1999 8.834280 63,295.93 10.226492 324,824.72 983,103.79 December 31, 1999 2.792380 20,006.87 3.261680 103,600.95 309,555.73 June 30, 2000 9.102750 65,219.46 10.478221 332,820.41 1,012,970.72 December 31, 2000 2.498950 17,904.50 2.942442 93,460.98 277,365.68 June 30, 2001 9.396180 67,321.83 10.855814 344,813.93 1,048,960.08 December 31, 2001 2.178230 15,606.60 2.593521 82,378.16 242,091.47 June 30, 2002 9.716900 69,619.73 11.233408 356,807.46 1,087,280.14 December 31, 2002 1.827680 13,094.98 2.139697 67,963.33 201,136.46 June 30, 2003 10.067450 72,131.36 11.705400 371,799.37 1,131,155.99 December 31, 2003 1.444530 10,349.78 1.730637 54,970.34 159,025.78 June 30, 2004 10.450600 74,876.55 12.208858 387,790.74 1,178,837.13 December 31, 2004 1.025750 7,349.30 1.258645 39,978.43 112,088.94 June 30, 2005 10.869380 77,877.03 12.680850 402,782.65 1,228,597.34 December 31, 2005 0.568020 4,069.75 0.692255 21,988.13 59,051.20 June 30, 2006 11.327110 81,156.58 12.429121 394,786.97 1,218,474.37 December 31, 2006 1.563316 11,200.86 2.045298 64,964.94 114,566.03
EX-10.41 9 EXHIBIT 10.41 1 Exhibit 10.41 Assignment and Assumption - Ground Sublease 2 Recording requested by, and when recorded, return to: Maxwell Technologies Systems Division, Inc. 9275 Sky Park Court San Diego, CA 92123 Attention: Donald M. Roberts ASSIGNMENT AND ASSUMPTION AGREEMENT (Ground Sublease) This Assignment and Assumption Agreement (the "Agreement") is made and entered into this 15th day of April, 1998, by and between PRIMEX PHYSICS INTERNATIONAL COMPANY, a California corporation (formerly known as Physics International Company), hereinafter referred to as "Assignor," and MAXWELL TECHNOLOGIES SYSTEMS DIVISION, INC., a California corporation, hereinafter referred to as "Assignee," with reference to the following recitals of fact: RECITALS WHEREAS, THE CONNECTICUT NATIONAL BANK, NOT INDIVIDUALLY BUT SOLELY AS TRUSTEE UNDER THAT CERTAIN TRUST AGREEMENT DATED AS OF DECEMBER 29, 1986, AMONG THE TRUSTEE AND MERCED ASSOCIATES, A MARYLAND GENERAL PARTNERSHIP, collectively are the Lessee (the "Lessee"), and D. HEBDEN PORTEUS, DAVID M. HAIG, FRED C. WEYLAND AND PAUL MULLIN GANLEY, TRUSTEES UNDER THE WILL AND OF THE ESTATE OF SAMUEL MILLS DAMON, DECEASED, collectively are the Lessor (the "Lessor"), under that certain Ground Lease dated December 29, 1986 (the "Ground Lease"), as the same may have been amended, for the that certain real property located in San Leandro, California (the "Premises"), and more particularly described in Exhibit A hereto; and WHEREAS, Lessee subleased the Premises to Assignor, under that certain Ground Sublease dated December 29, 1986 (the "Ground Sublease"), as the same may have been amended; and WHEREAS, Lessee leased the improvements situated on the Premises (the "Building") to Assigner, under that certain Facility Lease dated December 29, 1986 (the "Facility Lease"), as the same may have been amended; and 3 WHEREAS, Assignee has entered into an agreement to acquire simultaneously from Assignor the entirety of its interests in both the Ground Sublease and the Facility Lease; and WHEREAS, Assignee has entered into that certain Sublease Agreement dated April 15, 1998 ("Sublease") with Assignor, by which it has agreed to sublease a portion of the Premises to Assignor and to construct tenant improvements thereon; and WHEREAS, effective as of the date on which Assignee acquires the Ground Sublease from Assignor (the "Transfer Date"), Assignor desires to assign to Assignee, and Assignee desires to assume from Assignor, all of the rights and obligations of Assignor under the Ground Sublease; and NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: AGREEMENT --------- 1. Assignment. Effective as of the Transfer Date, except as provided herein, Assignor hereby sells, assigns, transfers and conveys to Assignee all of Assignor's right, title and interest in and to the Ground Sublease, including, without limitation, any extension and renewal options. 2. Assumption. Effective as of the Transfer Date, except as provided herein, Assignee hereby assumes and agrees to perform all of the obligations of Assignor under the Ground Sublease. 3. Notices of Default. Assignee agrees to promptly deliver to Assignor a copy of any notice of default given by Lessee, under the Ground Sublease. 4. Assignor Estoppel. Assignor is the holder of lessor's interests under the Ground Sublease. Assignor confirms that the documents described above constitute the entire Ground Sublease for the Premises, including any and all amendments and modifications, and that the Ground Sublease is in full force and effect and is the valid legal and binding obligation of Assignor. To the actual knowledge of Assignor, no defaults or potential defaults exist with respect to the Ground Sublease. 5. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which, together, shall constitute one and the same instrument. 4 IN WITNESS WHEREOF, the undersigned have entered into this Agreement as of the day and year first above written. ASSIGNOR: PRIMEX PHYSICS INTERNATIONAL COMPANY, a California corporation By: /s/ S. C. CURLEY ------------------------------------- Name: S. C. Curley Its: Treasurer By: ------------------------------------- Name: Its: ASSIGNEE: MAXWELL TECHNOLOGIES SYSTEMS DIVISION, INC., a California corporation By: /s/ WALTER R. ROBERTSON ------------------------------------- Name: Walter R. Robertson Its: President By: ------------------------------------- Name: Its: 5 EXHIBIT A LEGAL DESCRIPTION Those parcels of land, not including any buildings or improvements, in the City of San Leandro, County of Alameda, State of California, described as follows: PARCEL 1: Beginning at a point on the northwestern line of the 66.29 acre tract of land fifthly described in the Decree of Distribution in the Matter of the Estate of Georges LeRoy, deceased, in the Superior Court, Contra Costa County, Probate No. 11478, certified copy of which decree was recorded November 22, 1948, in Book 5660 OR, page 403 (AC/88342), distant thereon north 62 degrees 30' east 631.30 feet from the northeastern line of Merced Street; thence along said line of said 66.92 acre tract, north 62 degrees 30' east 315.65 feet; thence south 27 degrees 30' east 690 feet to the direct extension northeasterly of the northwestern line of the land described as Parcel III in the deed from Oakland Title Insurance Company to Southern Pacific Company, recorded March 23, 1954, in Book 7278 OR, page 297, (AJ/23953); thence along said direct extension south 62 degrees 30' west 315.65 feet to the most northern corner of said Parcel III in the last mentioned deed; and thence north 27 degrees 30' west 690 feet to the point of beginning. PARCEL 2: Portion of the 66.92 acre tract of land fifthly described in the Decree of Distribution in the Matter of the Estate of Georges LeRoy, deceased, in the Superior Court of Contra Costa County, Probate No. 11478, a certified copy of which decree was recorded November 22, 1948, in Book 5660 OR, page 403 (AC/88342), described as follows: Beginning at the intersection of the northeastern line of Merced Street, 60 feet wide, with the northwestern line of said 66.92 acre tract, thence along the northwestern line of said 66.92 acre tract north 62 degrees 30' east 631.30 feet; thence south 27 degrees 30' east 690 feet; thence south 62 degrees 30' west 631.30 feet to said line of Merced Street; thence along the last named line north 27 degrees 30' west 690 feet to the point of beginning. Excepting therefrom that portion quitclaimed to the City of San Leandro by instrument recorded October 10, 1957, Book 8490 OR, page 595, (AM/100857). 6 STATE OF CALIFORNIA ) ) SS. COUNTY OF SAN DIEGO ) On this 15th day of April 1998, before me a Notary Public in and for said County and State, personally appeared Stephen C. Currley who being duly sworn, deposes and says that he is Vice President & Treasurer of PRIMEX TECHNOLOGIES, INC. the corporation described in the above ASSIGNMENT and that he executed the above ASSIGNMENT as a free act on behalf of PRIMEX TECHNOLOGIES, INC. /s/ MYRNA R. JARO --------------------------------------- Notary Public SEAL: [LOGO] MYRNA R. JARO Comm. # 1141819 NOTARY PUBLIC-CALIFORNIA San Diego County My Comm. Expires June 19, 2001 7 STATE OF CALIFORNIA ) ) SS. COUNTY OF SAN DIEGO ) On this 15th day of April 1998, before me a Notary Public in and for said County and State, personally appeared Walter P. Robertson who being duly sworn, deposes and says that he is President of MAXWELL TECHNOLOGIES SYSTEM DIVISION, INC. the corporation described in the above ASSIGNMENT and that he executed the above ASSIGNMENT as a free act on behalf of MAXWELL TECHNOLOGIES SYSTEM DIVISION, INC. /s/ MYRNA R. JARO --------------------------------------- Notary Public SEAL: [LOGO] MYRNA R. JARO Comm. # 1141819 NOTARY PUBLIC-CALIFORNIA San Diego County My Comm. Expires June 19, 2001 8 GROUND LEASE /s/ P. HARTON THIS INDENTURE, made this 29th day of December, 1986, by and between D. HEBDEN PORTEUS, DAVID M. HAIG, FRED C. WEYAND and PAUL MULLIN GANLEY, Trustees under the Will and of the Estate of Samuel Mills Damon, deceased, hereinafter called Lessors, and THE CONNECTICUT NATIONAL BANK, not individually but solely as Trustee under that certain Trust Agreement dated as of December 29, 1986, among the Trustee and MERCED ASSOCIATES, a Maryland general partnership hereinafter called "Lessee", WITNESSETH That the Lessors, in consideration of the rent hereinafter reserved and of the covenants herein contained and on the part of the Lessee to be observed and performed, hereby demise and lease unto said Lessee, and the Lessee hereby accepts and rents: All of the property described in Schedule "All and attached hereto. TO HAVE AND TO HOLD the same, together with rights, easements, privileges and appurtenances thereunto belonging or appertaining, unto the said Lessee for the term beginning on the 31st day of December, 1986, and ending on the 31st day of the December, 2036 notwithstanding the earlier termination of the trust created under the Will of Samuel M. Damon, deceased, Lessee yielding and paying therefor unto the Lessors quarterly in four (4) -1- 9 equal payments in advance on the 1st day of January, April, July and October in each and every year during said term, (plus the additional payments for any partial calendar quarter in which the term begins, as hereinafter provided) without any deduction, all accrued payments to be made on execution hereof, net rent as follows: 1. For any partial calendar quarter at the beginning of the term, at the rate of $23,000 per month, paid prorated for any partial month on the basis of a 30 day month. Payment for any partial calendar quarter at the beginning of the term shall be made in advance upon delivery of the Indenture. 2. $69,000 for each full calendar quarter in 1987. 3. $75,166.67 on the first day of January, 1988, comprising rent for the first calendar quarter of 1988. 4. $87,500 on the first day of April 1988 and on the first day of each thereafter succeeding calendar quarter to and including the 10th anniversary of the last day of the month in which the term of the lease begins. 5. Reasonable rent for the second 10 years of the term of the Lease, and for each thereafter succeeding 10 year period of the term of the lease will be determined by agreement of Lessors and Lessee; or, failing agreement, by appraisal as provided in Paragraph (B) hereof. -2- 10 AND THE LESSORS hereby covenant with the Lessee that upon payment by the Lessee of the rent as aforesaid and upon observance and performance of the covenants by the Lessee hereinafter contained, the Lessee shall peaceably hold and enjoy said premises for the term hereby demised without hindrance or interruption by the Lessors or any other person or person lawfully or equitably claiming by, through or under them except as herein expressly provided; AND LESSEE hereby covenants with the Lessors as follows: 1. Payment of Rent. Lessee will pay said rent in lawful currency of the United States at the office of the Lessors, or such other place in Honolulu, Hawaii as shall be designated in writing by the Lessors, at the times and in the manner aforesaid, without any deduction and without any notice or demand. 2. Taxes and Other Charges. Lessee will pay to Lessors as additional rent before the same become delinquent all real property taxes and assessments and will pay directly all impositions, conveyance taxes, duties, water rates, charges and other outgoings of every description to which said premises or any part thereof or improvement thereon, or the Lessors or Lessee in respect thereof, are now or may during said term be assessed or become liable, whether assessed to or payable by the Lessors or Lessee -3- 11 including all assessments or other charges for any permanent benefit or improvement of any of the premises hereby demised or any part thereof made under any betterment law or otherwise, or any assessment or charges for sewage or street or sidewalk improvement, or municipal or other charges for any utilities or other services or any connections or meters therefor which may be legally imposed upon said premises or any part thereof or to which said premises or any part thereof, or the Lessors or Lessee in respect thereof, are now or may during said term become liable, and with each payment of rent, real property taxes and other charges hereunder payable by the Lessee, whether the same be actual or constructive receipts of the Lessors, the amount of all Hawaii general excise or other similar taxes payable by the Lessors on account of such receipt, and also on demand, interest at the rate of one (1) percent per month or higher as may then be permitted by law on all delinquent rent, taxes and other charges hereunder payable by Lessee from the respective due dates thereof until fully paid; provided, however, that with respect to any assessment made under any betterment or improvement law which may be payable in installments, the Lessee shall be required to pay only such installments of principal together with the interest on unpaid balances hereof as shall become due and payable during said term, and that real property taxes and assessments shall be prorated between the Lessors and -4- 12 Lessee as of the dates of commencement and expiration respectively of said term. 3. Improvements Required by Law. Lessee will at its own expense during the whole of said term make, build, maintain and repair all fences, sewers, drains, roads, curbs, sidewalks, and parking areas which may be required by law to be made, built, maintained and repaired upon or adjoining and in connection with or for the use of said premises or any part thereof, and whether same were erected by the Lessors or in existence at the inception of this lease; and in case any such improvements required by law shall be made, built, maintained or repaired by the Lessors, the Lessee shall forthwith reimburse the Lessors for the cost thereof. 4. Repair and Maintenance. Lessee will at its own expense, from time to time and at all times during said term, well and substantially repair, maintain, amend and keep all buildings, drainage ditches, culverts, tunnels and other improvements now or hereafter built on the land hereby demised with all necessary reparations and amendments whatsoever in good order and condition. 5. Inspection. Lessee will permit the Lessors and their agents, at all reasonable times during said term, to enter said premises and examine the state of repair and condition thereof, and will repair and make good all defects of which notice shall be given by the Lessors -5- 13 within thirty (30) days after giving of such notice or such further time as may be reasonably necessary to complete the same in the exercise of due diligence. 6. Laws and ordinances. Lessee will, during the whole of said term, keep said premises in a strictly clean and sanitary condition and observe and perform all laws, ordinances, rules and regulations for the time being applicable to said premises or any buildings and improvements now or hereafter erected thereon or the use thereof; and will indemnify the Lessors and the Estate and effects of Samuel M. Damon, deceased, against all actions, suits, damages and claims by whomsoever brought or made by reason of the nonobservance or nonperformance of said laws, ordinances, rules and regulations or of this covenant. 7. Construction and Bond. Lessee will not construct or make on the demised land by building or other structure, or any additions, alterations or remodeling at a cost exceeding $5,000 to such building or structure, except in accordance with plans and specifications therefor first approved in writing by the Lessors; when such approval is requested by the Lessee, the review of building plans and specifications by the Lessors will be at the expense of the Lessee; and if so required by the Lessors in their discretion, Lessee will before commencement of any such construction deposit with the Lessors a bond in the penal sum of at least the cost of such construction, in form and -6- 14 with surety satisfactory to the Lessors, guaranteeing the completion thereof free from any mechanics' or materialmen's liens. 8. Industrial or Mercantile Use. Lessee will use or allow to be used the premises hereby demised solely for industrial or mercantile purposes; and will at no time during said term permit the same to be occupied as a dwelling place without the consent of Lessors in writing. Lessee will not, without the written consent of the Lessors, use said premises or any part thereof for the storage of or dealing in junk, scrap, salvaged or other offensive materials of which the Lessors shall be the sole judge; and will not make or suffer any strip or waste or unlawful, improper or offensive use of said premises, nor overload the floors or walls of any building thereof, nor use said premises for any purpose or in any manner which will invalidate the insurance herein required on such buildings; and will not, without the written consent of the Lessors, take or remove therefrom any soil or limestone; and will not, without such consent, dig, drill, or cause to be dug or drilled any well, whether artesian or surface, or use or permit to be used any well on said premises; and will not, without such consent, use said premises or any part thereof or permit the same to be used for the manufacture or sale of any alcoholic liquor or the raising of pigs, fowl or livestock; and will not, without such consent, assign or -7- 15 mortgage this lease except as herein provided or sublease or subdivide said premises or any part thereof; and will not place or construct any billboard or sign on said premises without first receiving the written approval of the Lessors as to size, wording, style and location. 9. Boundary Setback. Lessee will not at any time during said term erect, place or maintain on said premises any fence, wall or other improvement within twenty (20) feet of the front or street boundaries other than a boundary fence or wall not more than six (6) feet high. 10. Insurance. Lessee will at all times during said term keep all buildings now or hereafter erected on said premises insured against loss or damage by fire with extended coverage, and during war time against war damage to the extent the same is reasonably obtainable, in the joint names of the Lessors and the Lessee in any insurance company authorized to do business in Hawaii in an amount equal to the maximum insurable value thereof, payable to the Lessors in case of loss or damage, and will pay all premiums thereon at the time and place the same are payable, and will from time to time forthwith after receiving the same deposit with the Lessors such policies of insurance or current certificates thereof and the receipt for every premium so paid; and all compensation, indemnity or other moneys paid on account of any loss or damage, other than rental value insurance, shall with all convenient -8- 16 speed be laid out by the Lessee in rebuilding, repairing or otherwise reinstating the same buildings in a good and substantial manner according to the plan and elevation of the building so destroyed or damaged, or according to such modified plan as shall be previously approved by the Lessors and the Lessee in writing, and in the event such proceeds are inadequate, the Lessee shall make up such deficiency from its own funds; provided, however, that if the main building on said premises shall be destroyed at any time during the last ten (10) years of the term hereof, the Lessee may at its option within sixty (60) days after such casualty either (a) surrender this lease, forfeiting all interest in the proceeds of insurance and in any remaining improvement, or (b) pay to the Lessors a sum of money equal to the then present worth of the quarterly installments of rent payable during the remainder of said term, calculated at compound discount at the rate of five percent (5%) per annum, and at its own expense remove from said premises the remains of said damaged building if so required by the Lessors, and thereupon all proceeds of such insurance shall be payable to and be the sole property of the Lessee, and this lease shall terminate. Lessee will procure at its own expense and keep in force during the entire period of this lease a policy of comprehensive general liability insurance with respect to said premises and appurtenant sidewalks in any insurance company authorized to do business in Hawaii, naming the Lessors as -9- 17 additional assureds, with minimum limits of not less than $300,000 for injury to one person and not less than $1,000,000 for injury to more than one person in any one accident or occurrence and insurance in the sum of not less than $100,000 against claims for property damage, or such higher limits as the Lessors may from time to time reasonably establish as prudent for their protection in the circumstances then existing, and will from time to time forthwith upon receiving the same deposit with the Lessors such policies of insurance or current certificates thereof. 11. Lessor's Expenses. Lessee will pay to the Lessors on demand all costs and expenses including reasonable attorneys' fees incurred by the Lessors in enforcing any of the covenants herein contained, in remedying any breach by the Lessee thereof, in recovering possession of said premises, in collecting any delinquent rent, taxes or other charges hereunder payable by the Lessee, or in connection with any litigation commenced by or against the Lessee (other than condemnation proceedings) to which the Lessors without any fault on their part shall be made parties. 12. Indemnity. Lessee will indemnify and hold the Lessors harmless from and against all claims and demands for loss or damage, including property damage, personal injury and wrongful death, arising out of or in connection with the use or occupancy of said premises by -10- 18 the Lessee or any other person claiming by, through or under the Lessee, or any accident or fire on said premises or any adjacent sidewalk or any nuisance made or suffered thereon, or any failure by the Lessee to keep said premises or sidewalk in a safe condition, and will reimburse the Lessors for all their costs and expenses including reasonable attorneys' fees incurred in connection with the defense of any such claims, and will hold all goods, materials, furniture, fixtures, equipment, machinery and other property on said premises at the sole risk of the Lessee and hold the Lessors harmless from liability for loss or damage thereto by any cause whatsoever, and will indemnify and hold the Lessors harmless from and against all loss, costs and expenses, including reasonable attorneys' fees with respect to any attachment, judgment, lien, charge or encumbrance whatsoever against said premises made or suffered by the Lessee. 