-----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, WpXKk6YvvU955//hbFQeS1+bDPzsSFt1G8mr6j4X4QSZIcmX6WDPdRViV4xY403e Dbp3ySXfjzbOwTpXn4NK7A== 0000936392-97-001263.txt : 19971002 0000936392-97-001263.hdr.sgml : 19971002 ACCESSION NUMBER: 0000936392-97-001263 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 22 CONFORMED PERIOD OF REPORT: 19970731 FILED AS OF DATE: 19971001 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXWELL LABORATORIES INC /DE/ 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: 97688927 BUSINESS ADDRESS: STREET 1: 8888 BALBOA AVE 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 10-K405 1 FORM 10-K 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, 1997 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 26, 1997, based on the closing price at which the Common Stock was sold on Nasdaq as of September 26, 1997, was $30.50. The number of shares of the Registrant's Common Stock outstanding as of September 26, 1997 was 6,163,151 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for the 1997 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, 1997
PAGE ---- PART I Item 1. Business................................................................... 10 Item 2. Properties................................................................. 28 Item 3. Legal Proceedings.......................................................... 28 Item 4. Submission of Matters to a Vote of Security Holders........................ 29 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...... 29 Item 6. Selected Financial Data.................................................... 30 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................. 31 Item 8. Financial Statements and Supplementary Data................................ 37 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................................. 37 PART III Item 10. Directors and Executive Officers of the Registrant......................... 38 Item 11. Executive Compensation..................................................... 40 Item 12. Security Ownership of Certain Beneficial Owners and Management............. 43 Item 13. Certain Relationships and Related Transactions............................. 44 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........... 44
i 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 Federal Division, Inc., Maxwell Information Services, Inc., Maxwell Energy Products, Inc. and PurePulse Technologies, 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. The 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. PowerCache(TM), PureBright(R), CoolPure(R), JAMIS(R) and ElectroBlast(TM) are trademarks of the Company. All other trademarks or tradenames referred to in this Form 10-K are the property of their respective owners. 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. 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 and services for commercial markets. The Company's success in this regard will depend upon a number of factors, including the Company's ability 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 1 4 these objectives would have a material adverse effect on the Company's business, results of operations and financial condition. FLUCTUATIONS IN OPERATING RESULTS; HISTORY OF LOSSES Although the Company had net income of $4.0 million in fiscal 1997, 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 contained 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 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 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." 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 Tetra Pak, a leading food packaging machinery and products company, for purification systems, and PacifiCorp, a leading utility holding company, for ultracapacitors. The loss of certain of its strategic relationships could have a material adverse effect on the Company's sales 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 2 5 the Company's strategic partners will not seek to manufacture jointly developed products themselves or obtain them from alternative sources. See "Business -- Strategic Partnerships." LIMITED VOLUME MANUFACTURING EXPERIENCE 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, 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 expand its current facilities or obtain additional facilities in order to manufacture a substantial quantity of its ultracapacitor, purification and EMI filter 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 market 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 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. 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 3 6 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. Lucent Technologies ("Lucent"), an OEM customer of the Company, accounted for approximately 11.9% of the Company's total sales in fiscal 1997 and is a significant customer of the Company's Industrial Computers and Subsystems business segment. A substantial portion of the Company's existing sales to Lucent involves products that have not been designed into Lucent's next generation products and the Company therefore expects that its business with Lucent will decline substantially in the second half of fiscal 1998 and subsequent periods. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Customers." 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 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 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. 4 7 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." COMPETITION The markets in which the Company sells commercial products is highly competitive, rapidly changing and significantly affected by new product introductions and other market activities of industry participants. The Company's primary competitors in ultracapacitors include Panasonic and SAFT, a part of the Alcatel-Alsthom Group; in government-funded research and system development include the Physics International unit of Primex Corporation and in the passive backplane segment for industrial computers, include Texas Microsystems, Diversified Technology, Advantech, Industrial Computer Source, Teknor and Trenton. 