13. Surrender. At the end of said term or other sooner determination of this lease, the Lessee will peaceably deliver up to the Lessors possession of the premises hereby demised; provided, however, that if the Lessee shall have observed and performed all covenants and conditions herein contained and on its part to be observed and performed, the Lessee shall have the privilege of removing any building or buildings which shall have been placed on the demised premises at its own expense or of -11- 19 selling such to a new in-coming tenant, but if the Lessee shall remove such building the Lessee shall clear the premises of all rubbish and debris and restore the surface to a condition satisfactory to the Lessors, all at Lessee's own expense. AND IT IS HEREBY MUTUALLY AGREED by and between the parties as follows: (A) Condemnation. If at any time or times during said term any authority having the power of eminent domain shall take or condemn said premises or any part thereof for public use, then and in every such case the estate and interest of the Lessee in said premises or such part so taken or condemned shall thereupon cease and determine, and the Lessee shall not by reason of such condemnation be entitled to claim or receive any portion of the compensation or damages payable or to be paid by reason of such condemnation, but the entire amount thereof shall be the sole property of the Lessors, provided however, that out of the proceeds of such condemnation the Lessors shall pay to the Lessee the amount of all compensation and damages awarded for or on account of any buildings placed on said premises at its own cost as specifically determined in the condemnation proceedings, but deducting therefrom a reasonable portion of the expense incurred by the Lessors in connection with such proceedings. In case only part of -12- 20 said premises shall be so taken or condemned, the rent herein reserved shall be reduced in the proportion that the area of the land taken or condemned bears to the total area of land demised, and all compensation and damages paid for or on account of any improvements placed on said premises by Lessee at is own cost as specifically determined in the condemnation proceedings shall be used promptly by the Lessee as may be necessary to restore or replace such improvements on the remaining premises according to plans first approved in writing by the parties; provided, further, that if more than one fourth of the demised land shall be so taken or condemned thereby rendering the remaining premises unsuitable for the Lessee's business purposes, the Lessee may within 90 days thereafter surrender to the Lessors this lease, subject to the Lessee's prior removal at its own expense of all buildings on the remaining demised land if so required by the Lessors and its restoration of said remaining land to good condition and even grade, and the Lessee shall thereby be relieved of all further obligations hereunder. (B) Appraisal. In case the parties hereto shall fail to agree on the net annual rent hereunder payable for any rental period of said term as herein provided at least 90 days before the commencement of such period, said rent shall be such fair and reasonable annual rent for the demised land (exclusive of buildings) as shall be determined by three impartial real estate appraisers, one to be -13- 21 appointed by each of the parties hereto, and the Lessors and Lessee shall each promptly name one such appraiser and give written notice thereof to the other party, and in case either party shall fail so to do within ten (10) days after appointment of the first appraiser, the appraiser already appointed shall name a second appraiser, and the two appraisers thus appointed in either manner shall appoint a third appraiser, and in case of their failure so to do within ten (10) days after appointment of the second appraiser, either party may have such third appraiser (who shall in this case be a member of the Honolulu Chapter of the American Institute of Real Estate Appraisers or other similar organization) appointed by any person then sitting as Judge of the Circuit Court of the First Circuit of the State of Hawaii, and the three appraisers so appointed shall thereupon proceed to determine the matter in question, and the decision of said appraisers or a majority of them shall be final, conclusive and binding upon both parties. The cost of such appraisal other than attorneys' fees shall be shared equally by the parties hereto. Until determination of such rent by agreement or appraisal as herein provided, quarterly installments at the same rate payable for the preceding year shall be paid on account thereof. (C) Forfeiture. This demise is upon the condition that if the Lessee shall fail to pay said rent or any -14- 22 part thereof within twenty (20) days after the same becomes due, whether the same shall or shall not have been legally demanded, or shall fail to observe and perform faithfully any of the covenants herein contained and on the part of the Lessee to be observed and performed and such default shall continue for thirty (30) days after written notice thereof given to the Lessee, or if the Lessee shall abandon said premise, or if the Lessee then owning this lease shall be adjudicated bankrupt or take any proceedings under the Federal Bankruptcy Act seeking the readjustment, rearrangement, postponement, composition or reduction of its debts, liabilities or obligations or make any assignment for the benefit of creditors, or if this lease or any estate or interest of the Lessee hereunder shall be taken or sold under any process of law, then and in any such case the Lessors may at once re-enter said premises or any part thereof in the name of the whole and, upon or without such entry, at their option, terminate this lease, and may expel and remove from said premises the Lessee and any persons claiming under the Lessee and their effects without being deemed guilty of any trespass or becoming liable for any loss or damage occasioned thereby, all without service of notice or legal process and without prejudice to any other remedy or right of action including summary possession which the Lessors may have for arrears of rent or for any preceding or other breach of contract. -15- 23 (D) Mortgages. Lessee may from time to time without further consent of the Lessors assign this lease by way of mortgage to any bank, insurance company or other established lending institution as mortgagee, and the mortgagee may enforce such mortgage and acquire title to the leasehold estate in any lawful way, and pending foreclosure of such mortgage may take possession of and rent said premises, and upon foreclosure thereof may without further consent of the Lessors sell and assign the leasehold estate by assignment in which the assignee shall expressly assume and agree to observe and perform all covenants of the Lessee herein contained, and such assignee may make a purchase money mortgage of this lease to the assignor, provided that upon the execution of any such assignment or mortgage a true copy thereof shall be delivered promptly to the Lessors, and that no other or further assignment of this lease for which any provision hereof requires the written consent of the Lessors shall be made without such consent. The mortgagee shall be liable to perform the obligations of the Lessee hereunder only during such period as it had possession or ownership of the leasehold estate, and the terms, covenants and conditions of this lease shall control in case of any conflict with the provisions of such mortgage. During the continuance in effect of any authorized mortgage of this lease the Lessors will not terminate this lease because of any default on the -16- 24 part of the Lessee to observe or perform any of the covenants or conditions herein contained if the mortgagee, within sixty (60) days after the Lessors have mailed to the mortgagee at its last known address a written notice of intention to terminate this lease for such cause, shall cure such default, if the same can be cured by the payment of money, or if such is not the case, shall undertake in writing to perform all the covenants of this lease capable of performance by the mortgagee until such time as this lease shall be sold upon foreclosure of such mortgage. In case of such undertaking the Lessors will not terminate this lease within such further time as may be required by the mortgagee to complete foreclosure of such mortgage or other remedy thereunder, provided (a) that such remedy is pursued promptly and completed with due diligence, and (b) that all rent and other charges accruing hereunder are paid as the same become due and all other covenants of this lease capable of performance by the Lessee are duly performed; and upon foreclosure sale of this lease the time for performance of any obligations of the Lessee then in default hereunder, other than the payment of money, shall be extended by the time reasonably necessary to complete such performance by due diligence. Any default consisting of the Lessee's failure to discharge promptly any lien, charge or encumbrance against said premises junior in priority to such mortgage shall be deemed to be duly cured -17- 25 if such mortgage shall be foreclosed by appropriate action instituted within said 60-day period and thereafter prosecuted in diligent and timely manner. (E) Notices. Any notice or demand to either party hereto provided for or permitted by this lease may be given sufficiently for all purposes in writing delivered personally to such party or any corporate officer thereof, if such party is a corporation, or mailed as registered or certified mail addressed to such party at its address herein specified or its last address given in writing to the other. (F) Nonwaiver and Definitions. Acceptance of rent by the Lessors shall not be deemed to be a waiver by them of any breach by the Lessee of any covenant herein contained, nor of the Lessors' right to terminate this lease for breach of covenant. The term "premises" whenever it appears herein includes and shall be deemed or taken to include (except where such meaning would be clearly repugnant to the context) all buildings and improvements now or any time hereafter built on said land hereby demised; the term "Lessors" herein shall include the Lessors, their successors in trust and assigns; and the term "Lessee", or any pronoun used in place thereof shall indicate and include the masculine or feminine, the singular or plural, and jointly and severally individuals, firms or corporations, and their and each of their respective successors, -18- 26 executors, administrators and permitted assigns, according to the context hereof. No approval or consent of the Lessors herein required for any action of the Lessee shall be unreasonably withheld. (G) Prior Lease. Physics International Company, by execution hereof, hereby assigns and surrenders to the Lessors as of the commencement of said term hereby demised that certain unrecorded prior lease of the said premises and of the improvements dated October 23, 1979, and all the leasehold estate and interest of the lessee thereunder, and the Lessors hereby accept the foregoing surrender and release the lessee from all further obligations under the said prior lease, subject, however, to all rights under any subsisting mortgage of said prior lease or sublease of all or any part of said premises, made with the written consent of the Lessors, which shall continue in full force and effect in accordance with their respective provisions. Lessee hereby assigns this lease as security under every such mortgage hereinbefore specified in substitution for said prior lease, subject to the written consent of the mortgagee thereof, with the same lien and effect as though specifically assigned and mortgaged by the same such mortgage. -19- 27 IN WITNESS WHEREOF, the parties hereto have executed these presents as of the day and year first above written. THE CONNECTICUT NATIONAL BANK, Trustee By [SIG] ------------------------------ -------------------------------- D. Hebden Porteus, Trustee -------------------------------- David M. Haig, Trustee -------------------------------- Fred C. Weyand, Trustee -------------------------------- Paul Mullin Ganley, Trustee "Lessee" "Lessors" PHYSICS INTERNATIONAL COMPANY executes this lease as of the day and year first above written for the limited purpose of assigning and surrendering to Lessors the prior lease, pursuant to Paragraph (G) hereof. PHYSICS INTERNATIONAL COMPANY By ----------------------------- James H. Banister, Jr. Senior Vice President Corporate Director of Administration "Prior Lessee" -20- 28 IN WITNESS WHEREOF, the parties hereto have executed these presents as of the day and year first above written. THE CONNECTICUT NATIONAL BANK, Trustee By D. HEBDEN PORTEUS ------------------------------ -------------------------------- D. Hebden Porteus, Trustee DAVID M. HAIG -------------------------------- David M. Haig, Trustee FRED C. WEYAND -------------------------------- Fred C. Weyand, Trustee PAUL MULLIN GANLEY -------------------------------- Paul Mullin Ganley, Trustee "Lessee" "Lessors" PHYSICS INTERNATIONAL COMPANY executes this lease as of the day and year first above written for the limited purpose of assigning and surrendering to Lessors the prior lease, pursuant to Paragraph (G) hereof. PHYSICS INTERNATIONAL COMPANY By ----------------------------- James H. Banister, Jr. Senior Vice President Corporate Director of Administration "Prior Lessee" -20- 29 IN WITNESS WHEREOF, the parties hereto have executed these presents as of the day and year first above written. THE CONNECTICUT NATIONAL BANK, Trustee By ------------------------------ -------------------------------- D. Hebden Porteus, Trustee -------------------------------- David M. Haig, Trustee -------------------------------- Fred C. Weyand, Trustee -------------------------------- Paul Mullin Ganley, Trustee "Lessee" "Lessors" PHYSICS INTERNATIONAL COMPANY executes this lease as of the day and year first above written. PHYSICS INTERNATIONAL COMPANY By /s/ JAMES H. BANISTER ----------------------------- James H. Banister, Jr. Senior Vice President Corporate Director of Administration "Prior Lessee" -20- 30 These Clarifications and Interpretations are made as of this 29th day of December, 1986 by and between D. Hebden Porteus, David M. Haig, Fred C. Weyand, and Paul Mullen Ganley, Trustees under the Will and of Samuel Mills Damon, deceased (Lessors); The Connecticut National Bank, not individually but solely as Trustee under that certain Trust Agreement dated as of December 29, 1986, among the Trustee and Merced Associates, a Maryland general partnership (Lessee); and Physics International Company, a California corporation ("PI") to clarify and interpret the provisions of the Indenture executed concurrently herewith by Lessors, Lessee and PI. The references to paragraph numbers and letters which follow are to the designated paragraphs of the Indenture. PARAGRAPH 2 - TAXES AND OTHER CHARGES: 1. Notwithstanding the provisions of paragraph 2, Lessee, at its sole expense may contest taxes, assessments, governmental impositions and the like against the premises, but as a condition of such contest, Lessors shall be provided with copies of all documents filed with any public agency in such contest. PARAGRAPH 3 - IMPROVEMENTS REQUIRED BY LAW: 1. Notwithstanding the provisions of paragraph 3, Lessors shall not make for the account of Lessee any improvements to the premises required by law until after -1- 31 written notice from Lessors advising Lessee that the latter has defaulted in making such improvements, and that the Lessors intend to make the improvements for the account of Lessee. 2. Further, notwithstanding the provisions of paragraph 3, Lessee may at its sole expense contest the action of any public authority in requiring improvements to be made to the premises but as a condition of such contest, Lessors shall be provided copies of all documents filed with any public agency in such contest. PARAGRAPH 7 - CONSTRUCTION AND BOND: 1. Notwithstanding the provisions of paragraph 7, it is the intention of the parties that Lessee may construct structures and make additions, alterations and remodeling at a cost up to $50,000.00 without the prior approval of Lessors. Further, Lessors shall respond to a request by Lessee for approval of plans and specifications within 10 working days after receipt of plans and specifications. PARAGRAPH 8 - INDUSTRIAL OR MERCANTILE USE: 1. Notwithstanding the provisions of paragraph 8, the premises may be used for any lawful use, other than for a dwelling place. PARAGRAPH 9 - BOUNDARY SETBACK: -2- 32 1. Notwithstanding the provisions of paragraph 9, Lessee need observe only the setback requirements of the City of San Leandro, and of any other public agency having jurisdiction over the premises. PARAGRAPH 10 - INSURANCE 1. Notwithstanding the provisions of paragraph 10, any institutional leasehold mortgagee shall be named as an additional insured in policies of fire and casualty insurance. Further, the references to "Hawaii" in the last line of Page 9 and the fifth line of Page 10 shall be to "California". PARAGRAPH 11 - LESSORS' EXPENSES: 1. Notwithstanding the provisions of paragraph 11, the prevailing party, whether Lessors or Lessee, in any proceeding for enforcement of the Lease, or for a declaration of rights and duties under the Lease, shall be entitled to recover its costs and expenses, including reasonable attorneys fees. PARAGRAPH 12 - INDEMNITY: 1. Notwithstanding the provisions of paragraph 12, the obligations of the Lessee to indemnify and hold Lessors harmless, and to assume the risk of damage to and loss of property, shall not extend to liability, damage, or losses resulting from the negligence or willful misconduct -3- 33 of Lessors. PARAGRAPH 13 - SURRENDER: 1. Notwithstanding the provisions of paragraph 13, if (i) Lessee shall have observed and performed all covenants and conditions herein contained and on its part to be observed and performed or (ii) shall have within 60 days after written notice from Lessors cured any default in the observation and performance of such covenants and conditions, then in either such event, the Lessees at the end of the term of this lease shall have the privilege of removing any improvements which have been placed on the premises by Lessee or which have been purchased from Lessors by Lessee except for plant materials in the ground, irrigation systems, and storm or sanitary sewers; provided, however, that if requested by Lessors, Lessee shall remove any plant materials. 2. It is contemplated and agreed between the parties hereto that the Lessee will issue a ground sublease to PI, that the Lessor will sell the improvements to the Property to Lessee, and that the Lessee will issue a lease of the improvements to PI. Lessor shall give written notice to PI of any default hereunder; PI shall have sixty (60) days after such notice to undertake in writing to assume the Lease, and to cure any defaults thereunder. Failing such assumption and cure by PI, the improvements shall revert to and become the property of Lessor, upon the expiration of -4- 34 sixty (60) days after such notice. PARAGRAPH (A) - CONDEMNATION: 1. Notwithstanding the provisions of paragraph (A) Lessors shall pay to Lessee the amount of all compensation and damages awarded for or on account of any improvements placed on the premises by Lessee or any sublessee, and any improvements which have been purchased from Lessors by Lessee or any sublessee; provided, however, that the amount of any payment to Lessee shall be reduced by the amount required to cure any default of Lessees under the Lease. 2. Further, notwithstanding the provisions of Paragraph (A) if any portion of the demised land shall be taken or condemned thereby rendering the remaining premises impossible of use for the business purposes of Lessee or any sublessee, the Lessee within 90 days thereafter may surrender to the Lessors this Lease, subject to the Lessee's prior removal, at its own expense of all buildings on the remaining demised land, if so required by the Lessors and its restoration of said remaining land to good condition and even grade, and the Lessee, its Sublessees and guarantors shall thereby be relieved of all further obligations. If there is a dispute as to whether a partial taking or condemnation renders the remaining premises impossible for use for the business purposes of Lessee or sublessee, the matter shall be submitted promptly to arbitration before and under the rules of the American Arbitration Association at San -5- 35 Francisco, California. The decision in arbitration shall not be binding, but the fact of the arbitration, and the testimony, findings and decision in arbitration shall be fully admissible at the instance of any party to any subsequent litigation, or binding arbitration, on the issue of the impossibility of use of the premises. PARAGRAPH (B) - APPRAISAL: 1. Notwithstanding the provisions of paragraph (B) the appointment of a third appraiser after failure of the two appraisers appointed by the parties to select the third shall be by any person then sitting as a Judge of the Superior Court of the State of California in and for the County of Alameda, and the person so appointed shall be a member of the American Institute of Real Estate Appraisers who maintains an office in the County of Alameda, Contra Costa, Santa Clara or in the City and County of San Francisco. PARAGRAPH (C) - FORFEITURE: 1. Paragraph (c) of the Lease shall be interpreted as if the phrase "in the payment of rent, or the observance and faithful performance of any other covenant of the Lease" were inserted after the word "default" in the fifth line of Paragraph (c). 2. Further, notwithstanding the provisions of paragraph (C), Lessee shall not be in default for any -6- 36 non-monetary breach of the Indenture, or of these Clarifications and Modifications to the Indenture if the breach is not susceptible of cure within thirty (30) days, unless Lessee fails to commence the cure within thirty (30) days of receipt of Lessors' written notice, and thereafter fails to diligently proceed to cure said breach; provided, however, that the time for cure shall not exceed six (6) months after receipt of Lessor's written notice. PARAGRAPH (E) - NOTICES: 1. Notwithstanding the provisions of paragraph (E) a copy of any notice to Lessee shall also be sent to: Maryland National Leasing Corporation 502 Washington Avenue Towson, MD 21204 ATTN: Vice President, Operations Olin Financial Services, Inc. 120 Long Ridge Road P.O. Box 1355 Stamford, CT 06904 ATTN: Corporate Secretary Physics International Company 2700 Merced Street P.O. Box 1538 San Leandro, CA 94577 ATTN: J.H. Banister -7- 37 SUPPLEMENTAL PROVISIONS: 1. Notwithstanding the absence of an express provision in the Indenture, Lessors agree to provide Lessee, and any leasehold mortgagee, upon reasonable request, estoppel certificates in the form customarily provided by Lessors. Further, Lessors confirm that the rights of Lessee under the Lease will be superior to the rights of any mortgagee of Lessors' reversionary interest which is later in time than the Lease. 2. Upon the written demand of the City of San Leandro for the dedication to it for street-widening purposes of a ten foot wide strip of the property running along Merced Street, and totalling approximately 7,187 square feet (the "Property to be Dedicated") Lessee or its subtenant shall have the right to purchase from Lessor, and Lessor shall sell to Lessee or its subtenant, the Property to the be Dedicated, on the following terms and conditions: a. Lessee, or its subtenant, shall pay to Lessor the purchase price of thirty thousand and no/100 dollars ($30,000.00) payable in cash at close of escrow. b. Lessor shall convey title to the Property to be Dedicated by quit claim deed. c. The written demand of the City of San Leandro shall be delivered to Lessor on close of escrow. d. Payment of the purchase price, delivery of the city's demand and the quit claim deed shall be consummated by means of an escrow established at a title company -8- 38 chosen by Lessee or its subtenant, Lessee or its subtenant to pay any and all closing costs. 3. Notwithstanding the absence of an express provision in the Indenture, Lessee may assign the Indenture or sublet the Property without the prior written consent of Lessors, only (a) for a period not extending beyond the initial term of the Ground Sublease to Physics International Company,; (b) if the guaranty of the Ground Sublease by Olin Corporation remains in effect, and (c) the Lessee is not released. Except as expressly provided in the preceding provisions of this Paragraph 3, Lessee shall not assign the Indenture or sublet the Property without the prior written consent of Lessors, which shall not be unreasonably withheld, and which shall be given to such assignment or subletting to any financially responsible party. Lessors hereby grant their consent to the exercise of any renewal term of the sublease of Physics International Company, a California corporation. 4. The foregoing clarifications and interpretations are solely for the sole benefit of Lessee, Olin corporation, a Virginia corporation, and for the benefit of any bank, insurance company or other established lending institution, as mortgagee of the Indenture and for the assignee of such mortgagee expressly assuming and agreeing to observe and perform all of the covenants of Lessee. -9- 39 IN WITNESS WHEREOF, the parties hereto have executed these presents as of the day and year first above written. THE CONNECTICUT NATIONAL BANK, TRUSTEES UNDER THE WILL Trustee ESTATE OF SAMUEL MILLS DAMON By [SIG] ------------------------------ -------------------------------- D. Hebden Porteus -------------------------------- By [SIG] David M. Haig ------------------------------ "Lessee" -------------------------------- Fred C. Weyand -------------------------------- Paul Mullin Ganley "Lessors" -10- 40 IN WITNESS WHEREOF the parties hereto have executed these presents as of the day and year first above written. THE CONNECTICUT NATIONAL BANK, TRUSTEES UNDER THE WILL Trustee ESTATE OF SAMUEL MILLS DAMON /s/ D. HEBDEN PORTEUS By __________________________ ----------------------------- D. Hebden Porteus /s/ DAVID M. HAIG By __________________________ ----------------------------- David M. Haig "Lessee" /s/ FRED C. WEYAND ----------------------------- Fred C. Weyand /s/ PAUL MULLIN GANLEY ----------------------------- Paul Mullin Ganley "Lessors" -10- 41 PHYSICS INTERNATIONAL COMPANY By /s/ E.T. MOORE, JR. ----------------------------- E.T. Moore, Jr. Executive Vice President -11- 42 Those parcels of land, not including any buildings or improvements, in the City of San Leandro, County of Alameda, State of California, described as follows: PARCEL 1: Beginning at a point on the northwestern line of the 66.29 acre tract of land fifthly described in the Decree of Distribution in the Matter of the Estate of Georges LeRoy, deceased, in the Superior Court, Contra Costa County, Probate No. 11478, certified copy of which decree was recorded November 22, 1948, in Book 5660 OR, page 403 (AC/88342), distant thereon north 62 degrees 30' east 631.30 feet from the northeastern line of Merced Street; thence along said line of said 66.92 acre tract, north 62 degrees 30' east 315.65 feet; thence south 27 degrees 30' east 690 feet to the direct extension northeasterly of the northwestern line of the land described as Parcel III in the deed from Oakland Title Insurance Company to Southern Pacific Company, recorded March 23, 1954, in Book 7278 OR, page 297, (AJ/23953); thence along said direct extension south 62 degrees 30' west 315.65 feet to the most northern corner of said Parcel III in the last mentioned deed; and thence north 27 degrees 30' west 690 feet to the point of beginning. PARCEL 2: Portion of the 66.92 acre tract of land fifthly described in the Decree of Distribution in the Matter of the Estate of Georges LeRoy, deceased, in the Superior Court of Contra Costa County, Probate No. 11478, a certified copy of which decree was recorded November 22, 1948, in Book 5660 OR, page 403 (AC/88342), described as follows: Beginning at the intersection of the northeastern line of Merced Street, 60 feet wide, with the northwestern line of said 66.92 acre tract, thence along the northwestern line of said 66.92 acre tract north 62 degrees 30' east 631.30 feet; thence south 27 degrees 30' east 690 feet; thence south 62 degrees 30' west 631.30 feet to said line of Merced Street; thence along the last named line north 27 degrees 30' west 690 feet to the point of beginning. Excepting therefrom that portion quitclaimed to the City of San Leandro by instrument recorded October 10, 1957, Book 8490 OR, page 595, (AM/100857). Schedule A 43 EXHIBIT __ GROUND SUBLEASE THIS AGREEMENT is made as of the 29th day of December, 1986, by and between The Connecticut National Bank, not individually but solely in its capacity as trustee (the "Trustee") under that certain trust agreement as of December 29, 1986 among Merced Associates, a Maryland general partnership and the Trustee, hereinafter referred to as "Landlord", and Physics International Company, a California corporation, hereinafter referred to as "Tenant". A. Landlord, as lessee, entered into an indenture (the "Ground Lease") with D. Hebden Porteus, David M. Haig, Fred C. Weyand and Paul Mullin Ganley, Trustees under the Will and Estate of Samuel Mills Damon, decreased, as lessors, dated as of December 29, 1986, leasing the land at 2700 Merced Street, San Leandro, California, (the "Property") exclusive of any improvements now or hereafter located on the premises. The Property is more particularly described in Exhibit A-1 and incorporated herein, and a copy of the Ground Lease is attached hereto as Exhibit A-2, and hereby incorporated herein. B. The parties hereto desire that Landlord sublet the Property to Tenant. NOW, THEREFORE, the parties hereto hereby covenant and agree as follows: -1- 44 1. Lease of Property. Landlord hereby leases to Tenant the Property for a term of 20 years beginning on January 1, 1987 and ending on December 31, 2006, unless sooner terminated in accordance herewith. 2. Renewal Term. Tenant shall have the option to extend the original term of this Ground Sublease for two (2) consecutive renewal terms of ten (10) years each on the terms and conditions contained herein. Tenant shall exercise each of such options by providing written notice of its exercise of such option to Landlord not less than one hundred eighty (180) days prior to the expiration of the original term, or the renewal term then in effect; provided, however, that the exercise of each such option shall be subject to the conditions that: (i) Tenant is not in default under any provision of this Ground Sublease on the date of exercise of such option or on the date of commencement of the renewal term; (ii) Tenant shall be and shall have been in possession and occupancy of the Property at all times since the effective date of this Ground Sublease; and (iii) Tenant simultaneously exercises its option to renew the Facility Lease between Landlord and Tenant of even date herewith (the "Facility Lease"). -2- 45 3. Rental Amount. Rent for the original term of this Lease, and for any renewal term, shall be the rent for said term reserved to the Landlord under the Ground Lease. Tenant shall pay said rent to Landlord at its office at 777 Main Street, Hartford, Connecticut 06115, or at such other place as shall be designated in writing by the Landlord, in the amount and at the times and in the manner as provided in the Ground Lease, without any deduction or setoff and without any notice or demand. 4. Assignment or Subletting. During the initial term of this Ground Sublease, Tenant shall have the right, upon sixty (60) days prior written notice to Landlord, to assign this Ground Sublease, in whole or in part, to sublet the Property, or any part or portion thereof for a term not to exceed the initial term of this Ground Sublease. Notwithstanding any such assignment or subletting, Tenant shall not be relieved of any liability under this Ground Sublease. Additionally, no party other than Tenant may exercise the renewal options set forth in Section 2 above, unless Olin Corporation ("Guarantor") provides Landlord with a Guaranty Agreement satisfactory to Landlord, guarantying payment and performance of such party's obligations to Landlord during any renewal term. Notwithstanding the above paragraph, (i) Tenant may not assign this Ground Sublease during its initial term unless concurrently therewith, Tenant also assigns the Facility Lease to the same party for the same term; and -3- 46 (ii) Tenant may not sublet the Property unless concurrently therewith, Tenant also sublets the improvements to the Property to the same party for the same term. During any renewal term of this Ground Sublease, Tenant may sublet the Property or assign this Ground Sublease upon the prior written consent of Landlord, which shall be granted to any financially responsible sublessee or assignee. 5. Additional Rent. If Landlord shall pay additional rent or any other sums pursuant to the provisions of the Ground Lease, Tenant shall be liable to repay to Landlord 100% of such additional rent or other sums. Any rent or other sums payable by Tenant under this article shall be additional rent and payable promptly upon Landlord's demand. 6. Subordination to Prime Lease. This Ground Sublease is subject to and subordinate to the Ground Lease. Except as is plainly inconsistent with the express terms hereof, all the terms, covenants and conditions in the Ground Lease shall be applicable to this Ground Sublease with the same force and effect as if Landlord were the lessor under the Ground Lease and Tenant were the lessee thereunder and the Tenant shall perform each such term, covenant and condition and shall owe to Landlord each such duty as is required to be performed by lessee or owed by lessee to lessor under the Ground Lease and Landlord shall -4- 47 have all rights against Tenant as lessor has against lessee under the Ground Lease. In the event of any breach hereof or of the Ground Lease by Tenant, Tenant shall be in default under this Ground Sublease and Landlord shall have all the rights against Tenant as would be available to the lessor against the lessee under the Ground Lease if such breach were by the lessee thereunder. 7. Cross Default. It shall constitute a default by Tenant if the Tenant or Guarantor is in default under the terms of any document, paper or agreement with Landlord or to which Landlord is a party, including but not limited to the following documents executed of even date herewith: the Purchase and Ground Lease Agreement among the Damon Estate, Landlord and Tenant; the Purchase and Assignment Agreement among Landlord, Tenant and Merced Associates, a Maryland general partnership; the Agreement of Guaranty Nos. 1 and 2 between Guarantor and Landlord; and the Facility Lease. 8. Indemnification. Tenant shall neither do nor permit anything to be done which would cause the Ground Lease to be terminated or forfeited by reason of any right of termination or forfeiture reserved or vested in the lessor under the Ground Lease, and Tenant shall indemnify and hold Landlord (in its individual and trust capacity) harmless from and against all claims of any kind whatsoever by reason of any breach or default on the part of Tenant of the terms of the Ground Lease or of this Ground Sublease. -5- 48 The duty of Tenant to indemnify Landlord shall extend to and include the performance of every duty imposed on Landlord, as lessee, to indemnify and hold harmless lessors by the Ground Lease, which provides as follows: Lessee will indemnify and hold the Lessors harmless from and against all claims and demands for loss or damage, including property damage, personal injury and wrongful death, arising out of or in connection with the use or occupancy of said premises by the Lessee or any other person claiming by, through or under the Lessee, or any accident or fire on said premises or any adjacent sidewalk or any nuisance made or suffered thereon, or any failure by the Lessee to keep said premises or sidewalk in a safe condition, and will reimburse the Lessors for all their costs and expenses including reasonable attorneys' fees incurred in connection with the defense of any such claims, and will hold all goods, materials, furniture, fixtures, equipment, machinery and other property on said premises at the sole risk of the Lessee and hold the Lessors harmless from liability for loss or damage thereto by any cause whatsoever, and will indemnify and hold the Lessors harmless from and against all loss, costs and expenses, including reasonable attorneys' fees with respect to any attachment, judgment, lien, charge or encumbrance whatsoever against said premises made or suffered by the Lessee. Notwithstanding the provisions of ... [the above paragraph], the obligations of the Lessee to indemnify and hold Lessors harmless, and to assume the risk of damage to the loss of property, shall not extend to liability, damage or losses resulting from the negligence or willful misconduct of Lessors. 9. Memorandum of Sublease. Tenant agrees that it will, upon Landlord's request, execute, acknowledge and deliver to Landlord a memorandum of this Ground Sublease in -6- 49 a form suitable for recording under applicable law. Such recordation shall be at Tenant's expense. 10. Notice. Any notice required or permitted by or in connection with this Ground Sublease shall be in writing and made by hand delivery or overnight delivery service or by certified mail, return receipt requested, postage prepaid, addressed to the respective parties at the appropriate address set forth below or to such other address as may be hereafter specified by written notice by any party, and shall be considered given as of the date of hand delivery or as of one (1) day after sending overnight delivery service or three (3) days after the date of mailing, independent of the date of delivery, as the case may be:
If to Tenant: Physics International Company 2700 Merced Street P.O. Box 1538 San Leandro, CA 94577 Attn: J.H. Banister, Jr. If to Landlord: The Connecticut National Bank 777 Main Street Hartford, CT 06115 ATTN: Bond and Trustee Administration Copy to: Maryland National Leasing Corporation 502 Washington Avenue Towson, MD 21204 ATTN: Vice-President Operations
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Copy to: Olin Financial Services 120 Long Ridge Road Stamford, CT 06904 ATTN: Corporate Secretary Copy to: Alan J. Mogol, Esq. Ober, Kaler, Grimes & Shriver 1600 Maryland National Bank Building 10 Light Street Baltimore, MD 21202
11. Merger. All prior understandings and agreements between the parties with respect to the subject matter hereof are merged within this Ground Sublease, which alone and completely sets forth the understanding of the parties and this Ground Sublease may not be changed or terminated orally or in any manner other than by an agreement in writing signed by all parties. 12. Binding Effect. The covenants and agreements herein contained shall bind and inure to the benefit of Landlord, Tenant and their respective successors and assigns. 13. Applicability of California Law. The laws of the State of California shall govern the rights and obligations of the parties to this Ground Sublease and the interpretation, construction and enforceability hereof and any and all issues relating to the transactions contemplated in this Ground Sublease. 14. Remedies Cumulative. All of the Landlord's rights and remedies hereunder shall be cumulative and supplemental to Landlord's rights and remedies under the -8- 51 Facility Lease and Purchase and Assignment Agreement of even date herewith. IN WITNESS WHEREOF, the parties hereto have executed this Ground Sublease on the day and year first written above.
WITNESS/ATTEST: LANDLORD: THE CONNECTICUT NATIONAL BANK, not individually but solely in its capacity as Trustee ________________________ By:__________________________(SEAL) TENANT: PHYSICS INTERNATIONAL COMPANY ________________________ By:__________________________(SEAL) James H. Banister, Jr. Senior Vice President Corporate Director of Administration
-9- 52 ACKNOWLEDGEMENTS STATE OF ______________________, CITY OF ___________________________ TO WIT: I HEREBY CERTIFY that on this _______ day of December, 1986, before the subscriber, a Notary Public of the State and subdivision aforesaid, personally appeared _________________, who acknowledged ____________ self to be the _______________ of THE CONNECTICUT NATIONAL BANK, not individually but solely in its capacity as trustee, and that _____________ he as such __________________, being so authorized to do, executed the foregoing instrument for the purposes therein contained by signing the name of the Trustee by ______ self as _____________ in my presence. IN WITNESS WHEREOF, I have hereunto set my hand and official seal. ____________________________________ Notary Public My Commission Expires: STATE OF CALIFORNIA ) ) ss. COUNTY OF _________ ) On _____________________, 19___, before me the undersigned a Notary Public, in and for said State, personally appeared _________________ known to me to be the ______________ President of the corporation that executed the within instrument, and also known to me to be the persons who executed it on behalf of such corporation, and acknowledged to me that such corporation executed the same, and further acknowledged to me that such corporation executed the instrument pursuant to its by-laws or a resolution of its Board of Directors. _________________________________________ Notary Public My Commission Expires: -10- 53 Those parcels of land, not including any buildings or improvements, in the City of San Leandro, County of Alameda, State of California, described as follows: PARCEL 1: Beginning at a point on the northwestern line of the 66.29 acre tract of land fifthly described in the Decree of Distribution in the Matter of the Estate of Georges LeRoy, deceased, in the Superior Court, Contra Costa County, Probate No. 11478, certified copy of which decree was recorded November 22, 1948, in Book 5660 OR, page 403 (AC/88342), distant thereon north 62 degrees 30' east 631.30 feet from the northeastern line of Merced Street; thence along said line of said 66.92 acre tract, north 62 degrees 30' east 315.65 feet; thence south 27 degrees 30' east 690 feet to the direct extension northeasterly of the northwestern line of the land described as Parcel III in the deed from Oakland Title Insurance Company to Southern Pacific Company, recorded March 23, 1954, in Book 7278 OR, page 297, (AJ/23953); thence along said direct extension south 62 degrees 30' west 315.65 feet to the most northern corner of said Parcel III in the last mentioned deed; and thence north 27 degrees 30' west 690 feet to the point of beginning. PARCEL 2: Portion of the 66.92 acre tract of land fifthly described in the Decree of Distribution in the Matter of the Estate of Georges LeRoy, deceased, in the Superior Court of Contra Costa County, Probate No. 11478, a certified copy of which decree was recorded November 22, 1948, in Book 5660 OR, page 403 (AC/88342), described as follows: Beginning at the intersection of the northeastern line of Merced Street, 60 feet wide, with the northwestern line of said 66.92 acre tract, thence along the northwestern line of said 66.92 acre tract north 62 degrees 30' east 631.30 feet; thence south 27 degrees 30' east 690 feet; thence south 62 degrees 30' west 631.30 feet to said line of Merced Street; thence along the last named line north 27 degrees 30' west 690 feet to the point of beginning. Exception therefrom that portion quitclaimed to the City of San Leandro by instrument recorded October 10, 1957, Book 8490 OR, page 595, (AM/100857) Exhibit A-1 EX-10.42 10 EXHIBIT 10.42 1 EXHIBIT 10.42 (1) PEGASUS AIRWAVE LIMITED (2) TRI-MAP INTERNATIONAL LIMITED (3) M R PONSFORD and P J GOODRIDGE UNDERLEASE of Premises at Units 2 and 3 Kingscroft Court Havant Hampshire Glanvilles Solicitors 16 Landport Terrace Portsmouth Hants PO1 2OT 2 UNDERLEASE dated BETWEEN: (1) PEGASUS AIRWAVE LIMITED whose registered office is at Pegasus House, Waterberry Drive, Waterlooville, Hampshire, PO7 7XX ("the Landlord") (2) TRI-MAP INTERNATIONAL LIMITED whose registered office is at Sandford House, Medwin Walk, Horsham, West Sussex ("the Tenant") (3) MARK RICHARD PONSFORD of 9 St James Road, Emsworth, Hampshire and PAUL JOHN GOODRIDGE of 98 Westbourne Avenue, Emsworth, Hampshire ("the Guarantor") 1. PARTICULARS 1.1 the Premises: all that land and building situate at Units 2 and 3 Kingscroft Court, Havant, Hampshire and shown for the purposes of identification only outlined in red on the Plan 1.2 Contractual Term: 10 years commencing on 3rd February 1997 and ending on 2nd February 2007 1.3 Rent Commencement Date: 3rd August 1997 1.4 Initial Rent: L.60,000 (sixty thousand pounds) per annum 1.5 Review Date: the 3rd February 2002 1.6 Interest Rate: 4% above the base lending rate of Midland Bank Plc or such other bank as the Landlord may from time to time nominate in writing 1.7 Permitted User: assembly of computer equipment together with storage and offices or such other use that falls within Class B1 of the Schedule to the Town and Country Planning (Use Classes) Order 1987 as the Landlord shall from 1 3 [MAP OF SITE] 4 time to time approve such approval not to be unreasonably delayed or withheld 1.8 Exterior Decorating Years: 2000 2003 2006 1.9 Interior Decorating Years: 2002 2006 2. DEFINITIONS 2.1 For all purposes of this underlease the terms defined in clauses 1 and 2 have the meanings specified 2.2 'Building' means the building or buildings now or at any time during the Term erected on the whole or part of the Premises 2.3 'the Insurance Rent' means the sums which the Landlord shall from time to time pay by way of premium and premium tax including any excess deducted by the insurers in respect of any claim: 2.3.1 for insuring the Premises (including insuring for loss of Rent) in accordance with the Landlord's obligations contained in this underlease; 2.3.2 and for insuring in such amount and on such terms as the Landlord shall reasonably consider appropriate against all liability of the Landlord to third parties arising out of or in connection with any matter including or relating to the Premises 2.3.3 all of any increased premium payable by reason of any act or omission of the Tenant 2.4 'Insured Risks' means fire lightning explosion aircraft (including articles dropped from aircraft) riot civil commotion malicious persons earthquake storm tempest flood bursting and overflowing of water pipes tanks and other apparatus and impact by road vehicles and such other risks as the Landlord from time to time the in the Landlord's reasonable discretion may think fit to insure against 2.5 'Interest' means interest during the period from the date on which the payment is due to the date of payment both before and after any judgment at the Interest Rate then prevailing or should the base rate referred to in clause 1.6 cease to 2 5 exist such other rate of interest as is most loosely comparable with the interest Rate to be agreed between parties or in default of agreement to be determined by the Surveyor acting as an expert and not as an arbitrator 2.6 'the 1954 Act' means the Landlord and Tenant Act 1954 Act and all statutes regulations and orders included by virtue of clause 3.18 2.7 'Pipes' means all pipes sewers drains mains ducts conduits gutters watercourses wires cables channels flues and all other conducting media and includes any fixings louvres cowls and any other ancillary apparatus which are in on or under or which serve the Premises 2.8 'the Plan' means the plan annexed to this underlease 2.9 'the Planning Acts' means the Town and Country Planning Act 1990 the Planning (Listed Building and Conservation Areas) Act 1990 the Planning (Hazardous Substances) Act 1990 and the Planning (Consequential Provisions) Act 1990 and all statutes regulations and orders included by virtue of clause 3.18 2.10 'Rent' means the Initial Rent and rent ascertained in accordance with the second schedule and such term does not include the Insurance Rent but the term 'rents' includes both the Rent and the insurance Rent 2.11 'the Operational Covenants' means the covenants set out in the third schedule 2.12 'Surveyor' means any person or firm appointed by the Landlord to perform any of the functions of the Surveyor under this underlease (including an employee of the Landlord and including also the person or firm appointed by the Landlord to collect the rents) 2.13 'VAT' means Value Added Tax as provided for in the Value Added Tax Act 1983 and legislation (delegated or otherwise) supplemental thereto and any similar tax replacing or introduced in addition to the same and unless otherwise stated all references to rents or other sums payable by the Tenant are exclusive of VAT 3 6 2.14 'the Headlease' means the superior leases under which the Landlord holds the Premises one made the 30th June 1987 between Marples Ridgeway Properties Limited (1) The Vision Research Company Limited (2) Kingscroft Management Limited (3) and Hill Samuel Finance (No 12) Limited (4) of Unit 2 for a term of 999 years from 30th June 1987 and the other made the 19th October 1987 between Marples Ridgeway Properties Limited (1) Minverose Limited (2) Kingscroft Management Limited (3) and Hill Samuel Finance (No 12) Limited (4) for a term of 999 years from 19th October 1987 of Unit 3 and any lease or leases superior to the Headlease 2.15 'the Superior Landlord' means Kingscroft Management Limited 3. INTERPRETATION 3.1 The expressions 'the Landlord' and 'the Tenant' wherever the context so admits include the person for the time being entitled to the reversion immediately expectant on the determination of the Term and the Tenant's successors in title respectively and any reference to a superior landlord includes the Landlord's immediate reversioner (and any superior landlords) at any time 3.2 Where the Landlord the Tenant or the Guarantor for the time being are two or more persons obligations expressed or implied to be made by or with such party are deemed to be made by or with such persons jointly and severally 3.3 Any obligation to pay money refers to a sum exclusive of VAT and any VAT charged on it is payable in addition 