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. 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 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 market. See "Business -- Competition." 5 8 RISKS ASSOCIATED WITH GOVERNMENT BUSINESS A substantial portion of the Company's sales (approximately 33% in fiscal 1997, 40% in fiscal 1996 and 43% in fiscal 1995) 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 over the past several years have adversely affected the Company's business, particularly in the area of system survivability products and services, such as weapons effects simulation and testing. The Company has experienced significant reductions in this business as the Department of Defense has 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 other various 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 partner 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 such licenses and rights 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 Company's participation in such 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. Currently the Company has a $10 million line of credit, but there can be no assurance that any 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 Com- 6 9 pany'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. 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. The Company manufactures most of its products using a large number of components or sub-assemblies, many of which are of 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. In addition, the Company currently has only one qualified supplier for a certain component of its ultracapacitors and is contractually obligated to qualify at least one additional supplier. No assurance can be given that such qualification will be completed in a timely manner. Moreover, the current sole domestic source of a component of the Company's EMI filter 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 that, if necessary, the Company could replace this supplier. 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 7 10 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 stock option plans at each of its five principal operating subsidiaries providing for the issuance of incentive and nonqualified stock options to purchase common stock of these companies. 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 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 13% at each of the Company's principal operating subsidiaries (17.% at one subsidiary). In addition, certain key employees of one of the Company's Information Products and Services subsidiaries, Maxwell Business Systems, Inc., 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 preclinical 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. 8 11 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. 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. 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 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 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. 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, at $32.50 per share, 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 acquiror 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 9 12 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 29, 1997 averaged 16,555 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, 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 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 in the computer telephony, 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. The Company's PowerCache ultracapacitors offer solutions to electrical energy storage and power delivery problems in a wide range of commercial applications including wireless communications devices, reliable power delivery for industrial processing and computing equipment and automotive electrical subsystems. The Company's ultracapacitors provide benefits such as extending battery life and increasing signal strength in wireless communications devices and protecting against power fluctuations and outages in industrial applications. The Company also designs and manufactures high voltage capacitors that are used in applications such as medical and industrial lasers, x-ray machines and high-speed trains. Pulsed power technology has also enabled the development of the Company's PureBright purification systems which deliver pulses of light to kill microorganisms in applications ranging from water treatment to sterilization of food packaging and medical and pharmaceutical products. The Company's EMI filters prevent electromagnetic radiation emitted from devices such as cellular phones and household appliances from disrupting the functioning of implantable heart defibrillators and pacemakers and other sensitive electronic equipment. The Company's pulsed power products are sold primarily to OEMs in target markets and through direct sales channels. 