3.4 Words importing one gender include all other genders and words importing the singular include the plural and vice versa 3.5 The expression 'Guarantor' includes not only the person referred to herein (if any) but also any person who enters into covenants with the Landlord pursuant to clauses 5.9.5 or 5.23 3.6 The expression 'the Premises' includes: 3.6.1 the Building; 3.6.2 all additions and improvements to the Premises; 4 7 3.6.3 all the Landlord's fixtures and fittings and fixtures of every kind which shall from time to time be in or upon the Premises (whether originally affixed or fastened to or upon the Premises or otherwise) except any such fixtures installed by the Tenant that can be removed from the Premises without defacing the Premises; 3.6.4 all Pipes in on under or over the Premises and 3.6.5 the entire thickness of all walls and fences forming the boundaries of the Premises but such expression includes no air space above the height of the top of the Building and references to 'the Premises' in the absence of any provisions to the contrary include any part of the Premises 3.7 The expression 'the Term' includes the Contractual Term and any period of holding-over or extension or continuance of the Contractual Term whether by statute or common law 3.8 References to 'the last year of the Term' include the last year of the Term if the Term shall determine otherwise than by effluxion of time and references to 'the expiration of the Term' include such other determination of the Term 3.9 References to any right of the Landlord to have access to the Premises shall be construed as extending to any superior landlord and any mortgagee of the Premises and to all persons authorised by the Landlord and any superior landlord or mortgagee (including agents professional advisers contractors workmen and others) where such superior lease or mortgage grants such rights of access to the superior landlord or mortgagee 3.10 Any covenant by the Tenant not to do an act or thing shall be deemed to include an obligation not to permit or suffer such act or thing to be done by another person 3.11 Any provisions in this underlease referring to the consent or approval of the Landlord shall be construed as also requiring the consent or approval of any mortgagee of the Premises and any superior landlord where such consent shall be required but nothing in this underlease shall be 5 8 construed as implying that any obligation is imposed upon any mortgagee or any superior landlord not unreasonably to refuse any such consent or approval 3.12 References to 'consent of the Landlord' or words to similar effect mean a consent in writing signed by or on behalf of the Landlord and to 'approved' and 'authorised' or words to similar effect mean (as the case may be) approved or authorised in writing by or on behalf of the Landlord 3.13 The terms 'the parties' or 'party' mean the Landlord and/or the Tenant but except where there is an express indication to the contrary exclude the Guarantor 3.14 References to the Superior Landlord shall include the Superior Landlord's successors in title and shall include all superior landlords however remote 3.15 Where under the terms of this underlease the consent of the Landlord is required for any act or matter the consent of the Superior Landlord under the terms of the Headlease shall also be required wherever requisite PROVIDED that nothing in this underlease shall be construed as imposing on the Superior Landlord any obligation (or indicating that such obligation is imposed on the Superior Landlord by virtue of the terms of the Headlease) not unreasonably to refuse any such consent 3.16 Reference to any right exercisable by the Landlord or any right exercisable by the Tenant in common with the Landlord shall be construed as including (where appropriate) the exercise of such right: 3.16.1 by the Superior Landlord and all persons authorised by the Superior Landlord and 3.16.2 in common with all other persons having a like right 3.17 'Development' has the meaning given by the Town and Country Planning Act 1990 Section 55 3.18 Any references to a specific statute include any statutory extension or modification amendment or re-enactment of such statute and any regulations or orders made under such statute and any general reference to 'statute' or 'statutes' 6 9 includes any regulations or orders made under such statute or statutes and all legislation of the European Community 3.19 References in this underlease to any clause sub-clause or schedule without further designation shall be construed as a reference to the clause sub-clause or schedule to this underlease so numbered 3.20 The clause paragraph and schedule headings do not form part of this underlease and shall not be taken into account in its construction or interpretation 4. DEMISE The Landlord demises to the Tenant the Premises EXCEPTING AND RESERVING to the Landlord the rights specified in the first schedule TO HOLD the Premises to the Tenant for the Contractual Term TOGETHER WITH the rights set out in the Headlease so far as the Landlord can grant the same SUBJECT to all rights easements privileges restrictions covenants and stipulations of whatever nature affecting the Premises including any specified in the Headlease and including any matters contained or referred to in the fifth schedule YIELDING AND PAYING to the Landlord: 4.1 The Rent payable without any deduction by equal quarterly payments in advance on the usual quarter days in every year and proportionately for any period of less than a year the first such payment being a proportionate sum in respect of the period from and including the Rent Commencement Date to and including the day before the quarter day next after the Rent Commencement Date to be paid on the Rent Commencement Date and 4.2 By way of further rent the Insurance Rent payable on demand in accordance with clause 7 4.3 By way of further rent payable on demand amounts equal to such sums paid from time to time by the Landlord pursuant to the terms of the Headlease in respect of any service charge as defined in the Headlease PROVIDED that if the Superior Landlord shall require the service charge to be paid to it direct then the Tenant complying with such requirement there 7 10 shall be no further obligation to reimburse the Landlord therefor 5. THE TENANT'S COVENANTS The Tenant covenants with the Landlord: 5.1 Rent 5.1.1 To pay the rents on the days and in the manner set out in this underlease and not to exercise or seek to exercise any right or claim to withhold rent or any right or claim to legal or equitable set-off 5.1.2 If so required in writing by the Landlord to make such payments so far as they relate to the Rent by banker's order or credit transfer to any bank and account in the UK that the Landlord may from time to time nominate 5.1.3 To pay the Landlord on demand sums equal to the amounts paid from time to time by the Landlord to the Superior Landlord pursuant to the terms of the Headlease in respect of any service charge as defined in the Headlease SUBJECT to the proviso to clause 4.3 hereof and to the right of the Tenant to require certification of such sums in accordance with the terms of the Headlease 5.2 Outgoings and VAT 5.2.1 To pay and to indemnify the Landlord against all or in the absence of direct assessment of the Premises to pay to the Landlord a fair proportion of rates taxes assessments duties charges impositions and outgoings which are now or during the Term shall be charged assessed or imposed upon the Premises or upon the owner or occupier of them and if the Landlord shall suffer any loss of rating relief which may be applicable to empty premises after the end of the Term by reason of such relief being allowed to the Tenant in respect of any period before the end of the Term to make good such loss to the Landlord and 8 11 5.2.2 To pay VAT which may from time to time be charged on rents or other sums payable by the Tenant under this underlease 5.3 Electricity, Gas and other Services Consumed To pay to the suppliers and to indemnify the Landlord against all charges for electricity gas and other services consumed or used at or in relation to the Premises (including meter rents) 5.4 Repair, Cleaning, Decoration etc 5.4.1 To repair the Premises and keep them in repair excepting damage caused by an Insured Risk other than where the insurance money is irrecoverable in consequence of any act or default of the Tenant or anyone at the Premises expressly or by implication with the Tenant's authority PROVIDED that the Tenant shall not be required to carry out any repairs or redecorations to the external cladding to the Building 5.4.2 To replace from time to time the Landlord's fixtures and fittings in the Premises which may be or become beyond repair at any time during or at the expiration of the Term 5.4.3 To clean the Premises and keep them in a clean condition 5.4.4 Not to cause any land roads or pavements abutting the Premises to be untidy or in a dirty condition and in particular (but without prejudice to the generality of the above) not to deposit on them refuse or other materials 5.4.5 In each of the Exterior Decorating Years and in the last year of the Term to redecorate the exterior of the Building provided as in clause 5.4.1 and in each of the Interior Decorating Years and in the last year of the Term to redecorate the interior of the Building in both instances in a good and workmanlike manner and with appropriate materials of good quality any change in the tints colours and patterns of such 9 12 decoration to be approved by the Landlord (such approval not to be unreasonably withheld) 5.4.6 Where the use of Pipes boundary structures or other things is common to the Premises and other property to be responsible for and to indemnify the Landlord against all sums due from and to undertake all work that is the responsibility of the owner lessee or occupier of the Premises in relation to those Pipes or other things 5.4.7 To observe and perform the covenants and conditions as to repair and decoration on the part of the lessee contained in the Headlease (provided as in clause 5.4.1) and to indemnify the Landlord from and against any actions proceedings claims damages costs expenses or losses arising from any breach non-observance or non-performance of such covenants and conditions both during and at the determination of the Term (provided as aforesaid) 5.4.8 To keep any part of the Premises which may not be built upon ('the Open Land') adequately surfaced in good condition and free from weeds 5.4.9 Not to bring keep store stack or lay out upon the Open Land any materials equipment plant bins crates cartons boxes or any receptacle for waste or any other item 5.4.10 Not to deposit or permit to be deposited any waste rubbish or refuse on the Open Land 5.4.11 Not to keep or store on the Open Land any caravan or movable dwelling 5.5 WASTE AND ALTERATIONS 5.5.1 Not to: 5.5.1.1 commit any waste 5.5.1.2 make any addition to the Premises 5.5.1.3 unite the Premises with any adjoining premises 10 13 5.5.1.4 make any alteration to the Premises save as permitted by the following provisions of this clause 5.5.2 Not to make internal non-structural alterations to the Building without: 5.5.2.1 obtaining and complying with all necessary consents of any competent authority and paying all charges of any such authority in respect of such consents 5.5.2.2 making an application to the Landlord supported by drawings and where appropriate a specification in duplicate 5.5.2.3 paying the fees of the Landlord any superior landlord any mortgagee and their respective professional advisers and 5.5.2.4 entering into such covenants as the Landlord may reasonably require as to the execution and reinstatement of the alterations and in the case of any works of a substantial nature the Landlord may require prior to the commencement of such works the provision by the Tenant of adequate security in the form of a deposit of money or the provision of a bond as assurance to the Landlord that any works which may from time to time be permitted by the Landlord shall be fully completed 5.5.3 Subject to the provisions of clause 5.5.2 not to make any internal non-structural alterations to the Building without the consent of the Landlord such consent not to be unreasonably withheld or delayed provided that: 5.5.3.1 the installation by the Tenant without such consent of internal demountable partitions in the Premises of a design and of materials approved in writing by the Landlord such approval not to be unreasonably withheld shall be deemed not to be a breach of this covenant and 11 14 5.5.3.2 the Tenant may without further consent reposition and remove or alter such internal partitions from time to time 5.5.4 To remove any additional buildings additions alterations or improvements made to the Premises at the expiration of the Term if so requested by the Landlord and to make good any part or parts of the Premises which may be damaged by such removal 5.5.5 Not to make connection with the Pipes that serve the Premises otherwise than in accordance with plans and specifications approved by the Landlord such approval not to be unreasonably withheld or delayed subject to consent to make such connection having previously been obtained from the competent statutory authority or undertaker 5.6 Aerials, Signs and Advertisements 5.6.1 Not to erect any pole mast or wire (whether in connection with telegraphic telephonic radio television or satellite communication without the prior written consent of the Landlord such consent not to be unreasonably withheld or delayed) or otherwise upon the Premises 5.6.2 Not to affix to or exhibit on the outside of the Building or to or through any window of the Building nor display anywhere on the Premises any placard sign notice fascia board or advertisement except any sign permitted by virtue of any consent given by the Landlord pursuant to a covenant contained in this underlease 5.7 Statutory Obligations 5.7.1 At the Tenant's own expense to execute all works and provide and maintain all arrangements upon or in respect of the Premises or the use to which the Premises are being put that are required in order to comply with the requirements of any statute (already or in the future to be passed) or any government department local authority other public or competent 12 15 authority or court of competent jurisdiction regardless of whether such requirements are imposed on the lessor the lessee or the occupier. 5.7.2 Not to do in or near the Premises any act or thing by reason of which the Landlord may under any statute incur have imposed upon the Landlord or become liable to pay any penalty damages compensation costs charges or expenses 5.7.3 Without prejudice to the generality of the above to comply in all respects with the provisions of any statutes and any other obligations imposed by law or by any byelaws applicable to the Premises or in regard to carrying on the trade or business for the time being carried on on the Premises 5.8 Access of the Landlord and Notice to Repair 5.8.1 To permit the Landlord upon reasonable prior notice and at reasonable times except in an emergency: 5.8.1.1 to enter upon the Premises for the purpose of ascertaining that the covenants and conditions of this underlease have been observed and performed 5.8.1.2 to view (and to open up floors and other parts of the Premises where such opening-up is reasonably required in order to view) the state of repair and condition of the Premises and 5.8.1.3 to give to the Tenant (or leave upon the Premises) a notice specifying any repairs cleaning maintenance or painting that the Tenant has failed to execute in breach of the terms of this underlease including the making good of such opening-up (if any) provided that any such opening-up shall be forthwith made good by and at the cost of the Landlord where such opening-up reveals no breaches of the terms of this underlease 13 16 5.8.2 To commence and proceed to repair cleanse maintain and paint the Premises as required by such notice within one month after service thereof 5.8.3 If within one month of the service of such a notice the Tenant shall not have commenced and be proceeding diligently with the execution of the work referred to in the notice or shall fail to complete the work within two months or if in the Landlord's opinion the Tenant is unlikely to have completed the work within such period to permit the Landlord to enter the Premises to execute such work as may be necessary to comply with the notice and to pay to the Landlord the cost of so doing and all expenses incurred by the Landlord (including legal costs and surveyor's fees) within 14 days of a written demand 5.8.4 To permit the Landlord and all persons authorised by the Landlord (including agents professional advisers contractors workmen and others) upon reasonable notice (except in the case of emergency) to enter upon the Premises for any purpose that is in the reasonable opinion of the Landlord necessary to enable it to comply with the covenants and the conditions contained in the Headlease 5.9 Alienation 5.9.1 Not to hold on trust for another or (save pursuant to a transaction permitted by and effected in accordance with the provisions of this underlease) part with the possession of the whole or any part of the Premises or permit another to occupy the whole or any part of the Premises PROVIDED that the Tenant may share occupation of the Premises with a company within the same group of companies (within the meaning of section 42 of the 1954 Act) as the Tenant provided that no relationship of landlord and tenant is created and for so long as both companies remain a member of the same group 14 17 5.9.2 Not to assign underlet or charge part only of the Premises save that the Tenant may subject to clause 5.9.6 underlet either Unit 2 or Unit 3 as a whole with the prior consent of the Landlord which is not to be unreasonably withheld or delayed 5.9.3 Not to assign or charge or underlet the whole of the Premises without the prior consent of the Landlord such consent not to be unreasonably withheld or delayed 5.9.4 Not to assign the whole of the Premises without the prior consent of the Landlord such consent not to be unreasonably withheld or delayed PROVIDED THAT the Landlord shall be entitled for the purposes of Section 19(1A) of the Landlord and Tenant Act of 1927 to withhold its consent or licence to an assignment of the whole of the Premises if the circumstances and conditions set out in clause 5.9.5 do not exist or have not been complied with and PROVIDED ALWAYS that the Landlord may withhold its consent on any other ground or grounds where such withholding of consent would be reasonable or to impose any further reasonable condition or conditions upon the grant of consent 5.9.5 The circumstances and conditions referred to in clause 5.9.4 are: 5.9.5.1 that the Tenant who is to assign the underlease enters into an Authorised Guarantee Agreement with the Landlord in the form set out in the Fourth Schedule with such changes thereto as the Landlord may reasonable require from time to time and 5.9.5.2 that such persons as the Landlord may reasonably require act as Guarantors for the intended assignee in the form set out in clause 8 of the underlease 5.9.5.3 that any arrears of rent and other monetary payments due under the terms of this 15 18 underlease have been paid prior to completion of the assignment 5.9.5.4 that all other material breaches of the Tenant's covenants and conditions in this underlease have been remedied 5.9.5.5 that the assignee and any other required guarantors have produced accounts and references reasonably acceptable to the Landlord 5.9.5.6 that the Tenant has with the application for consent to assign produced to the Landlord an unconditional undertaking from its solicitors to pay whether the license is granted or not all costs and disbursements (including VAT) which may be properly incurred by the Landlord in connection with the application for consent (including without prejudice to the generality of the foregoing) its solicitors' costs, its surveyors' costs and its accountants' costs (if any) or that the Tenant has provided such other security for such costs and disbursements as the landlords reasonably requires or 5.9.5.7 the assignee has first covenanted by deed with the Landlord in such form as the Landlord may reasonably require that with effect from the date of the assignment and during the residue of the Term or until the proposed assignee is released from such covenants or conditions the assignee will pay the Rent and observe and perform all the provisions of this underlease to be observed and performed by the Tenant 5.9.5.8 the assignee has if reasonably required by the Landlord procured a covenant by deed with the Landlord from a guarantor or 16 19 guarantors for the assignee (such guarantors to be reasonably acceptable to the Landlord) in the form of the guarantee set out in clause 8 of the underlease 5.9.6 That each and every permitted underlease shall be granted without any fine or premium at a rent not less than the then open market rental value of the Premises to be approved by the Landlord prior to any such underlease or the Rent then being paid (whichever shall be greater) (adjusted if only one unit is being underlet) such rent being payable in advance on the days on which Rent is payable under this underlease and shall contain provisions approved by the Landlord: 5.9.6.1 for the upwards only review of the rent reserved by such underlease on the basis and on the dates on which the Rent is to be reviewed in this underlease 5.9.6.2 prohibiting the undertenant from doing or allowing any act or thing in relation to the underlet premises inconsistent with or in breach of the provisions of this underlease 5.9.6.3 for re-entry by the underlandlord on breach of any covenant by the undertenant 5.9.6.4 imposing an absolute prohibition against all dispositions of or other dealings whatever with the Premises other than an assignment of the whole 5.9.6.5 prohibiting any assignment of the whole without the prior consent of the Landlord under this underlease but providing that such consent may not be unreasonably withheld or delayed 5.9.6.6 prohibiting the undertenant from permitting another to occupy the whole or any part of the Premises 17 20 5.9.6.7 imposing in relation to any permitted assignment the same obligations for registration with the Landlord as are contained in this underlease in relation to dispositions by the Tenant 5.9.6.8 excluding the provisions of the sections 24-28 of the 1954 Act 5.9.7 Prior to any permitted underletting to procure that the undertenant enters into direct covenants with the Landlord to the like effect as those contained in clause 5.9.6 5.9.8 To enforce the performance and observance by every such undertenant of the provisions of the underlease and not at any time either expressly or by implication to waive any breach of the covenants or conditions on the part of any undertenant or assignee of any underlease nor (without the consent of the Landlord such consent not to be unreasonably withheld or delayed) vary the terms or accept a surrender of any permitted underlease 5.9.9 In relation to any permitted underlease: 5.9.9.1 to ensure that the rent is reviewed in accordance with the terms of the underlease 5.9.9.2 not to agree the reviewed rent with the undertenant without the approval of the Landlord 5.9.9.3 where the underlease provides such an option not to agree that the third party determining the rent in default of agreement shall act as an arbitrator or as an expert without the approval of the Landlord 5.9.9.4 not to agree upon the appointment of a person to act as the third party determining the rent in default of agreement without the approval of the Landlord 5.9.9.5 to incorporate as part of any submissions or representations to that third party such 18 21 submissions or representations as the Landlord shall reasonably require 5.9.9.6 to give notice to the Landlord of the details of the determination of every rent review within 14 days provided that the Landlord's approvals specified in this clause 5.9.9 shall not be unreasonably withheld or delayed 5.9.10 Within 28 days of any assignment charge underlease or sub-underlease or any transmission or other devolution relating to the Premises to produce for registration with the Landlord's solicitor such deed or document or a certified copy of it and to pay the Landlord's solicitor's reasonable charges for the registration of every such document such charges not being less than L.25 (twenty five pounds) plus VAT 5.10 Nuisance, Etc. and Residential Restrictions 5.10.1 Not to do nor allow to remain upon the Premises anything which may be or become or cause a nuisance annoyance disturbance inconvenience injury