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 10 13 management team to drive the commercialization of Maxwell's portfolio of core technologies and market penetration of the resulting products. INDUSTRY BACKGROUND Pulsed Power Pulsed power is the storage of electrical energy and the delivery of brief controlled bursts of electricity at high power for periods typically ranging from a microsecond up to 60 seconds. Research and development of pulsed power technologies have been funded for over 30 years, primarily by the United States government. The expertise gained through this funded research forms the basis for the development of commercial products based on pulsed power technologies. In recent years, pulsed power applications have been developed which offer solutions to power storage and delivery problems in a wide range of commercial applications, including wireless communications, automotive electrical subsystems, water treatment and sterilization of medical and pharmaceutical products and food packaging. Benefits of pulsed power include extending battery life, improving system performance, reducing cost and system size and enabling new system functions. Ultracapacitors. The proliferation and increasing complexity of electronic products and the electrical power requirements associated with them are spurring demand for innovative solutions for power delivery in a wide variety of applications including portable electronics, power quality and automotive electrical subsystems. Portable electronic products such as wireless communications devices, which typically transmit data in a series of short bursts and personal data assistants, which typically have subsystems that start up and shut down rapidly, require reliable internal power sources that are capable of supplying repeated bursts of power and that adhere to exacting size and weight constraints. In addition, computer-intensive businesses, manufacturers and other commercial users of high-speed industrial processing equipment, such as semiconductor manufacturers and high speed printers, demand power quality (i.e., the uninterrupted supply of power at a constant voltage). In the absence of power quality protection, small fluctuations in power often shut down automated production systems, which may damage products on the assembly line and cause significant delays in business operations. Technology Insights estimates that the power quality market in the year 2000, including adjustable speed drives, uninterruptable power systems and engine start and actuator applications, will amount to over $11 billion. Moreover, automobile manufacturers are utilizing an increasing number of electrical subsystems that require sophisticated power management in conventional combustion engine vehicles. In response to legislation adopted in several U.S. states requiring zero-emission vehicles, automobile manufacturers are also seeking enabling technologies for commercially viable electric vehicles and hybrid/combustion electric vehicles. Batteries and capacitors have long served as electrical energy storage and power delivery devices. However, limitations in battery and capacitor performance are an obstacle to both the continued enhancement of many electronic devices and the development of new applications. Batteries degrade over time, do not effectively provide bursts of power and do not function well in extreme temperatures or allow for practical, accurate measurement of remaining energy reserves. The capacitor, utilized in situations in which high power output in short bursts is required, differs from batteries in that it can charge and discharge stored energy rapidly and does not degrade with each charge and discharge. However, traditional capacitors are not suitable for energy storage and power delivery applications which require higher energy storage capability and longer discharge times. 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 discharge energy at low voltages. Like traditional capacitors, ultracapacitors store and discharge electrical energy rapidly, 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. Purification Systems. Pulsed power technologies can also be utilized for microbial decontamination by delivering intense bursts of light or pulses of electricity to kill microorganisms. Conventional techniques for 11 14 controlling microorganisms commonly present in water and other liquids, on foods, on food packaging and on medical products include filtering, heat pasteurization and sterilization, ionizing radiation and application of chemicals. Conventional purification techniques often fail to effectively fulfill end-user needs for a variety of reasons, including failure to eliminate certain microorganisms in water supplies (chlorination, ultraviolet light and similar processes), change in taste and texture of foods (heat and chemicals), time and cost (many conventional techniques, including autoclave heat sterilization of medical instruments), environmental concerns (ionizing radiation and chemicals) and effective monitoring of performance by the user (most conventional techniques). The markets for purification technologies where pulsed power purification systems may be applied are large and growing. According to the Water Quality Association, the worldwide market for water treatment technologies is expected to be approximately $13.9 billion in 1997. Pulsed light purification products are targeted to a specialized portion of this market. EMI Filtering The electromagnetic fields and signals generated by electronic devices can 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. To combat the effects of EMI, some manufacturers of electronic products incorporate EMI filters into the circuitry of their products. An alternative approach 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. In addition to feedthrough filtering capabilities, electronic device manufacturers seek EMI filters that can block a broad range of electromagnetic frequencies and conform to small form factors. Industrial Computers and Subsystems Industrial computers form the backbone and control system for many types of electronic equipment. Unlike general purpose computers such as PCs, industrial computers provide a computing platform for a larger system made by an OEM. These products can be designed to accept specialized additional hardware and software from a customer or third party vendor and satisfy additional requirements such as high reliability, non-standard input/output capability and specific form factors. Industrial computers are incorporated into a broad range of products, including computer telephony products (voice messaging systems, interactive voice response servers and telephone switch management systems), telecommunications products (cellular