or damage to the Landlord or the Landlord's tenants or other owners or occupiers of adjacent or neighbouring premises 5.10.2 Not to use the Premises for a sale by auction or for any dangerous noxious noisy or offensive trade business manufacture or occupation nor for any illegal or immoral act or purpose 5.10.3 Not to use the Premises as sleeping accommodation or for residential purposes nor keep any animal fish reptile or bird anywhere on the Premises 5.11 Landlord's Costs To pay to the Landlord on an indemnity basis all costs fees charges disbursements and expenses (including without prejudice to the generality of the above those payable to counsel solicitors surveyors and bailiffs) properly and reasonably incurred by the Landlord in relation to or incidental to: 19 22 5.11.1 every application made by the Tenant for a consent or licence required by the provisions of this underlease whether such consent or licence is granted or refused or proffered subject to any qualification or condition or whether the application is withdrawn 5.11.2 the preparation and service of a notice under the Law of Property Act 1925 Section 146 or incurred by or in contemplation of proceedings under Sections 146 or 147 of that Act notwithstanding that forfeiture is avoided otherwise than by relief granted by the court 5.11.3 the recovery or attempted recovery of arrears of rent or other sums due from the Tenant and 5.11.4 and steps taken in contemplation of or in connection with the preparation and service of a schedule of dilapidations during or within three months after the expiration of the Term 5.12 The Planning Acts 5.12.1 Not to commit any breach of planning control (such term to be construed as it is used in the Planning Acts) and to comply with the provisions and requirements of the Planning Acts that affect the Premises whether as to the Permitted User or otherwise and to indemnify (both during or following the expiration of the Term) and keep the Landlord indemnified against all liability whatsoever including costs and expenses in respect of any contravention such consent not to be unreasonably withheld or delayed 5.12.2 At the expense of the Tenant to obtain all planning permissions and to serve all such notices as may be required for the carrying out of any operations or user on the Premises which may constitute Development provided that no application for planning permission shall be made without the previous consent of the Landlord such consent not to be unreasonably withheld or delayed 20 23 5.12.3 Subject only to any statutory direction to the contrary to pay and satisfy any charge or levy that may subsequently be imposed under the Planning Acts in respect to the carrying out or maintenance of any such operations or the commencement or continuance of any such user 5.12.4 Notwithstanding any consent which may be granted by the Landlord under this underlease not to carry out or make any alteration or addition to the Premises or any change of use until: 5.12.4.1 all necessary notices under the Planning Acts have been served and copies produced to the Landlord 5.12.4.2 all necessary permissions under the Planning Acts have been obtained and produced to the Landlord and 5.12.4.3 the Landlord has acknowledged that every necessary planning permission is acceptable the Landlord being entitled to refuse to acknowledge acceptance of a planning permission on the grounds that any condition contained in it or anything omitted from it or the period referred to in it would be (or be likely to be) prejudicial to the Landlord's interest in the Premises whether during or following the expiration of the Term 5.12.5 Unless the Landlord shall otherwise direct to carry out and complete before the expiration of the Term: 5.12.5.1 any works stipulated to be carried out to the Premises by a date subsequent to such expiration as a condition of any planning permission granted for any Development begun before the expiration of the Term and 5.12.5.2 any Development begun upon the Premises in respect of which the Landlord shall or may 21 24 be or become liable for any charge or levy under the Planning Acts 5.12.6 In any case where a planning permission is granted subject to conditions and if the Landlord so reasonably requires to provide security for the compliance with such conditions and not to implement the planning permission until security has been provided 5.13 Plans, Documents and Information 5.13.1 If called upon to do so to produce to the Landlord or the Surveyor all plans documents and other evidence as the Landlord may reasonably require in order for the Landlord to be satisfied that the provisions of this underlease have been complied with 5.13.2 If called upon to do so to furnish to the Landlord the Surveyor or any person acting as the third party determining the Rent in default of agreement between the parties under any provisions for rent review contained in this underlease such information as may reasonably be requested in writing in relation to any pending or intended step under the 1954 Act or the implementation of any provisions for rent review 5.14 Indemnities To be responsible for and to keep the Landlord fully indemnified against all damage damages losses costs expenses actions demands proceedings claims and liabilities made against or suffered or incurred by the Landlord arising directly or indirectly out of: 5.14.1 any act omission or negligence of the Tenant or any persons at the Premises expressly or impliedly with the Tenant's authority or 5.14.2 any breach or non-observance by the Tenant of the covenants conditions or other provisions of this underlease or any of the matters to which this demise is subject or 5.14.3 the use or occupation of the Premises 22 25 5.15 Reletting Boards To permit the Landlord at any time during the last 6 months of the Contractual Term and at any time thereafter (or sooner if the rents or any part of them shall be in arrear and unpaid for longer than 28 days) to enter upon the Premises and affix and retain anywhere upon the Premises a notice for reletting the Premises (but not so as to obscure the doors or windows thereof) and during such period to permit persons with the written authority of the Landlord or the Landlord's agent at reasonable times of the day by appointment to view the Premises 5.16 Encroachments 5.16.1 Not to stop up darken or obstruct any windows or light belonging to the Building 5.16.2 To take all steps to prevent any new window light opening doorway path passage pipe or other encroachment or easement being made or acquired in against out of or upon the Premises and to notify the Landlord immediately upon it coming to the notice of the Tenant if any such encroachment or easement shall be made or acquired (or attempted to be made or acquired) and at the request and cost (unless due to the Tenant's default or omission) of the Landlord to adopt such means as shall be required to prevent such encroachment or the acquisition of any such easement 5.17 Yield Up At the expiration of the Term: 5.17.1 to yield up the Premises in repair and in accordance with the terms of this underlease 5.17.2 to give up all keys of the Premises to the Landlord and 5.17.3 to remove all signs erected by the Tenant in upon or near the Premises and immediately to make good any damage caused by such removal 5.18 Interest on arrears 5.18.1 If the Tenant shall fail to pay the rents or any other sum due under this underlease within 14 days of 23 26 the date due whether formally demanded or not the Tenant shall pay to the Landlord Interest on the rents or other sum from the date when they were due to the date on which they are paid and such Interest shall be deemed to be rents due to the Landlord 5.18.2 Nothing in the preceding clause shall entitle the Tenant to withhold or delay any payment of the rents or any other sum due under this underlease after the date upon which they fall due or in any way prejudice affect or derogate from the rights of the Landlord in relation to such non-payment including (but without prejudice to the generality of the above) under the proviso for re-entry contained in this underlease 5.19 Statutory Notices etc. To give full particulars to the Landlord of any notice direction order or proposal for the Premises made given or issued to the Tenant by any local or public authority within 7 days of receipt and if so required by the Landlord to produce it to the Landlord and without delay to take all necessary steps to comply with the notice direction or order and at the request of the Landlord but at the joint cost of the Landlord and the Tenant to make or join with the Landlord in making such objection or representation against or in respect of any notice direction order or proposal as the Landlord shall deem expedient 5.20 Keyholders To ensure that at all times the Landlord has written notice of the name home address and home telephone number of at least 2 keyholders of the Premises 5.21 Sale of Reversion etc. To permit upon reasonable notice at any time during the Term during normal business hours prospective purchasers of or agents instructed in connection with the sale of the Landlord's reversion or of any other interest superior to the Term to view the Premises by prior appointment without interruption provided they are authorised in writing by the Landlord or its agents 24 27 5.22 Defective Premises To give notice to the Landlord of any defect in the Premises which might give rise to an obligation on the Landlord to do or refrain from doing any act or thing in order to comply with the provisions of this underlease or the duty of care imposed on the Landlord pursuant to the defective Premises Act 1972 or otherwise as soon as the same shall come to the notice of the Tenant and at all times to display and maintain all notices which the Landlord may from time to time require to be displayed at the Premises 5.23 New Guarantor Within 14 days of the death during the Term of any Guarantor or of such person becoming bankrupt or having a receiving order made against him or having a receiver appointed under the Mental Health Act 1983 or being a company passing a resolution to wind up or entering into liquidation or having a receiver appointed to give notice of this to the Landlord and if so required by the Landlord at the expense of the Tenant within 28 days to procure some other person acceptable to the Landlord to execute a guarantee in respect of the Tenant's obligations contained in this underlease in the form of the Guarantor's covenants contained in this underlease 5.24 Landlord's Rights To permit the Landlord at all times during the Term to exercise without interruption or interference any of the rights granted to the Landlord by virtue of the provisions of this underlease 5.25 To observe and perform the covenants and conditions contained in the Headlease To observe and perform the covenants and conditions on the part of the lessee contained in the Headlease except in so far as the Landlord expressly covenants in this underlease to observe and perform the same and to indemnify the Landlord from and against any actions proceedings claims damages costs expenses or losses arising from any breach 25 28 non-observance or non-performance of such covenants and conditions 5.26 Not to commit a breach of the terms of the Headlease Not to do omit suffer or permit in relation to the Premises any act or thing which would or might cause the Landlord to be in breach of the Headlease or which if done omitted or suffered or permitted by the Landlord would or might constitute a breach of the covenants on the part of the lessee and the conditions contained in the Headlease 5.27 The Operational Covenants To observe and perform the Operational Covenants 6. THE LANDLORD'S COVENANTS The Landlord covenants with the Tenant: 6.1 Quiet Enjoyment To permit the Tenant peaceably and quietly to hold and enjoy the Premises without any interruption or disturbance from or by the Landlord or any person claiming under or in trust for the Landlord 6.2 To pay the Headlease rent(s) To pay the rents reserved by the Headlease and to perform so far as the Tenant is not liable for such performance under the terms of this underlease the covenants and conditions on the part of the lessee contained in the Headlease 6.3 To enforce the covenants in the Headlease On the request and at the expense of the Tenant to take all reasonable steps to enforce the covenants on the part of the Superior Landlord contained in the Headlease 6.4 To obtain consents under the Headlease To take all reasonable steps at the Tenant's expense to obtain the consent of the Superior Landlord wherever the Tenant makes application for any consent required under this underlease where the consent of both the Landlord and the Superior Landlord is needed by virtue of this underlease and the Headlease 26 29 6.5 External cladding After any notice given by the Tenant as to any substantial defect in the external cladding of the Building having come to the notice of the Tenant to inspect the same and to carry out any work which may reasonably be required thereto so as to ensure that the Building remains wind and water tight 7. Insurance 7.1 Warranty re Convictions The Tenant warrants that prior to the execution of this underlease the Tenant has disclosed to the Landlord in writing any conviction judgment or finding or any court or tribunal relating to the Tenant (or any director other officer or major shareholder of the Tenant) of such a nature as to be likely to affect the decision of any insurer or underwriter to grant or to continue insurance of the Building against loss of damage by any of the Insured Risks 7.2 Landlord to Insure 7.2.1 Subject to the Tenant paying the Insurance Rent the Landlord covenants with the Tenant to insure the Premises unless such insurance shall be vitiated by any act of the Tenant or by anyone at the Premises expressly or by implication with the Tenant's authority 7.2.2 Insurance shall be effected: 7.2.2.1 in such insurance office or with such underwriters and through such agency as the Landlord may from time to time decide 7.2.2.2 for the following sums: (a) such sum as the Landlord shall from time to time be advised as being the full cost of rebuilding and reinstatement including VAT architect's surveyors' and other professional fees fees payable upon any applications for planning permission or other permits or consents 27 30 that may be required in relation to the rebuilding or reinstatement of the Premises the cost of the debris removal demolition site clearance any works that may be required by statute and incidental expenses and (b) the loss of Rent payable under this underlease from time to time (having regard to any review of rent which may become due under this underlease) for 3 years or such longer period as the Landlord may from time to time consider to be sufficient for the purposes of the planning and carrying out the rebuilding or reinstatement 7.2.2.3 against damage or destruction by the Insured Risks to the extent that such insurance may ordinarily be arranged for properties such as the Premises with an insurer of repute and subject to such excesses exclusions or limitations as the insurer may require 7.3 Payment of Insurance Rent The Tenant shall pay the Insurance Rent on the date of this underlease for the period from and including the date of this underlease to the day before the next policy renewal date and subsequently the Tenant shall pay the Insurance Rent on demand and (if so demanded) in advance of the policy renewal date 7.4 Suspension of Rent 7.4.1 If and whenever during the Term: 7.4.1.1 the Premises or any part of them are damaged or destroyed by any of the Insured Risks so that the Premises or any part of them are unfit for occupation or use and 7.4.1.2 payment of the insurance money is not refused in whole or in part by reason of any act or default of the Tenant or anyone at 28 31 the Premises expressly or by implication with the Tenant's authority the provisions of clause 7.4.2 shall have effect 7.4.2 When the circumstances contemplated in clause 7.4.1 arise the Rent or a fair proportion of the Rent according to the nature and extent of the damage sustained shall cease to be payable until the Premises or the affected part shall have been rebuilt or reinstated so that the Premises or the affected part are made fit for occupation or use or until the expiration of 3 years from the destruction or damage whichever period is the shorter 7.5 Reinstatement and Termination if Prevented 7.5.1 If and whenever during the Term: 7.5.1.1 the Premises or any part of them are damaged or destroyed by any of the Insured Risks 7.5.1.2 the payment of the insurance money is not refused in whole or in part by reason of any act or default of the Tenant or anyone at the Premises expressly or by implication with the Tenant's authority the Landlord shall use the Landlord's best endeavours to obtain all planning permissions or other permits and consents that may be required under the Planning Acts or other statutes (if any) to enable the Landlord to rebuilt and reinstate ('Permissions') 7.5.2 Subject to the provisions of clauses 7.5.3 and 7.5.4 the Landlord shall as soon as the Permissions have been obtained or immediately where no Permissions are required apply all money received in respect of such insurance (except sums in respect of loss of Rent) in rebuilding or reinstating the Premises so destroyed or damaged and shall make up any shortfall out of the Landlord's own monies 7.5.3 For the purposes of this clause the expression 'Supervening Events' means: 29 32 7.5.3.1 the Landlord has failed despite using the Landlord's best endeavours to obtain the Permissions 7.5.3.2 any of the Permissions have been granted subject to a lawful condition with which in all the circumstances it would be unreasonable to expect the Landlord to comply 7.5.3.3 some defect or deficiency in the site upon which the rebuilding or reinstatement is to take place would mean that the same could only undertaken at a cost that would be unreasonable in all the circumstances 7.5.3.4 the Landlord is unable to obtain access to the site for the purposes of rebuilding or reinstating 7.5.3.5 the rebuilding or reinstating is prevented by war act of God Government action strike lock-out or 7.5.3.6 any other circumstances beyond the control of the Landlord 7.5.4 The Landlord shall not be liable to rebuild or reinstate the Premises if and for so long as such rebuilding or reinstating is prevented by Supervening Events 7.5.5 If upon the expiry of a period of 2-1/2 years commencing on the date of the damage or destruction the Premises have not been rebuilt or reinstated so as to be fit for the Tenant's occupation and use either party may by notice served at any time within 6 months of the expiry of such period invoke the provisions of clause 7.5.6 7.5.6 Upon service of a notice in accordance with clause 7.5.5: 7.5.6.1 the Term will absolutely cease but without prejudice to any rights or remedies that may have accrued to either party against the other including (without prejudice to the 30 33 generality of the above) any right that the Tenant might have against the Landlord for a breach of the Landlord's covenants set out in clauses 7.5.1 and 7.5.2 7.5.6.2 all money received in respect of the insurance effected by the Landlord pursuant to this clause shall belong to the Landlord 7.6 Tenant's Insurance Covenants The Tenant covenants with the Landlord: 7.6.1 to comply with all the requirements and recommendations of the insurers 7.6.2 not to do or omit anything that could cause any policy of insurance on or in relation to the Premises to become void or voidable wholly or in part nor (unless the Tenant shall have previously notified the Landlord and have agreed to pay the increased premium) anything by which additional insurance premiums may become payable 7.6.3 to keep the Premises supplied with such fire fighting equipment as the insurers and the fire authority may require or as the Landlord may reasonably require and to maintain such equipment to their satisfaction and in efficient working order and at least once in every 6 months to cause any sprinkler system and other fire fighting equipment to be inspected by a competent person 7.6.4 not to store or bring onto the Premises any article substance or liquid of a specially combustible inflammable or explosive nature and to comply with the requirements and recommendations of the fire authority and the reasonable requirements of the Landlord as to fire precautions relating to the Premises 7.6.5 not to obstruct the access to any fire equipment or the means of escape from the Premises nor to lock any fire door while the Premises are occupied 31 34 7.6.6 to give notice to the Landlord immediately upon the happening of any event which might affect any insurance policy on or relating to the Premises or upon the happening of any event against which the Landlord may have insured under this underlease 7.6.7 immediately to inform the Landlord in writing of any conviction judgment or finding of any court or tribunal relating to the Tenant (or any director other officer or major shareholder of the Tenant) of such a nature as to be likely to affect the decision of any insurer or underwriter to grant or to continue any such insurance 7.6.8 if at any time the Tenant shall be entitled to the benefit of any insurance on the Premises (which is not effected or maintained in pursuance of any obligation contained in this underlease) to apply all money received by virtue of such insurance in making good the loss or damage in respect of which such money shall have been received 7.6.9 if and whenever during the Term the Premises or any part of them are damaged or destroyed by an Insured Risk and the insurance money under the policy of insurance relating to the Premises is by reason of any act or default of the Tenant or anyone at the Premises expressly or by implication with the Tenant's authority wholly or partially irrecoverable immediately in every such case (at the option of the Landlord) either: 7.6.9.1 to rebuild and reinstate at the Tenant's own expense the Premises or the part destroyed or damaged to the reasonable satisfaction and under the supervision of the Surveyor the Tenant being allowed towards the expenses of so doing upon such rebuilding and reinstatement being completed the amount (if any) actually received in respect of 32 35 such destruction or damage under any such insurance policy or 7.6.9.2 to pay to the Landlord on demand with Interest the amount of such insurance money so irrecoverable in which event the provisions of clauses 7.4 and 7.5 shall apply 7.7 Landlord's Insurance Covenants The Landlord covenants with the Tenant in relation to the policy of insurance effected by the Landlord pursuant to the Landlord's obligations contained in this underlease to produce to the Tenant on demand reasonable evidence of the terms of the policy and fact that the last premium has been paid 8. The Guarantor's Covenants The Guarantor covenants with the person named herein as Landlord and without the need for any express assignment with all the Landlord's successors in title that: 8.1 To Pay Observe and Perform Whilst the underlease is vested in the Tenant or the Tenant remains liable by virtue of the Landlord and Tenant (Covenants) Act 1995 and whilst the Tenant remains liable to the Landlord under any authorised guarantee agreement entered into pursuant to this underlease ("the Liability Period") the Tenant shall punctually pay the rents and observe and perform the covenants and other terms of this underlease and if at any time during the Liability Period the Tenant shall make any default in payment of the rents or in observing or performing any of the covenants or other terms of this underlease the Guarantor will pay the rents and observe or perform the covenants or terms in respect of which the Tenant shall be in default and make good to the Landlord on demand and indemnify the Landlord against all losses and damages costs and expenses arising or incurred by the Landlord as a result of such non-payment non-performance or non-observance notwithstanding: 8.1.1 any time or indulgence granted by the Landlord to the Tenant or any neglect or forbearance of the Landlord 33 36 in enforcing the payment of the rents or the observance or performance of the covenants or other terms of this underlease or any refusal by the Landlord to accept rents tendered by or on behalf of the Tenant at a time when the Landlord was entitled (or would after the service of a notice under the Law of Property Act 1925 Section 146 have been entitled) to re-enter the Premises 8.1.2 that the terms of this underlease may have been varied by agreement between the parties 8.1.3 that the Tenant shall have surrendered part of the