base stations, two-way paging systems, advanced intelligent networks, enhanced service systems and video conferencing servers), Internet/worldwide web servers, electronics and semiconductor testing, manufacturing and assembly equipment, a range of medical devices and other commercial applications. The rapid proliferation of complex electronics applications has created attractive markets for highly focused industrial computer manufacturers who possess the engineering know-how and experience to provide design-intensive solutions. OEMs frequently conclude that their needs for such products can be better met by specialized outside manufacturers rather than by developing these capabilities internally. Electronic Trend Publications estimates that the size of the total industrial computer market will exceed $2.5 billion worldwide in 1997. OEMs are also continually seeking means to integrate more functionality and new technologies into smaller enclosures with higher levels of fault tolerance at lower cost. In industrial computers, a number of architectures are currently in use. One of the most prevalent architectures, passive backplane, facilitates compatibility with components designed for PCs, design flexibility, fault tolerance, customization of input/output ports and cost effectiveness. CompactPCI, an emerging architecture which certain OEMs are 12 15 beginning to design into their next generation products, will incorporate the cost effectiveness and design flexibility of passive backplane architecture, while enhancing ruggedness and fault tolerance in a smaller form factor. According to Electronic Trend Publications, annual sales of industrial computers and subsystems incorporating CompactPCI architecture are projected to exceed $400 million in 2000 and grow to $1.0 billion in 2001. Government Funded Research and Systems Development The United States government relies on companies with significant scientific and technical expertise to provide technology-driven research and development programs supporting a variety of military and space programs. Many of the United States' strategic defense capabilities are examined and tested through weapons effects simulation and computer modeling. Additionally, research and development is required on techniques to harden electronics against weapons effects and the space environment, devise sensors designed to detect hostile environments, particularly in space applications, and devise alternate means of generating nuclear fuel without the potential environmental impact of traditional methods. Many of these efforts involve the development, design, construction and operation of major pulsed power systems and the application of sophisticated computer modeling and analysis of complex physical phenomena. MAXWELL'S SOLUTIONS With over 30 years of experience in pulsed power research and development programs, Maxwell has developed substantial scientific and engineering expertise in electrical energy storage and power delivery systems. The Company has leveraged its expertise, particularly in pulsed power, to design and manufacture a range of products which apply pulsed power technology to commercial applications and address a number of commercial markets. Ultracapacitors. The Company is a leader in ultracapacitor development. In a 1996 study conducted by the Idaho National Energy Laboratory, the Company's PowerCache ultracapacitor demonstrated a substantial performance advantage in both the storage of electrical energy and the release of power over all of the other organizations that participated in the study, including competing commercial developers of this technology as well as national laboratories. The flexibility of the Company's PowerCache ultracapacitor technology enables it to produce ultracapacitors in a wide range of sizes and energy storage capabilities that address a broad range of applications. The Company has initially targeted its ultracapacitor products to the wireless communications, power quality and automotive markets. In the wireless communications market, the Company's ultracapacitors are being used as battery supplements in two-way pagers, wireless modems and emergency locator beacons to extend battery life and to increase signal strength. In the power quality market, banks of PowerCache ultracapacitors offer solutions for temporary voltage fluctuations and power interruptions, diesel and electric motor startup and battery load leveling and enhancements. In the automotive market, the Company is providing ultracapacitors for evaluation in electrical subsystems in combustion engine vehicles for applications ranging from catalytic converter preheating, airbag actuators and seat belt tighteners to power steering and power braking subsystems. The Company is also collaborating with leading automobile companies to develop PowerCache ultracapacitors for use as battery supplements or replacements in electric vehicles and hybrid electric vehicles. Purification Systems. The Company's pulsed power based purification products, PureBright and CoolPure, address the limitations of conventional techniques for microbial decontamination. The PureBright system utilizes pulsed power to deliver intense light pulses in rapid sequence to kill a wide range of microorganisms in water and pharmaceutical products, on food and packaging surfaces and on medical products. The PureBright system is effective against many microorganisms, including cryptosporidium, which conventional systems fail to kill, and meets treatment standards as stringent as those for pharmaceutical products sterilization. PureBright does not pollute the environment and is readily monitored for performance by end-users. The Company's CoolPure system, now in prototype development, uses high energy electric pulses, rather than light pulses, to decontaminate opaque or cloudy liquids and liquid foods. 13 16 Other Pulsed Power Products. Leveraging its experience researching, designing and operating major pulsed power systems for the United States government, the Company designs and manufactures traditional high voltage capacitors, power supplies and other electrical components for applications requiring reliable sources of high power output. The Company's products are incorporated in portable heart defibrillators, medical and industrial lasers and power conditioning equipment for x-ray machines and high speed trains. EMI Filters. The Company's EMI filter is a feedthrough filter capacitor that blocks a broad range of frequencies and is available in small form factors. The Company's patented EMI filter enables it to meet the increasing demand for smaller filters by mounting the feedthrough filter on the surface of an implantable device. In the implantable heart defibrillator market, the Company believes its EMI feedthrough filter is a market leader because of its small size and effective broadband filtering capabilities. The Company currently supplies EMI filters to CPI/Guidant for defibrillator and pacemaker applications and has a contract to supply the Pacesetter division of St. Jude Medical, Inc. with EMI filters for pacemakers. The Company's EMI filters are also sold for military and space program applications. Industrial Computers and Subsystems. The Company's industrial computing products, incorporating passive backplane architecture, offer the advantages of high input/output slot capacity, fault tolerance and low cost demanded by OEMs. The Company is currently developing new products based on CompactPCI architecture which incorporate the cost effectiveness and design flexibility of passive backplane architecture and provide increased ruggedness and fault tolerance in a smaller form factor. The Company believes it is a leading supplier of passive backplane systems, particularly for the growing computer telephony and other telecommunications markets. Government Funded Research and Systems Development. Maxwell continues to provide high technology research and systems development to the United States Department of Defense, other government agencies and national laboratories. The Company is a leader in pulsed power research, weapons effects simulations and complex computer modeling and analysis of physical phenomena. Additionally, the Company's expertise addresses the government's needs in power quality and power conditioning for large, high energy systems, electric and electrothermal gun research, advanced pulsed power development, high-power microwave source development and technology oversight for space-based sensor development. STRATEGY Having expanded its business beyond funded research and development activities to a focus on commercial opportunities, Maxwell intends to continue to execute its commercialization strategy, develop products incorporating core technologies and identify and penetrate key markets for its products. The Company's strategy encompasses the following elements: Capitalize on Technical Expertise. Through its long history of research and development in pulsed power, the Company has become a leader in the development of commercial products based on pulsed power technologies and intends to continue to capitalize on its technical expertise in this area. In the wireless communications market, the Company has developed ultracapacitor products that extend battery life and increase functionality in devices such as two-way pagers. In the purification systems market, the Company has leveraged its expertise in pulsed power to create systems which are designed to offer rapid, "in-line" decontamination for food packaging and medical product manufacturing, enabling customers to achieve increased production efficiency. The Company intends to continue pursuing research and development programs, principally those funded by strategic partners and the government, that enhance its technical expertise and enable improvement of existing products and development of additional products. Focus on Selected Large and Growing Commercial Markets. In recent years, the Company has chosen to enter selected large and growing commercial markets in which the Company believes it has enabling technology or in which the Company's technical expertise offers a competitive advantage. For its ultracapacitor products, the Company has targeted the wireless communications, power quality and automotive markets in which battery performance is a critical issue. Similarly, the Company's EMI filter business is focusing on medical applications in which manufacturers are increasingly concerned about the effects of EMI on implantable devices. The Company intends to increase penetration of its current target markets and to 14 17 continue pursuing clearly defined commercial market opportunities that enable it to leverage its core technologies. Leverage Strategic Partnerships. The Company has established a number of strategic partnerships with industry leaders for product development, marketing and sales. Through these strategic partnerships, Maxwell seeks to obtain specific market knowledge and enhanced understanding of market demands and needs, access to funding for continued product development, product and customer validation and a channel for market penetration. In recent years the Company has formed or expanded strategic partnerships with, among others, Tetra Pak, a worldwide leader in food packaging equipment, to develop sterilization systems for incorporation into food packaging machinery, PacifiCorp, a diversified utility holding company, to develop and market ultracapacitor products for the power quality marketplace, a leading automobile manufacturer to develop ultracapacitors as battery supplements in electric and hybrid electric vehicles and an international restaurant chain to develop a PureBright system for water treatment. The Company intends to leverage its existing strategic partnerships and seek new strategic partners in promising markets. Expand International Presence. The