Premises in which event the liability of the Guarantor under this underlease shall continue in respect of the part of the Premises not so surrendered after making any necessary apportionments under the Law of Property Act 1925 Section 140 and 8.1.4 any other act or thing by which but for this provision the Guarantor would have been released 8.2 To Take Underlease Following Disclaimer If at any time during the Liability Period the Tenant (being an individual) shall become bankrupt or (being a company) shall enter into liquidation and the trustee in bankruptcy or liquidator shall disclaim this underlease the Guarantor shall if the Landlord shall by notice within 60 days after such disclaimer so require take from the Landlord an underlease of the Premises for the residue of the Contractual Term which would have remained had there been no disclaimer at the Rent then being paid under this underlease and subject to the same covenants and terms as in this underlease (except that the Guarantor shall not be required to procure that any other person is made a party to that underlease as guarantor) such new underlease to take effect from the date of such disclaimer and in such case the Guarantor shall pay the costs of such new underlease and execute and deliver to the Landlord a counterpart of it 34 37 8.3 To Make Payments Following Disclaimer If this underlease shall be disclaimed and for any reason the Landlord does not require the Guarantor to accept a new underlease of the Premises in accordance with clause 8.2 the Guarantor shall pay to the Landlord on demand an amount equal to the difference between any money received by the Landlord for the use of occupation of the Premises and the rents in both cases for the period commencing with the date of such disclaimer and ending on whichever is the earlier of the following dates: 8.3.1 the date 6 months after such disclaimer and 8.3.2 the date (if any) upon which the Premises are relet 9. PROVISOS 9.1 Re-entry If and whenever during the Term: 9.1.1 the rents (or any of them or any part of them) under this underlease are outstanding for 14 days after becoming due whether formally demanded or not or 9.1.2 there is a breach by the Tenant or the Guarantor of any covenant or other term of this underlease or any document supplemental to this underlease or 9.1.3 an individual Tenant or the Guarantor: 9.1.3.1 becomes bankrupt or 9.1.3.2 has an interim receiver appointed in respect of his property or 9.1.3.3 has a bankruptcy order made against him 9.1.4 a company Tenant or the Guarantor: 9.1.4.1 enters into liquidation whether compulsory or voluntary (but not if the liquidation is for amalgamation or reconstruction of a solvent company) or 9.1.4.2 has an administrative or other receiver appointed 9.1.5 the Tenant enters into an arrangement for the benefit of the Tenant's creditors or 35 38 9.1.6 the Tenant has any distress or execution levied on the Tenant's goods the Landlord may re-enter the Premises (or any part of them in the name of the whole) at any time (and even if any previous right of re-entry has been waived) and then the Term will absolutely cease but without prejudice to any rights or remedies which may have accrued to the Landlord against the Tenant or the Guarantor in respect of any breach of covenant or other term of this underlease (including the breach in respect of which the re-entry is made) 9.2 Exclusion of Use Warranty Nothing in this underlease or in any consent granted by the Landlord under this underlease shall imply or warrant that the Premises may lawfully be used under the Planning Acts for the purpose authorised in this underlease(or any purpose subsequently authorised) 9.3 Entire Understanding This underlease embodies the entire understanding of the parties relating to the Premises and to all the matters dealt with by any of the provisions of this underlease 9.4 Representations The Tenant acknowledges that this underlease has not been entered into in reliance wholly or partly on any statement or representation made by or on behalf of the Landlord except any such statement or representation that is expressly set out in this underlease 9.5 Licences etc. Under Hand Whilst the Landlord is a limited company or other corporation all licences consents approvals and notices required to be given by the Landlord shall be sufficiently given if given under the hand of a director the secretary or other duly authorised officer of the Landlord 9.6 Tenant's Property If after the Tenant has vacated the Premises on the expiry of the Term any property of the Tenant remains in or on the Premises and the Tenant fails to remove it within 7 days after being requested in writing by the Landlord to do so or 36 39 if after using reasonable endeavours the Landlord is unable to make such a request to the Tenant within 14 days from the first attempt so made by the Landlord: 9.6.1 the Landlord may as the agent of the Tenant sell such property and the Tenant will indemnify the Landlord against any liability incurred by the Landlord to any third party whose property shall have been sold by the Landlord in the mistaken belief held in good faith (which shall be presumed unless the contrary be proved) that such property belonged to the Tenant 9.6.2 if the Landlord having made reasonable efforts is unable to locate the Tenant the Landlord shall be entitled to retain such proceeds of sale absolutely unless the Tenant shall claim them within 3 months of the date upon which the Tenant vacated the Premises and 9.6.3 the Tenant shall indemnify the Landlord against any damage occasioned to the Premises and any actions claims proceedings costs expenses and demands made against the Landlord caused by or related to the presence of the property in or on the Premises 9.7 Compensation on Vacating Any statutory right of the Tenant to claim compensation from the Landlord on vacating the Premises shall be excluded to the extent that the law allows 9.8 Disputes under the Headlease Where any issue question or matter arising out of or under or relating to the Headlease which also affects or relates to the provisions of this underlease is to be determined as provided in the Headlease the determination of such issue question or matter pursuant to the provisions of the Headlease shall be binding on the Tenant as well as the Landlord for the purposes both of the Headlease and this underlease 9.9 Service of Notices The provisions of the Law of Property Act 1925 Section 196 as amended by the Recorded Delivery Service Act 1962 37 40 shall apply to the giving and service of all notices and documents under or in connection with this underlease 9.10 Jurisdiction 9.10.1 This underlease shall be governed by English Law 9.10.2 The parties submit to the non-exclusive jurisdiction of the High Court of Justice in England 9.11 Landlord and Tenant (Covenants) Act 1995 The parties hereby certify that this is a new tenancy for the purpose of the Landlord and Tenant (Covenants) Act 1995 9.12 Landlord's Release The Landlord shall be released from all liability under this underlease on an assignment by the Landlord of its reversionary interest (subject always to section 26(2) of the Landlord and Tenant (Covenants) Act 1995) 9.13 Option to Determine If the Tenant wishes to determine this Lease on the expiry of the fifth year of the Term and shall give to the Landlord not less than six months' prior notice in writing and shall up to the time of such determination pay the rents reserved by and in all material respects perform and observe the covenants contained in this underlease then upon the expiry of such notice the Term shall immediately cease and determine but without prejudice to the respective rights of either party in respect of any antecedent claim or breach of covenant 9.14 Tenant's option with regard to external cladding If the Tenant shall at any time after the expiry of the fifth year of the Term give to the Landlord notice in writing that the decorative condition of the external cladding of the Building has substantially deteriorated such that re-decoration is reasonably required then the Landlord shall within three months of the date of service of such notice either: 9.14.1 Carry out the re-decoration of the external cladding in a proper and workmanlike manner and with good 38 41 quality materials and to the reasonable satisfaction of the Tenant or 9.14.2 Give counternotice to the Tenant that the Landlord does not propose to carry out such decorations in which event the Tenant may within six months of the service of such counternotice forthwith determine the Lease by written notice to the Landlord on the same conditions as for the determination of the Lease in accordance with clause 9.13 hereof IN WITNESS of which this deed has been executed the day and year first above written FIRST SCHEDULE Rights Reserved 1. The right at any time during the Term at reasonable times and upon reasonable notice except in cases of emergency to enter (or in cases of emergency to break and enter) the Premises: 1.1 to inspect the condition and state of repair of the Premises 1.2 to take schedules or inventories of fixtures and other items to be yielded upon on the expiry of the Term and 1.3 to exercise any of the rights granted to the Landlord elsewhere in this underlease 2. The right with the Surveyor and the third party determining the Rent in default of agreement between the parties under any provisions for rent review contained in this underlease at convenient hours and on reasonable prior notice to enter and inspect and measure the Premises for all purposes connected with any pending or intended step under the 1954 Act or the implementation of the provisions for rent review 39 42 SECOND SCHEDULE Rent and rent review 1. DEFINITIONS 1.1 The terms defined in this paragraph shall for all purposes of this schedule have the meanings specified 1.2 'Review Period' means the period between the Review Date and the expiry of the Term (inclusive) 1.3 'the Assumptions' means the following assumptions at the Review Date: 1.3.1 that no work has been carried out on the Premises by the Tenant or the Tenant's subtenants or their predecessors in title during the Term or during any previous term held by the Tenant which has diminished the rental value of the Premises 1.3.2 That if the Premises have been destroyed or damaged they have been fully restored 1.3.3 that the covenants contained in this underlease on the part of the Tenant have been fully performed and observed 1.3.4 that the Premises are available to let by a willing landlord to a willing tenant by one underlease without a premium being paid by either party and with vacant possession 1.3.5 that the Premises are ready for and fitted out and equipped for immediate occupation and use for the purpose or purposes required by the willing tenant referred to in paragraph 1.3.4 and that all the services required for such occupation and use are connected to the Premises 1.3.6 that the underlease referred to in paragraph 1.3.4 contains the same terms as this underlease except the amount of the Initial Rent and any rent free period allowed to the Tenant for fitting out the Premises for the Tenant's occupation and use at the commencement of the Term but including the provisions for rent review on the Review Dates and at similar 40 43 intervals after the last Review Date and except as set out in paragraph 1.3.7 1.3.7 that the term of the underlease referred to in paragraph 1.3.4 is equal in length to the Contractual Term and that such term begins on the relevant Review Date and that the rent shall commence to be payable from that date and that the years during which the tenant covenants to decorate the Premises are at similar intervals after the beginning of the term of such underlease as those specified in this underlease 1.3.8 that the underlease referred to in paragraph 1.3.4 will be renewed at the expiry of its term under the provisions of the 1954 Act 1.3.9 that the hypothetical tenant is and that tenants in the market generally are registered for the purposes of VAT and will be able to set off in full by way of input tax any VAT payable in respect of any payment of rent against the output tax payable by such tenant 1.4 'the Disregarded Matters' means: 1.4.1 any effect on rent of the fact that the Tenant or the Tenant's permitted subtenants or their respective predecessors in title have been in occupation of the Premises 1.4.2 any goodwill attached to the Premises by reason of the carrying on at the Premises of the business of the Tenant or the Tenant's permitted subtenants or their predecessors in title in their respective businesses 1.4.3 any increase in rental value of the Premises attributable to the existence at the relevant Review Date of any improvement addition alteration or other work to the Premises carried out with consent where required otherwise than in pursuance of an obligation to the Landlord or the Landlord's predecessors in title by the Tenant or the Tenant's permitted subtenants or their respective predecessors in title during the Term 41 44 1.4.4 any adverse effect on rent of any temporary works operations or other activities on any adjoining or neighbouring property 1.4.5 any rent free or reduced rent period or reverse premiums or other concessions that a willing landlord might give to a willing tenant in the open market at the relevant Review Date 1.5 'the President' means the President for the time being of the Royal Institution of Chartered Surveyors the duly appointed deputy of the President or any person authorised by the President to make appointments on his behalf 1.6 'the Independent Surveyor' means a person appointed by agreement between the parties or in the absence of agreement within 14 days of one party giving notice to the other of their nomination or nominations nominated by the President on the application of either party made not earlier than 6 months before the relevant Review Date or at any time afterwards 2. ASCERTAINING THE RENT 2.1 The Rent shall be: 2.1.1 until the first Review Date the Initial Rent and 2.1.2 during the Review Period a rent equal to the greater of: 2.1.2.1 the Rent payable immediately prior to the relevant Review Date or if payment of Rent has been suspended pursuant to the proviso to that effect contained in this underlease the Rent which would have been payable had there been no suspension or 2.1.2.2 such Rent as may be ascertained in accordance with this schedule 2.2 Such revised Rent for the Review Period may be agreed in writing at any time between the parties or (in the absence of agreement) will be determined not earlier than the Review Date by the Independent Surveyor 42 45 2.3 The revised Rent to be determined by the Independent Surveyor shall be such as he shall decide to be the rent at which the Premises might reasonably be expected to be let on the open market at the Review Date making the Assumptions but disregarding the Disregarded Matters 2.4 The Independent Surveyor shall act as an arbitrator in accordance with the Arbitration Acts 1950 to 1979 unless before his appointment the Landlord shall elect in writing that the Independent Surveyor shall act as an expert and not as an arbitrator and in such event the Independent Surveyor acting as an expert shall nevertheless afford the parties a reasonable opportunity to make written representations to him but save in the event of manifest error his decision as an expert shall be final and binding on the parties 2.5 The Independent Surveyor shall also have authority to determine the proportions in which the costs of his determination shall be borne between the parties 2.6 If the Independent Surveyor shall die or become unwilling to act or incapable of acting or withdraws or if for any other reason the President or the person acting on the President's behalf shall think fit the Independent Surveyor shall be discharged and the President or the person acting on his behalf shall appoint another in his place and this shall be repeated as many times as may be necessary in the circumstances 2.7 Whenever the Rent shall have been ascertained in accordance with this schedule memoranda to this effect shall be signed by or on behalf of the parties and annexed to this underlease and its counterpart and the parties shall bear their own costs in this respect (but failure to sign such a memorandum shall not affect the recovery of the new rent) 3. ARRANGEMENT PENDING ASCERTAINMENT OF REVISED RENT 3.1 If the revised Rent payable during the Review Period has not been ascertained by the relevant Review Date Rent shall continue to be payable at the rate previously payable such payments being on account of the Rent for that Review Period 43 46 3.2 If one party shall upon publication of the Independent Surveyor's award pay all the Independent Surveyor's fees and expenses such party shall be entitled to recover (in default of payment within 21 days of a demand to that effect in the case of the Landlord as Rent in arrears or in the case of the Tenant by deduction from Rent) such proportion of them (if any) as the Independent Surveyor shall award against the other party 4. PAYMENT OF REVISED RENT 4.1 If the revised Rent shall be ascertained on or before the Review Date and that date is not a quarter day the Tenant shall on that Review Date pay to the Landlord the amount by which one quarter's Rent at the rate payable on the immediately preceding quarter day is less than one quarter's Rent at the rate of the revised rent apportioned on a daily basis for that part of the quarter during which the revised Rent is payable 4.2 If the revised Rent payable during the Review Period has not been ascertained by the Review Date then immediately after the date when the same has been agreed between the parties or the date upon which the Independent Surveyor's award shall be received by one party the Tenant shall pay to the Landlord: 4.2.1 any shortfall between the Rent which would have been paid on the Review Date and on any subsequent quarter days had the revised rent been ascertained on or before the Review Date and the payments made by the Tenant on account and 4.2.2 interest at the rate equal to the base lending rate of the bank referred to in or nominated pursuant to clause 1.6 prevailing on the day upon which the shortfall is paid in respect of each instalment of Rent due on or after the Review Date on the amount by which the instalment of the revised Rent which would have been paid on the relevant Review Date or such quarter day exceeds the amount paid on account and 44 47 such interest shall be payable for the period from the date upon which the instalment was due up to the date of payment of the shortfall 5. ARRANGEMENTS WHEN INCREASING RENT PREVENTED ETC. 5.1 If at any of the Review Dates there shall be in force a statute which shall prevent restrict or modify the Landlord's right to review the Rent in accordance with this underlease and/or to recover any increase in the Rent the Landlord shall when such restriction or modification is removed relaxed or modified be entitled (but without prejudice to the Landlord's rights (if any) to recover any Rent the payment of which has only been deferred by law) on giving not less than one month's nor more than 3 month's notice in writing to the Tenant to invoke the provisions of paragraph 5.2 5.2 Upon the service of a notice pursuant to paragraph 5.1 the Landlord shall be entitled: 5.2.1 to proceed with any review of the Rent which may have been prevented or further to review the Rent in respect of any review where the Landlord's right was restricted or modified and the date of expiry of such notice shall be deemed for the purposes of this underlease to be a Review Date (provided that without prejudice to the operation of this paragraph nothing in this paragraph shall be construed as varying any subsequent Review Dates) 5.2.2 to recover any increase in Rent with effect from the earliest date permitted by law THIRD SCHEDULE The Operational Covenants 1. USER 1.1 To use the Premises for the Permitted User only 45 48 1.2 Not to cease carrying on business in the Premises or leave the Premises continuously unoccupied for more than one month without: 1.2.1 notifying the Landlord and 1.2.2 providing such caretaking or security arrangements as the Landlord shall reasonably require and the insurers shall require in order to protect the Premises from vandalism theft damage or unlawful occupation 2. SMOKE ABATEMENT 2.1 To ensure that every furnace boiler or heater at the Premises (whether using solid liquid or gaseous fuel) is constructed and used so as substantially to consume or burn the smoke arising from it 2.2 Not to cause or permit any grit or noxious or offensive effluvia to be emitted from any engine furnace chimney or other apparatus on the Premises without using the best possible means for preventing or counteracting such emission 2.3 To comply with the provisions of the Clean Air Acts 1956 and 1968 and the Control of Pollution Act 1974 and with the requirements of any notice of the local authority served under them 3. POLLUTION Not to permit to be discharged into any Pipes serving the Premises: 3.1 any oil or grease or any deleterious objectionable dangerous poisonous or explosive matter or substance and to take all measures to ensure that any effluent discharged into the Pipes will not be corrosive or otherwise harmful to the Pipes or cause obstruction or deposit in them or 3.2 any fluid of a poisonous or noxious nature or of a kind likely to or that does in fact destroy sicken or injure the fish or contaminate or pollute the water of any stream or river 46 49 4. ROOF AND FLOOR WEIGHTING 4.1 Not to bring or permit to remain upon the Building any safes machinery goods or other articles which shall or may strain or damage the Building or any part of it 4.2 Not without the consent of the Landlord to suspend any weight from the stanchions roof purlins or portal frames or use the same for storage of goods or place any weight on them 4.3 On any application by the Tenant for the Landlord's consent under paragraph 4.2 the Landlord shall be entitled to consult and obtain the advice of an engineer or other person in relation to the roof or floor loading proposed by the Tenant and the Tenant shall repay to the Landlord on demand the fee of such engineer or other person 5. MACHINERY 5.1 To keep all plant apparatus and machinery (including any boilers and furnaces) upon the Premises properly maintained and in good working order and for that purpose to employ reputable contractors for the regular periodic inspection and maintenance of them 5.2 To renew all working and other parts as and when necessary or when recommended by such contractors 5.3 To ensure by directions to the Tenant's staff and otherwise that such plant apparatus and machinery are properly operated and 5.4 To avoid damage to the Premises by vibration or otherwise 6. SIGNS At all times to display and maintain a suitable sign showing the Tenant's trading name and business of a size and kind first approved by the Landlord on a point on the Premises to be reasonably specified in writing to the Landlord 7. UNLOADING AND PARKING Not to unload any goods or materials from vehicles and convey them into the Premises except through the approved entrances provided 47 50 for the purpose and not to cause congestion of adjoining parking areas or inconvenience to any other user of them} FOURTH SCHEDULE Authorised Guarantee Agreement THIS GUARANTEE is made the day of 199 BETWEEN: (1) of ("the Guarantor") (2) of ("the Landlord") NOW IT IS AGREED as follows: 1. DEFINITIONS AND INTERPRETATION In this guarantee the following expressions shall (where the context permits) have the following meanings respectively: 1.1 "the Assignee" means 1.2 "the Lease" means the underlease dated and made between (Stop01) and (Stop02) [and (Stop03)] for a term of from [and varied by a deed dated and made between ] 1.3 "the Premises" means the premises demised by the Lease 1.4 "the Liability Period" means the period during which the Assignee is bound by the tenant covenants of the Lease 1.5 the expressions "authorised guarantee agreement" and "tenant covenants" shall have the same meaning in this guarantee as in the Landlord and Tenant (Covenants) Act 1995 section 28(1) 2. RECITALS 2.1 By clause 5.9 of the Lease the Landlord's consent is required to the assignment of the Lease 2.2 The Landlord has agreed to give consent to the assignment to the Assignee on condition that the Guarantor enters into this guarantee 48 51 2.3 This guarantee takes effect only when the Lease is assigned to the Assignee 3. In consideration of the Landlord's consent to the assignment the Guarantor covenants with the Landlord and without the need for any express assignment with all its successors in title that: 3.1 To pay observe and perform The Assignee shall punctually pay the rents and observe and perform the covenants and other terms of the Lease throughout the Liability Period and if at any time during the Liability Period the Assignee shall make any default in payment of the rents or in observing or performing any of the covenants or other terms of the Lease the Guarantor will pay the rents and observe or perform the covenants or terms in respect of which the Assignee shall be in default and make good to the Landlord on demand and indemnify the Landlord against all losses damages costs and expenses arising or incurred by the Landlord as a result of such non-payment non-performance or non-observance notwithstanding: 3.1.1 any time or indulgence granted by the Landlord to the Assignee or any neglect or forbearance of the Landlord in enforcing the payment of the rents or observance or performance of the covenants or other terms of the Lease or any refusal by the Landlord to accept rents tendered by or on behalf of the Assignee at a time when the Landlord was entitled (or would after the service of a notice under the Law of Property Act 1925 Section 146 have been entitled) to re-enter the Premises 3.1.2 that the terms of the Lease may have been varied by agreement between the parties 3.1.3 that the Assignee shall have surrendered part of the Premises in which event the liability of the Guarantor under the Lease shall continue in respect of the part of the Premises not so surrendered after 49 52 making any necessary apportionments under the law of Property Act 1925 Section 140 and 3.1.4 any other act or thing by which but for this provision the Guarantor would have been released 3.2 To take lease following disclaimer If during the Liability Period the Assignee (being an individual) shall become bankrupt or (being a company) shall enter into liquidation and the trustee in bankruptcy or liquidator shall disclaim the Lease the Guarantor shall if the Landlord shall by notice within 60 days after such disclaimer so require take from the Landlord a lease of the Premises for the residue of the contractual term of the Lease which would have remained had there been no disclaimer at the rent then being paid under the Lease and subject to the same covenants and terms as in the Lease (except that the Guarantor shall not be required to procure that any other person is made a party to that lease as guarantor) such new lease to take effect from the date of such disclaimer and in such case the Guarantor shall pay the costs of such new lease and execute and deliver to the Landlord a counterpart of it 3.3 To make payments following disclaimer If during the Liability Period the Lease shall be disclaimed and for any reason the Landlord does not require the Guarantor to accept a new underlease of the Premises in accordance with clause 3.2 above the Guarantor shall pay to the Landlord on demand an amount equal to the rents for the period commencing with the date of such disclaimer and ending on whichever is the earlier of the following dates: 3.3.1 the date 6 months after such disclaimer and 3.3.2 the date (if any) upon which the Premises are relet FIFTH SCHEDULE (Particulars of matters to which the Premises are subject) All those matters set out in the Headlease and in the registered title of the premises. 50 53 THE COMMON SEAL OF ) PEGASUS AIRWAVE LIMITED ) was hereunto affixed to this instrument ) as a deed in the presence of ) /s/ (Signature) Director - ----------------------------------- /s/ (Signature) Secretary - ----------------------------------- 51 54 DATED ___________, 1998 THE TRUSTEES OF THE SUMMERTHORNE ESTATES LIMITED EXECUTIVE PENSION FUND - to - MAP MANUFACTURING LIMITED (TRI-MAP INTERNATIONAL LIMITED AS GUARANTOR) Counterpart/ L E A S E relating to 60-64 Framfield Road Uckfield East Sussex DAWSON HART The Old Grammer School 9 Church Street Uckfield East Sussex TN22 1BH JB.09.SD 55 THIS LEASE is made ______________________, 1998 BETWEEN MICHAEL CLIFFORD TIMMS, MICHAEL JOHN ROBERTS and PENSIONEER TRUSTEES (LONDON) LIMITED all care of Mercer House Thames Side Windsor Berkshire SL4 1QN ("the Landlord" which expression where the context so admits shall include the reversioner for the time being immediately expectant upon the term hereby granted) of the first part MAP MANUFACTURING LIMITED whose registered office is situate at Units 2 & 3 Kingscroft Court Ridgway Havant Hampshire PO9 1LS ("the Tenant" which expression where the context so admits shall include the company or persons in whom the term hereby granted may from time to time be vested) of the second part and TRI-MAP INTERNATIONAL LIMITED whose registered office is at Sanford House Medwin Walk Horsham West Sussex RH12 1AG "the Guarantor") of the third part WHEREAS in this Lease the following expressions shall have the following meanings: (1) "the Demised Premises" means the property known as 60-64 Framfield Road Uckfield East Sussex more particularly described in the First Schedule hereto (2) "the Conduits" means all sewers drains pipes gullies gutters ducts wires cables and other conducting media of whatsoever nature (3) "the Utilities" means water soil gas and electricity telecommunications and other services and supplies of whatsoever nature (4) "the Landlord's Surveyor" means any chartered surveyor or other agent appointed by the Landlord to determine any issue as to rent or other matter contained in the Lease allowing for determination by the Landlord's Surveyor NOW THIS DEED WITNESSETH as follows: 1 56 1. DEMISE AND RENTS In consideration of the rents herein reserved and covenants on the part of the Tenant and the Guarantor herein contained the Landlord HEREBY DEMISES unto the Tenant ALL THOSE the Demised Premises TO HOLD the Demised Premises unto the Tenant for a term of FIFTEEN YEARS from 10th December 1997 ("the Term") YIELDING AND PAYING therefor FIRSTLY yearly and proportionately for any fraction of a year: (a) for the first three years of the term a rent of FORTY-TWO THOUSAND POUNDS (L.42,000) (b) for the fourth and fifth years of the term a rent of FORTY-EIGHT THOUSAND POUNDS (L.48,000) (c) for the remainder of the term the yearly term of FORTY-EIGHT THOUSAND POUNDS (L.48,000) or (if higher) such other rent as may become payable under and by virtue of the provisions of the Second Schedule hereto by equal quarterly payments to be made in advance on the usual quarter days in every year without any deduction (and if the Landlord so requires by standing order) and SECONDLY by way of additional rent from time to time such sum or sums as are equal to the amount which the Landlord expends in effecting and maintaining the insurance of the Demised Premises in accordance with clause 4 hereof such last mentioned rent to be paid without deduction forthwith on demand 2. TENANT'S COVENANTS The Tenant HEREBY COVENANTS with the Landlord as follows: 2.1 TO PAY RENTS 2 57 To pay the rents hereinbefore reserved at the times and in manner aforesaid without any deduction whatsoever 2.2 TO PAY INTEREST ON OVERDUE MONEYS If any of the said rents or any other sum of money payable to the Landlord by the Tenant under this Lease shall remain unpaid for more than 14 days after the date upon which the Landlord notifies the Tenant in writing that such rent or other sum of money has not been paid on the due date to pay interest thereon from the date of such notice to the actual date of payment at the yearly rate of 4% per annum above the base rate for the time being of National Westminster Bank plc or in the event of National Westminster Bank plc ceasing to publish a base rate such other reasonable comparable rate of interest as the Landlord shall from time to time determine (in either case called "the Prescribed Rate") 2.3 TO PAY OUTGOINGS To bear pay and discharge all rates taxes duties charges assessments impositions and outgoings of whatever nature now or hereafter assessed charged or imposed upon or payable in respect of the Demised Premises or any part thereof or upon the owner of occupier thereof and a proper proportion attributable to the Demised Premises of any such rates taxes duties charges assessments impositions and outgoings now or hereafter assessed charged or imposed upon or payable in respect of the Demised Premises or any part thereof or upon the owners or occupiers thereof jointly with any adjoining or neighbouring property or the owners or occupiers thereof excluding any payable by the Landlord occasioned by any disposition or dealing with or ownership of the reversion to this Lease 3 58 2.4 TO KEEP IN REPAIR To keep the whole of the Demised Premises in good tenantable repair and condition (damage by any of the Insured Risks (as defined in clause 4 hereof) excepted unless payment of the insurance moneys shall be withheld or refused by reason of any wilful act neglect or default on the part of the Tenant) PROVIDED ALWAYS that the Landlord will indemnify the Tenant for the roofing works specified as items 1 2 and 3 in a letter to Map Manufacturing Limited from Albany Roofing Group Limited dated 21 October 1997 as and when such works are put in hand (such letter being set out in the Third Schedule) 2.5 DECORATIONS (a) In every fifth year of the Term and also during the last six months of the last year of the Term (whether determined by effluxion of time or otherwise) in a proper and workmanlike manner to clean prepare and paint or otherwise treat as appropriate the exterior of the Demised Premises (b) In every fifth year of the Term and also during the last three months of the last year of the Term (whether determined by effluxion of time or otherwise) in a proper and workmanlike manner to clean prepare paint paper decorate or otherwise treat as appropriate the interior of the Demised Premises 2.6 CLEANING To keep the Demised Premises in a clean and tidy condition and regularly to clean all the windows in the Demised Premises 2.7 TO YIELD UP 4 59 At the expiration or sooner determination of the Term quietly to yield up the Demised Premises to the Landlord in such good and tenantable repair and condition as shall be in accordance with the covenants on the part of the Tenant herein contained 2.8 ENTRY BY LANDLORD AND OTHERS To permit the Landlord and the Landlord's agents surveyors and workmen with all necessary materials and appliances by prior written appointments (except in the case of emergency) to enter and remain upon the Demised Premises for any of the following purposes: (a) to view and examine the state and condition of the Demised Premises and to take schedules or inventories of the Landlord's fixtures and fittings (b) for any other purpose connected with the interest of the Landlord in the Demised Premises including but not limited to valuing or disposing of the interest of the Landlord (c) to exercise any of the rights excepted and reserved by this Lease the Landlord making good as soon as reasonably practicable any damage caused thereby 2.9 TO COMPLY WITH NOTICES TO REPAIR To repair and make good to the reasonable satisfaction of the Landlord all defects wants of repair and breaches of covenant of which notice in writing shall be given to the Tenant by the Landlord and for which the Tenant is liable under this Lease within three months of such notice and if the Tenant shall fail within one month of such notice (or as soon as reasonably possible in case of 5 60 emergency) to commence and then diligently and expeditiously to continue to comply with such notice in all respects then it shall be lawful (but without prejudice to the right of re-entry and forfeiture hereinafter contained) for the Landlord and the Landlord's agents surveyors and workmen to enter upon the Demised Premises and carry out all or any of the works referred to in such notice and the cost of so doing and all expenses incurred thereby shall be paid by the Tenant to the Landlord on demand and in default of payment shall be recoverable as rent in arrear 2.10 ALTERATIONS (a) Not without the Landlord's consent in writing to make any alterations or additions to the structure or exterior of the Demised Premises (b) Not without the Landlord's consent in writing (such consent not to be unreasonably withheld or delayed) to make any major internal alterations to the Demised Premises (c) The Landlord may as a condition of giving any such consent as aforesaid require the Tenant to enter into such covenants with the Landlord as the Landlord may reasonably require as regards the execution of any such works and the reinstatement of the Demised Premises at the end or sooner determination of the Term (if required) but save for reimbursement of reasonable legal fees and reasonable surveyors' fees for giving consent the Landlord shall not be entitled to charge for such consent (d) In the event of the Tenant failing to observe this covenant it shall be lawful for the Landlord and the Landlord's agents surveyors and 6 61 workmen with all necessary materials and appliances to enter upon the Demised Premises and remove any alterations or additions and execute such works as may be necessary to restore the Demised Premises to their former state and the costs and reasonable expenses thereof (including surveyor's and other professional fees) shall be paid by the Tenant to the Landlord on demand 2.11 STATUTORY REQUIREMENTS At the Tenant's own expense to observe and comply in all respects with the provisions and requirements of The Offices Shops and Railway Premises Act 1963 The Fire Precautions Act 1971 The Defective Premises Act 1972 and The Health and Safety at Work Etc Act 1974 and of every other statute already or hereafter to be passed or prescribed or required by any public local or other authority so far as they relate to or affect the Demised Premises or any additions or improvements thereto or the user thereof for any purpose or the employment therein of any person or any fixture machinery plant or chattel for the time being affixed thereto or being thereupon 2.12 PLANNING (a) To comply in all respects with all Town and Country Planning legislation ("the Planning Acts") and to keep the Landlord indemnified in respect thereof (b) Not to make any application for planning permission or change of use without the consent in writing of the Landlord whose consent shall not be unreasonably withheld 7 62 (c) To pay and satisfy any charge that may hereafter be imposed under the Planning Acts in respect of the carrying out by Tenant of any of the Tenant's operations on the Demised Premises or the institution or continuation by the Tenant of any use thereof which may constitute development within the meaning of the Planning Acts (d) Unless the Landlord shall otherwise direct to carry out before the expiration or sooner determination of the Term any works stipulated to be carried out to the Demised Premises by a date subsequent to such expiration or sooner determination as a condition of any planning permission which may have been granted to and implemented by the Tenant (3) If and when called upon to do so to produce to the Landlord all plans documents and other evidence which the Landlord may reasonably require in order to satisfy the Landlord that the provisions of this subclause have been complied with in all respects 2.13 STATUTORY NOTICES Within 14 days of the receipt of notice of the same to produce to the Landlord a true copy of any permission notice or order or proposal for a notice or order relevant to the Demised Premises or to the use or condition thereof made given or issued to the Tenant by any government department or local or public authority and without unreasonable delay to take all reasonable or necessary steps to comply therewith 2.14 FIRE PRECAUTIONS 8 63 (a) To keep the Demised Premises sufficiently supplied and equipped with such fire-fighting and extinguishing appliances as shall from time to time be required by any statute or by the fire or other competent authority or the insurers of the Demised Premises (b) Not to obstruct the access to or means of working of any fire-fighting and extinguishing appliances or the means of escape from the Demised Premises in case of fire 2.15 USER (a) Not at any time during the Term to use or permit the Demised Premises to be used for any noisy noisome noxious dangerous or offensive trade manufacture or business whatsoever nor for the carrying on of anything which shall be a nuisance damage annoyance or inconvenience to the Landlord or to the tenants or owners or occupiers of any nearby property or which shall in any way be injurious to the same nor to allow any sale by auction to be held in the Demised Premises (b) Not to use or permit the Demised Premises to be used otherwise than in accordance with Class B1 B2 and B8 of the Schedule to the Town and Country Planning (Use Classes) Order 1987 together with ancillary office and storage areas 2.16 NOT TO AFFIX SIGNS Not without the consent in writing of the Landlord (whose consent shall not be unreasonably withheld) to affix or exhibit or permit to be affixed or exhibited to or upon any part of the Demised Premises any sign board or other advertisement other than the signs currently displayed on the Demised Premises showing the 9 64 Tenant's business PROVIDED THAT the consent of the Landlord shall not be required for any new fascia for the Tenant's business of similar size to those at present 2.17 NOTICES FOR DISPOSAL To permit the Landlord to fix and retain in a conspicuous position on the Demised Premises but not so as to obscure the Tenant's windows a notice board for the reletting (in the event of the termination of the Term) and/or the sale of the Landlord's reversion to the Demised Premises and not to take down or obscure the said notice board and to permit all persons authorised in writing by the Landlord or the Landlord's agents to view the Demised Premises at all reasonable hours in the daytime upon prior appointment having been make 2.18 TO NOTIFY LANDLORD OF ENCROACHMENTS To give immediate notice to the Landlord of any notice or claim affecting the Demised Premises or any part thereof and not knowingly to permit or suffer any encroachment upon the Demised Premises or the acquisition of any new right to light passage drainage or other easement on over or under the Demised Premises and if any such encroachment or easement shall be made or acquired or threatened to be made or acquired forthwith to give notice to the Landlord and at the cost of the Landlord to do all such things as may be proper for the purpose of preventing the making of such encroachment or the acquisition of such easement or right 2.19 LANDLORD'S COSTS To pay on demand to the Landlord all reasonable costs professional fees charges and expenses properly and justifiably incurred by the Landlord: 10 65 (a) incidental to the preparation and service of a notice under Section 146 of the Law of Property Act 1925 or in contemplation of any proceedings under Sections 146 or 147 of the said Act (whether or not any right of re-entry or forfeiture has been waived by the Landlord or a notice served under the said Section 146 is complied with by the Tenant or the Tenant has been relieved under the provisions of the said Act and notwithstanding forfeiture is avoided otherwise than by relief granted by the Court) (b) incidental to the preparation and service of all notices and schedules relating to wants of repair whether served during or after the expiration of the Term (but relating in all cases only to such wants of repair that accrued not later than the expiration or sooner determination of the Term) (c) in connection with or in procuring the remedying of the breach of any covenant by the Tenant contained in this Lease (d) in relation to any application for consent required by this Lease 2.20 ALIENATION (a) Not to assign underlet or otherwise part with the possession of any part of the Demised Premises or permit another to occupy any part of the Demised Premises (b) Not to assign the whole of the Demised Premises without the prior written consent of the Landlord such consent not to be unreasonably withheld or delayed PROVIDED THAT the Landlord shall not be considered to be unreasonably withholding or delaying the Landlord's 11 66 consent to an assignment in the event that the Tenant fails to comply with the provisions of paragraphs (c)(d) and (e) of this sub-clause (c) Prior to any permitted assignment at the Tenant's own expense to procure that the assignee of the Demised Premises enters into a direct covenant with the Landlord to perform and observe all the tenant's covenants and all other provisions of this Lease (d) On or before completion of any assignment the Tenant shall enter into an authorised guarantee agreement in such form as is reasonably required by the Landlord (so long as it complies with the provisions of Section 16 of the Landlord and Tenant (Covenants) Act 1995) (e) On or before completion of any assignment to a company the Tenant shall (if the Landlord reasonably so requires) procure a guarantor or other suitable security for the assignee's obligations such guarantee or other security to be in such form as is reasonably required by the Landlord (f) Not to underlet the whole of the Demised Premises without the prior written consent of the Landlord such consent not to be unreasonably withheld or delayed (g) Prior to any permitted underlease of the whole of the Demised Premises the underlessee shall in the licence to underlet covenant directly with the Landlord to observe and perform the covenants and conditions contained in this Lease (other than the covenant to pay rent) and shall further covenant not to assign underlet or charge or otherwise part with the possession of the whole or any part of the Demised Premises or permit 12 67 another to occupy the whole or any part of the Demised Premises other than by way of assignment of the whole of the Demised Premises with the prior consent in writing of the Landlord (not to be unreasonably withheld or delayed) and the Tenant (h) Within 21 days of any assignment charge underlease or any transmission or other devolution relating to the Demised Premises or any part thereof to produce for registration with the Landlord's solicitor such deed or document or a certified copy thereof and to pay the Landlord's solicitor's reasonable charges for the registration of every such document such charge being not less than L.20 plus value added tax 2.21 VALUE ADDED TAX (a) To pay and keep the Landlord indemnified against all value added tax which may from time to time be charged or chargeable on any rent or other sum payable by the Tenant pursuant to the terms of this Lease or any document entered into pursuant hereto (b) Any rent or other sum specified in this Lease or in any document entered into pursuant hereto is and any sum to be agreed certified determined or ascertained pursuant to the provisions hereof shall be a sum net of value added tax (c) The Tenant HEREBY IRREVOCABLY consents to the Landlord charging value added tax on any such rent or other sum should the Landlord elect to do so 3. LANDLORD'S COVENANT 13 68 The Landlord HEREBY COVENANTS with the Tenant that the Tenant paying the rents hereby reserved and performing and observing the several covenants conditions and agreements herein contained and on its part to be performed and observed shall and may peaceably and quietly hold and enjoy the Demised Premises during the Term without any lawful interruption or disturbance from or by the Landlord or any person or persons lawfully claiming under or in trust for the Landlord 4. INSURANCE The Landlord and the Tenant HEREBY COVENANT with each other as follows: 4.1 LANDLORD TO INSURE The Landlord shall insure and keep insured with some publicly quoted insurance company or with Lloyds' Underwriters: (a) the Demised Premises in the name of the Landlord in the full reinstatement cost of the Demised Premises against loss or damage by fire storm flood explosion and aircraft bursting or overflowing of water tanks apparatus or pipes and impact and such other usual risks subject to cover being available in the United Kingdom insurance market as the Landlord may from time to time require subject to such exclusions excesses and limitations as may be imposed by the insurers ("the Insured Risks") including architects' surveyors' and other professional fees and disbursements (and where applicable value added tax thereon) and the cost of shoring-up demolition and site clearance and similar expenses (b) the loss of rent payable under this Lease or reasonably estimated to be payable for a period of three years 14 69 (c) the explosion of any engineering and electrical plant and machinery to the extent that the same is not covered by paragraph (a) of this sub-clause (d) property owners' liability 4.2 LANDLORD TO PRODUCE EVIDENCE OF INSURANCE At the request of the Tenant the Landlord: (a) shall produce to the Tenant a copy