Company intends to pursue international markets as key avenues for growth and increase the percentage of sales generated in international markets. In fiscal 1997, the Company's international sales were 12.4% of total sales, compared to 9.3% of total sales in fiscal 1996. In furtherance of its strategy, the Company has concluded key strategic partnerships with international companies such as an international wireless communications company, a leading automobile manufacturer and Tetra Pak. In 1997, the Company opened a sales office in London focused on purification systems and industrial computers. Create Focused Centers of Expertise. As part of its shift to a commercially-oriented business, in 1996 the Company completed a reorganization that combined like and synergistic businesses into business units, creating focused centers of expertise. The Company intends to continue operating in business units focused on clearly defined markets. The Company believes that this structure facilitates the management and commercialization of its diverse technology base. The Company has provided and will continue to provide incentives to encourage entrepreneurism from its employees and senior managers. PRODUCTS Ultracapacitors Maxwell's PowerCache 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 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's ultracapacitors range in price from a few dollars to over $1,000 per cell. The Company is initially targeting the wireless communications, power quality and automotive markets for its ultracapacitors. Wireless Communications. In wireless communications devices, PowerCache ultracapacitors increase signal strength and significantly extend battery life for devices that transmit in sequences of bursts. The Company's ultracapacitors have been incorporated into 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. The Company is constructing a facility for volume production to meet anticipated demands of that OEM. The same ultracapacitor is being designed into an emergency locator beacon made by another OEM. The Company is also engaged in research and development for an ultracapacitor for cellular telephones, which require shorter discharge times (0.01 to 0.1 seconds) than many other wireless devices (0.1 to 3.0 seconds). However, because substantial technical challenges must be overcome, no assurance can be given as to whether the Company will be able to develop an ultracapacitor suitable for use in cellular phones. 15 18 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 selling distributed energy generating systems incorporating the Company's ultracapacitors, utilizing ultracapacitors in its own backup systems and marketing ultracapacitor systems to 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 is manufacturing an additional 56-volt bank and a 170-volt bank for PacifiCorp for demonstration and application purposes, with the 170-volt bank specifically intended to address the power quality requirements of semiconductor manufacturers. 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 applications in catalytic converter pre-heating, air bag deployment, seat belt tightening and engine ignition. 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 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 acceleration power for 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. Three automobile manufacturers and two automotive component manufacturers are in discussions with the Company to utilize ultracapacitors in the development of electrical subsystems for combustion vehicles. The Company has sold ultracapacitors to leading automotive manufacturers for tests in electric vehicles. Purification Systems The Company's PureBright and CoolPure 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, including cryptosporidium, viruses and spores in water and pharmaceuticals, on food and food packaging surfaces and on medical products. The CoolPure system uses a direct electrical pulse to kill microorganisms in liquids and liquid foods, such as juices, dairy products and sauces. The Company's PureBright product line includes compact water treatment systems and large industrial systems that can be used on a standalone basis or as a component designed into other industrial equipment. Prices of the Company's purification systems range from a few thousand dollars to over $100,000. PureBright systems are in field testing for restaurant water treatment applications, have been designed in as an option in Tetra Pak's next generation food packaging machinery and are in the FDA approval process for use as a sterilization device for certain medical products manufactured by other strategic partners. Water Quality. The Company, in a strategic partnership with an international restaurant chain, has developed a PureBright system for water treatment in restaurants. The PureBright system is designed to replace ultraviolet light treatment and chemical treatments such as chlorine for elimination of microorganisms in water. The PureBright water treatment system designed for restaurant use is a four-gallon per minute wall-mounted unit with dimensions of 16" x 30" x 11" and plugs into standard electrical power outlets. The restaurant partner is now engaged in field testing the on-site performance of the system. The Company has 16 19 granted exclusivity for restaurant use to its strategic partner for a two-year period, but intends to market the system for point-of-entry or point-of-use applications to hotels, laboratories, manufacturers, healthcare providers and, after the exclusivity period, other restaurant operators. The Company believes PureBright technology will be particularly useful in developing nations because of uneven water quality levels found in some of those countries. The Company believes 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. 