of the policy of such insurance and current schedule of insurance cover and (b) procure the insurers note the interest of the Tenant on the said policy 4.3 DESTRUCTION OF THE DEMISED PREMISES If the Demised Premises or any part thereof are destroyed or damaged by any of the Insured Risks then: (a) unless payment of the insurance moneys shall be refused by reason of any act neglect or default on the part of the Tenant or any undertenant and (b) subject to the Landlord being able to obtain any necessary planning consents and all other necessary licences approvals and consents and the Landlord shall use all reasonable endeavours to obtain the same without delay and (c) subject to the necessary labour and materials being and remaining available and the Landlord shall use all reasonable endeavours to obtain the same without delay the Landlord shall as soon as reasonably practicable lay out the net proceeds of such insurance (other than any in respect of loss of rent) in the rebuilding and 15 70 reinstatement of the premises so destroyed or damaged substantially as the same were prior to any such destruction or damage 4.4 FRUSTRATION (a) If for any reason whatsoever the obligation by the Landlord to rebuild or reinstate as aforesaid becomes impossible of performance the said obligation shall thereupon be deemed to have been discharged and either the Landlord or the Tenant may then by notice in writing given to the other terminate this demise but without prejudice to any claim by either party against the other in respect of any antecedant breach of covenant (b) (i) The Landlord shall immediately following completion of any rebuilding or reinstatement of the Demised Premises advise the Tenant in writing of such completion (ii) The Tenant shall be entitled to terminate this Lease by notice in writing to that effect served on the Landlord within 14 days of receipt of such advice (iii) This Lease shall terminate on the date falling six months after service by the Tenant of such notice (iv) Termination of this Lease pursuant to this clause 4.4(b) shall be without prejudice to any claim by either party against the other in respect of any antecedent breach of covenant 4.5 PAYMENT OF INSURANCE MONEYS REFUSED If the payment of any insurance moneys is refused in whole or in part as a result of some act neglect or default on the part of the Tenant or any undertenant the Tenant shall pay to the Landlord on demand the amount so refused 16 71 4.6 CESSER OF RENT In case the Demised Premises or any part thereof shall be destroyed or damaged by any of the Insured Risks so as to render the Demised Premises unfit for occupation or use and the policy or policies of insurance shall not have been vitiated or payment of the policy moneys refused in consequence of some act neglect or default on the part of or suffered by the Tenant or any undertenant then the rent first hereby reserved or a fair proportion thereof according to the nature and extent of the damage sustained shall be suspended until the Demised Premises shall be again rendered fit for occupation and use or the expiration of three years from the date of the destruction or damage (whichever is the earlier) and any dispute regarding the cesser of rent shall be referred to the award of a single arbitrator to be appointed in default of agreement upon the application of either party by or on behalf of the President for the time being of The Royal Institution of Chartered Surveyors in accordance with the provisions of the Arbitration Acts 1950 to 1996 (as the same may from time to time be amended) 4.7 BENEFIT OF OTHER INSURANCES If the Tenant shall become entitled to the benefit of any insurance on the Demised Premises which is not effected or maintained in pursuance of the obligations herein contained then the Tenant shall apply all moneys received by virtue of such insurance (in so far as the same shall extend) in making good the loss or damage in respect of which the same shall have been received 4.8 INSURANCE BECOMING VOID The Tenant shall not do anything whereby any policy or policies of insurance for the time being in force in respect of or including or covering the Demised 17 72 Premises against damage by any of the Insured Risks may become void or voidable or except with Landlord's consent (not to be unreasonably withheld) whereby the rate of premium thereon may be increased and shall repay on demand to the Landlord all sums paid by way of increased premiums arising therefrom and all expenses incurred by the Landlord in or about the renewal of such policy or policies rendered necessary by a breach of this covenant 4.9 REQUIREMENTS OF INSURERS The Tenant shall at all times comply with all the reasonable requirements of the insurers which are made known by the Landlord to the Tenant 5. PROVISOS AGREEMENTS AND DECLARATIONS PROVIDED ALWAYS AND IT IS HEREBY AGREED AND DECLARED as follows: 5.1 FORFEITURE Without prejudice to any other right and remedy or power herein contained or otherwise available to the Landlord: (a) if rents hereby reserved or any part thereof shall be unpaid for 28 days after becoming payable or (b) if the Tenant shall commit a material breach of any of the covenants on the part of the Tenant contained in this Lease or (c) if the Tenant (being a company) shall be wound up compulsorily or voluntarily (other than a voluntary liquidation of a solvent company for the purpose of amalgamation or reconstruction) or shall have a receiver appointed or 18 73 (d) if the Tenant (being an individual or if more than one individual then any one of them) shall become bankrupt or shall have a receiving order made against him or (e) if the Tenant shall make any assignment for the benefit of creditors or make any arrangements with creditors for the liquidation of debts by composition or otherwise then and in any such case and thenceforth it shall be lawful for the Landlord or any person duly authorised by the Landlord in that behalf at any time thereafter to re-enter the Demised Premises or any part thereof in the name of the whole and thereupon this demise shall absolutely cease and determine but without prejudice to any right of action or remedy of the Landlord in respect of any antecedent breach of any of the covenants on the part of the Tenant contained in this Lease 5.2 IMPLIED EASEMENTS That nothing herein contained shall operate expressly or impliedly to confer upon or grant to the Tenant any easement right or privilege whatsoever 5.3 NOTICES (a) Any notice or document to be given under this Lease may be delivered or sent by first class registered post or facsimile transmission to the party to be served at the party's address appearing in this Lease or the address of that party's solicitors or other such address as that party shall notify in writing to the other Any such notice or document shall be deemed to be served: (i) if delivered at time of delivery 19 74 (ii) if posted at the expiration of 48 hours after the envelope containing the same shall have been put in the post (iii) if sent by facsimile transmission on despatch (b) In proving such service it shall be sufficient to prove that delivery was made or that the envelope containing such notice or document was properly addressed and posted as a prepaid first class registered letter or that the sender of the facsimile transmission has its copy with the successful transmission slip attached 5.4 INTERPRETATION In this Lease where the context so admits words importing the neuter gender only include the masculine or feminine gender (as the case may be) and words importing the masculine gender only include the feminine gender and words importing the singular number only include the plural number and vice versa and where there are two or more individuals included in the expression "the Tenant" covenants herein expressed to be made by the Tenant shall be deemed to be made by such persons jointly and severally 5.5 PARAGRAPH HEADINGS The paragraph headings hereto shall not affect the construction of these presents 6. BREAK CLAUSE If the Tenant so desires and serves at least six months' prior notice in writing to the Landlord or their agents of its desire so to do the Tenant hereby has the right to determine this Lease at the end of the fifth year of the term and PROVIDED all payments and rent and other monies covenanted to be paid by the Tenant shall have been paid up to such date this Lease shall determine and cease on such date but without 20 75 prejudice to the right of either party to any claim for any antecedent breach of the terms hereof 7. NO PRIOR AGREEMENT There is no prior agreement to which this Lease gives effect and this Lease is a new tenancy for the purposes of the Landlord and Tenant (Covenants) Act 1995 8. GUARANTEE PROVISIONS The Guarantor hereby covenants with the Landlord that if at any time during the term and the period of any holding-over or any extensions or continuance thereof whether by statute or common law: 1. the Tenant shall make any default in payment of the rent hereby reserved (or as otherwise agreed between the Landlord and the Tenant) or in observing or performing any of the covenants or conditions herein contained the Guarantor will pay the said rent and observe and perform the covenants or conditions in respect of which the Tenant shall be in default notwithstanding: 1.1. any time or indulgence granted by the Landlord to the Tenant 1.2. any other act or thing whereby but for this provision the Guarantor would have been released 2. The Tenant shall enter into liquidation and the liquidator shall disclaim this Lease. The Guarantor will if the Landlord shall by notice in writing within two months after receiving such notice of disclaimer so require take from the Landlord a Lease of the Demised Premises for the residue of the term which would have remained had there been no disclaimer subject to the same covenants and conditions as in this Lease with the exception of this Clause 8 such new Lease to take effect from the date of disclaimer 21 76 in such case the Guarantor shall pay the costs of such new Lease and execute and deliver to the Landlord an executed counterpart thereof IN WITNESS whereof this Lease has been duly executed as a deed the day and year first before written THE FIRST SCHEDULE THE DEMISED PREMISES AND RIGHTS GRANTED ALL THAT commercial premises known as 60 62 and 64 Framfield Road Uckfield East Sussex. All which premises are registered at H M Land Registry in the names of the Landlord under Title Numbers ESX59739 and ESX175214 together with all alterations additions and improvements thereto and all landlord's fixtures and fittings now or hereafter or in or about the same TOGETHER WITH (so far as the Landlord can grant the same) the right for the Tenant any undertenant or other permitted occupier their servants agents and visitors of free and uninterrupted passage of the Utilities through the appropriate Conduits now or at any time during the Term serving the Demised Premises THE SECOND SCHEDULE RENT REVIEW (DUE IN 5TH AND 10TH YEARS OF THE TERM) 1. DEFINITIONS (1) "Review Date" means every fifth anniversary of the commencement of the Term of this Lease and the expression "Relevant Review Date" shall be construed accordingly (2) "Open Market Rent" means the yearly rent at which the Demised Premises might reasonably be expected to be let as a whole in the open market on the Relevant Review Date by a willing landlord to a willing tenant with vacant possession and without a premium or any other consideration for the grant 22 77 thereof for a term of years equal to the residue of the Term remaining unexpired on the Relevant Review Date and otherwise on the same terms and conditions as are contained in this Lease (except as to the amount of the rent payable hereunder but including these provisions for the review of rent) and on the assumption (if not a fact) that at the Relevant Review Date: (a) the Demised Premises are fit for immediate occupation and use (b) the Demised Premises are in good repair (c) no work has been carried out to the Demised Premises by the Tenant or any undertenant during the Term which has diminished the rental value of the Demised Premises (d) if the Demised Premises have been destroyed or damaged they have been fully rebuilt or reinstated (e) all the covenants on the part of the Tenant contained in this Lease have been fully performed and observed BUT there shall be disregarded: (i) any effect on rent of the fact that the Tenant or any permitted undertenant may have been in occupation of the Demised Premises (ii) any goodwill attached to the Demised Premises by reason of any business carried on therein by the Tenant or any permitted undertenant (iii) any increase in the rental value of the Demised Premises attributable to the existence at the Relevant Review Date of any improvement to the Demised Premises or any part thereof carried out by the Tenant or any permitted undertenant after the date hereof with the consent (where required) of the Landlord 23 78 (iv) the taxable status of the Tenant for the purposes of value added tax or any other tax (3) "Surveyor" means the independent professionally qualified surveyor of not less than 10 years' standing being suitably experienced in rent review valuations of retail premises of a similar size and nature to the Demised Premises appointed from time to time to determine the Open Market Rent pursuant to the provisions of this Schedule (4) "the President" means the President for the time being of The Royal Institution of Chartered Surveyors and shall include the duly appointed deputy of the President or any person authorised by the President to make appointments on his behalf (5) "Rent Restrictions" means any restrictions imposed by statute for the control of rent in force on a Review Date or on the date on which any increased rent is ascertained in accordance with this Schedule and which operate to impose any limitation whether in time or amount on the collection of an increase in the rent first hereby reserved or any part thereof 2. UPWARDS ONLY REVIEW The rent hereby reserved shall be reviewed at each Review Date in accordance with the provisions of this Schedule and from and including each Review Date the rent shall be equal to the higher of either the rent payable immediately before the Relevant Review Date or the Open Market Rent on the Relevant Review Date agreed or determined as hereinafter provided 3. AGREEMENT OR DETERMINATION OF THE REVIEWED RENT 24 79 The Open Market Rent at any Review Date may be agreed in writing at any time between the Landlord and the Tenant but if for any reason (whether through failure or omission to agree or negotiate or to initiate any negotiations) the Landlord and the Tenant do not so agree then either the Landlord or the Tenant may (not more than 12 weeks before but at any time after the Relevant Review Date) by notice to the other party require the Open Market Rent to be determined by the Surveyor 4. APPOINTMENT OF SURVEYOR In default of agreement between the Landlord and the Tenant on the appointment jointly of the Surveyor the Surveyor shall be appointed by the President on the written application of either the Landlord or the Tenant who shall be at liberty to make such application not more than 10 weeks before but at any time after the Relevant Review Date 5. FUNCTIONS OF THE SURVEYOR The Surveyor shall: (1) acts as an arbitrator (2) invite the Landlord and the Tenant to submit to him within such time limits (not being less than 14 days) as he shall consider appropriate a valuation accompanied if desired by a statement of reasons and such representations and cross-representations as to the amount of the Open Market Rent with such supporting evidence as they may respectively wish (3) within 42 days of his appointment or within such extended period as the Landlord and the Tenant shall jointly agree in writing give to each of them written notice of the amount of the Open Market Rent as determined by him 6. COSTS OF REFERENCE TO SURVEYOR 25 80 The costs of any reference to the Surveyor shall be in his award and failing such award the costs shall be borne by the parties in equal shares 7. APPOINTMENT OF NEW SURVEYOR If the Surveyor does not give notice of his determination within the time aforesaid or if he shall die or become unwilling to act or incapable of acting or if for any other reason he is unable to act then either the Landlord or the Tenant may request the President to discharge the Surveyor and appoint another Surveyor in his place which procedure may be repeated as many times as necessary 8. INTERIM PAYMENTS PENDING DETERMINATION In the event that by the Relevant Review Date the amount of the reviewed rent has not been agreed or determined as aforesaid (such date of agreement or determination being called "the Determination Date") then in respect of the period of time ("the Interim Period") beginning with the Relevant Review Date and ending on the quarter day following the Determination Date the Tenant shall pay to the Landlord rent at the yearly rate payable immediately before the Relevant Review Date and within 14 days of the Determination Date if the reviewed rent exceeds the rent actually paid the Tenant shall pay to the Landlord the amount by which the reviewed rent exceeds the rent actually paid during the Interim Period (apportioned on a daily basis) together with interest on each part of such excess at the Prescribed Rate less 4% for the period from the date that such part would have been due if the reviewed rent had been agreed or determined to the date of actual payment unless such delay is demonstrably through no fault of the Tenant 26 81 9. RENT RESTRICTIONS On each and every occasion during the Term that Rent Restrictions shall prevent or prohibit either wholly or partially: (1) the operation of the above provisions of review of the rent or (2) the normal collection and retention by the Landlord of any increase in the rent or any installment of part thereof then and in each such case respectively: (a) the operation of such provisions for review of the rent shall be postponed to take effect on the first date or dates thereafter upon which such operation may occur (b) the collection of any increase or increases in the rent shall be postponed to take effect on the first date or dates thereafter that such increase or increases may be collected and/or retained in whole or in part and on as many occasions as shall be required to ensure the collection of the whole increase and until the Rent Restrictions shall be relaxed either partially or wholly the rent first hereby reserved shall be the maximum sum from time to time permitted by the Rent Restrictions as may be applicable 10. MEMORANDA OF REVIEWED RENT As soon as the amount of any reviewed rent has been agreed or determined memoranda thereof shall be prepared by the Landlord or the Landlord's solicitors and thereupon shall be signed by or on behalf of the Landlord and the Tenant and annexed to this Lease and the Counterpart thereof and the parties shall bear their own costs in respect thereof 11. TIME NOT OF THE ESSENCE For the purposes of this Schedule time shall not be of the essence 27 82 THE THIRD SCHEDULE Letter from Albany Roofing Group Limited date 21 October 1997 EXECUTED as a deed by MAP ) MANUFACTURING LIMITED ) Acting by two of its Directors: ) EXECUTED as a deed by TRI-MAP ) INTERNATIONAL LIMITED acting ) By two of its Directors: ) 28 83 SAM/1174/TS/FG/RQ [ALBANY LOGO] Map Manufacturing Ltd 60-64 Framfield Road UCKFIELD East Sussex TN22 5AR For the attention of Mr. P. Hough - Managing Director SPECIFICATION 21 October 1997 Dear Sirs Ref: Roof Maintenance and Repairs Further to our recent discussions we are pleased to submit our revised quotation for the works previously described in our estimate reference SAM/1156/TS/FG dated 10 October 1997. For ease of identification and specification purposes, we have itemised our quotation as follows:- Item 1 - 2 No. Gutters Since installation, settlement has occurred throughout the length of this guttering, and the dips in various places tend to retain rainwater measuring to a depth of 25mm. These permanently damp conditions support a large amount of vegetation which hinders flow to the outlets, considerably increasing the risk of overflowing during heavy rain conditions. In order to prolong the life of the existing fabric of the guttering, we propose that the full length and accessible girth of the weatherside of the guttering be lined with bituminous roofing emulsion, reinforced as necessary with bitumen impregnated glassfibre membrane. This will be to a total gutter length of approximately 84 square metres (this covers the front eaves and valley gutter, we were informed there were no problems with the rear eaves gutter). Prior to the application of this treatment all gutter joints will be inspected for leakage and if necessary resealed as we deem most appropriate. Item 2 - Vents We were informed that leaks occur around the 10 no. vents that are situated within sheets and protrude through the roof of the rear of the factory. At your request we propose the following:- Continued ... 84 -2- SAM/1174/TS/FG/RQ Continued... We would therefore remove 10 no. of these sheets and replace them with new to BS 476 Part 3 having a fire classification of EXT. S.A.A. with a class 1 spread of flame rating, conforming to current building regulations, all being sealed with mastic and the side laps stitched with seam bolts. Item 3 - Health & Safety Requirements In order to comply with our obligations in relation to site safety we have provided in our costing for the supply of equipment or plant that we deem necessary for the undertaking of the above contract. To carry out all work as specified above WOULD BE FOR THE SUM OF (pounds)2098.00 (two thousand and ninety eight pounds). Item 4 - General Report During our survey it was noted that the corrugated asbestos cement sheeting to this roof has become very fibrous and porous, and is covered with a find fungoid growth with accumulations of moss in places. Deterioration by further weathering will therefore be considerably accelerated. We feel that if this roof area is left and allowed to decay further a complete re-roofing operation will become inevitable in the very near future. If remedial action is taken in time, a great deal of inconvenience and expense can be saved, as it is our opinion that there is still sound and sufficient material to form a basis for a waterproofing treatment. If you require us to do so, we would be happy to provide you with an estimate for the recommended work, together with a detailed specification. This quotation does not include VAT which will be added to the invoice at the appropriate rate. We allow in our costings for all old materials or debris connected with our work, to be lowered to the ground and removed from site. PAYMENT TO BE MADE IN THE FORM OF INTERIMS, AS WORK PROGRESSES. Continued... 85 -3- SAM/1174/TS/FG/RQ Continued... It is assumed that suitable storage will be provided by you for our materials, close to the working area. Please note our Conditions of Contract, which will apply if our quotation is accepted. We trust this meets with your approval and look forward to receiving your further instructions. Yours faithfully ALBANY ROOFING GROUP LIMITED Stephen A Moore Senior Area Surveyor SW EX-21.1 11 EXHIBIT 21.1 1 Exhibit 21.1 SUBSIDIARIES ENTITY STATE OF INCORPORATION Maxwell Technologies, Inc. Delaware PurePulse Technologies, Inc. Delaware I-Bus, Inc. California Maxwell Business Systems, Inc. California Maxwell Federal Division, Inc. California Maxwell Information Systems, Inc. California Maxwell Energy Products, Inc. California Phoenix Power Systems, Inc. California I-Bus UK, Ltd. United Kingdom EX-23.1 12 EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 2-91483, 33-88634, 33-88636, 33-88638, 333-07835, 333-07831, 333-63815 and 333-63813) and Form S-3 (Nos. 333-36853, 333-49941 and 333-57947) of Maxwell Technologies, Inc. of our report dated September 15, 1998, with respect to the consolidated financial statements of Maxwell Technologies, Inc. included in the Annual Report (Form 10-K) for the year ended July 31, 1998. ERNST & YOUNG LLP San Diego, California October 28, 1998 EX-27 13 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEETS, CONSOLIDATED STATEMENTS OF OPERATIONS, CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND CONSOLIDATED STATEMENTS OF CASH FLOWS IN THE APPENDIX TO MAXWELL TECHNOLOGIES, INC.'S ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JUL-31-1998 AUG-01-1997 JUL-31-1998 21,224 0 37,012 (950) 15,823 75,286 59,413 (36,137) 105,065 27,154 361 0 0 838 75,000 105,065 125,308 125,308 83,459 83,459 43,539 0 214 (463) 226 (769) 0 0 0 (769) (0.10) (0.10)
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