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, with dimensions of 2' x 3' x 6', 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 partnership 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. Tetra Pak has incorporated PureBright as an option in its next generation container filling machines. The Company's relationship with Tetra Pak prohibits the Company from pursuing additional customers in most food packaging applications, but permits it to pursue additional customers in cup, lid, bottle cap 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 is being designed to 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 United States Army and an international food products company. CoolPure is composed of a 89" x 68" x 84" pulsed power unit, linked to a smaller treatment chamber with electrodes applying the electrical pulses. EMI Filters 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 supply agreements with two of the largest manufacturers of implantable medical devices, CPI/Guidant, whose implantable defibrillators use the Company's filters, and the Pacesetter division of St. Jude Medical, Inc., which is incorporating the Company's EMI filter in certain of its implantable heart pacemakers. The Pacesetter contract, awarded in March 1997, expands the market penetration of the Company's device from implantable defibrillators to pacemakers. The Company also 17 20 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 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 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. A potential commercial application stemming from the Company's funded research and systems development is ElectroBlast, a process initially identified using expertise gained in studying effects of advanced weapons technology. The ElectroBlast process uses a pulsed electric discharge to fracture rock by rapidly expanding a non-toxic material. If successful, the technology would, in contrast to dynamite and other conventional explosives, produce no toxic fumes and minimize dust and flyrock, providing opportunities for continuous tunneling and thus potentially significant economic advantages over conventional methods. ElectroBlast is also being investigated as an alternative to explosives in demolition of concrete structures. The technology has been tested in underground mines, but is still in the early development stage. 18 21 Industrial Computers and Subsystems Through its industrial computers and subsystems business acquired in 1991, 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 cards and backplanes to fully integrated and highly customized computer systems. The Company's product line primarily employs passive backplane architecture and the Company is completing the development of its first CompactPCI products. Prices for the Company's standard products such as enclosures, CPU cards and fully integrated systems range from $1,500 to $10,000. The Company's components and systems are design-intensive applications based on Intel's x86 and Pentium architecture 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 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). In addition, the Company has recently begun marketing its computers as private-labeled products to file server manufacturers for resale into the small-to-medium file server market. The Company's enclosures 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, SCSI Bus and IDE and, microprocessors in the Intel family up to the Pentium Pro and Pentium II, following its release, and support operating systems including Windows 95, Windows NT and Solaris. 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 provides software-related products and services for cost accounting and management information systems, Internet content, educational software and public safety and criminal justice information systems. The Company is marketing its cost accounting and management information software programs, which incorporate sophisticated job cost and activity-based accounting capabilities, to large contractors and others interested in tracking costs by job, activity or cost center. The software is sold under the JAMIS (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, contracts and purchasing. Development continued in fiscal 1997 on a new, open platform, graphical user interface based version of this software. The Company 19 22 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. The Company also provides Internet content including real-time municipal traffic information available to users on a co-branded basis with the Yahoo! search directory and with Microsoft on the upcoming version of its Internet browser. The Company also offers wide area and local area network and software integration services. The Company offers interactive educational software compact discs for mathematics and physical science instruction designed for in-classroom use. The Company also markets and sells public safety and criminal justice information system products and integration services, including client-server based software for criminal case management, law enforcement records management, computer-aided dispatch, jail management, and fire and emergency record management. STRATEGIC PARTNERSHIPS In recent years the Company has formed or expanded several strategic partnerships. Through these alliances, Maxwell obtains an enhanced understanding of market demands and needs, access to funding for continued development and commercialization of products, and 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 Tetra Pak's next generation food packaging machinery. Tetra Pak has an exclusive license for PureBright in most food packaging applications. In similar fashion, the Company has received funding from an international restaurant chain for development of PureBright for water treatment applications. The Company and this strategic partner are negotiating an agreement whereby the Company would supply PureBright units to the restaurant chain, contingent upon successful completion of field testing now in process. The strategic partner has a two-year exclusive right to use PureBright in its restaurants beginning when the first system is ordered. For CoolPure, an international food products company is providing product development funding, is currently evaluating prototype units and 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 product development and testing for ultracapacitors in power quality applications, and PacifiCorp and the Company are jointly marketing ultracapacitors to industrial customers. The Company is discussing with PacifiCorp an additional $5 million in funding, possibly including an equity investment in the Company's subsidiary, Maxwell Energy Products, Inc. A leading automobile manufacturer provided funding for ultracapacitor development and purchased prototype units, with the Company providing technology disclosure and a period of exclusivity that has now expired. The Company is negotiating with this strategic partner for an expanded development agreement. 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 and, eventually, their success in marketing or willingness to purchase any such products. The 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. See "Risk Factors -- Extensive Reliance on Strategic Relationships; Restrictions Due to Exclusivity Rights." 20 23 CUSTOMERS The Company's products and services support a broad base of over 1,000 customers that spans each business segment. A number of the Company's customers and strategic partners that are evaluating or are in the early stages of adopting the Company's ultracapacitor products or purification systems have required confidentiality from the Company and therefore are not named in this Annual Report on Form 10-K or identified in the following table. Such customers include a major wireless telecommunications device manufacturer and automotive manufacturers for ultracapacitor products and an international restaurant chain, an international food products company and a medical products manufacturer for purification products. The following table is a representative list of the Company's customers by product family.
CUSTOMER APPLICATION PRODUCT - ---------------------------------- -------------------------- ---------------------------------- PULSED POWER AND ELECTRONIC COMPONENTS Cubic Defense Systems, Inc. Defense Nuclear Event Detector General Electric Medical Systems Medical X-Ray Equipment Resistors Hewlett-Packard Medical Equipment Defibrillator Capacitors Los Alamos National Laboratory Physics Research Switches, Capacitors PacifiCorp Power Quality Ultracapacitors Pulse Sciences, Inc. Physics Research Capacitors, Power Supplies SLS Biophile, Ltd. Medical Laser Equipment Capacitors, Power Supplies TetraPak Food Packaging PureBright Purification Systems Western Atlas Oil Well/Logging High Temperature Capacitors Zoll Medical Medical Equipment Defibrillator Capacitors EMI FILTERS Baker Hughes Inteq Oil Field Services Capacitors, EMI Filters Cardiac Control Systems Medical EMI Filters Guidant/CPI Medical EMI Filters Lockheed Martin Military EMI Filters St. Jude/Pacesetter Medical EMI Filters INDUSTRIAL COMPUTERS AND SUBSYSTEMS Active Voice Inc. Voice Mail Systems Enclosures, CPU Boards Allan Crawford Associates Canadian Distributor All Products Applied Voice Technology, Inc. Voice Mail Systems Enclosures, CPU Boards AT&T Computer Telephony Fault Tolerant Platforms, CPU Boards Banctec Technologies Document Sorting Systems Enclosures, CPU Boards Brite Voice Interactive Voice Response Enclosures Comverse Information Systems Computer Telephony Fault Tolerant Platforms Digital Equipment Corp. Computer Platforms Enclosures, Fault Tolerant Platforms Lucent Technologies Voice Messaging Computer Platforms Videoserver Inc. Video Conferencing Enclosures, CPU Boards GOVERNMENT FUNDED RESEARCH AND SYSTEMS DEVELOPMENT Defense Special Weapons Agency Weapons Effects Simulation Pulsed Power Operations, Analysis Kyobuto Boeki Kaisha, Limited Geophysics and Geothermal Engineering, Scientific Support Los Alamos National Laboratory Physics Research High Voltage Power Supplies Mission Research Corporation Electromagnetic Electronic Testing Interaction NASA Space Environment Effects Physics Models and Effects on Systems Analysis Sandia National Laboratories Pulsed Power Research Engineering, Scientific Support U.S. Air Force Phillips Lab Electronic Sensors for Technology Oversight and Analysis Space Weapons Effects Simulation Pulsed Power Operations and Support U.S. Air Force Hanscom AFB Space Physics Engineering and Scientific Analysis
21 24 Products and services provided to the Department of Defense constituted a substantial portion of the Company's sales in fiscal 1997, with sales to the United States Air Force constituting 14.0% of consolidated sales. Only one other individual customer, Lucent, accounted for more than 10% of consolidated sales. Lucent accounted for approximately 11.9% of consolidated fiscal 1997 sales and is a significant customer in the industrial computers and subsystems business segment. The Company's products that comprise a significant portion of its sales to Lucent have not been designed into Lucent's next generation products and the Company therefore expects that its business with Lucent will decline substantially in the second half of fiscal 1998 and subsequent periods. Customers for the Company's software products include federal, state and local government organizations such as judicial organizations and school districts, government contractors and textbook publishers. SALES AND MARKETING The Company's commercial products sales teams consist of sales personnel based in its manufacturing 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 and has recently opened a sales office in London focused on marketing and selling purification systems and industrial computers in Europe. 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 a website on the Internet. As emerging technologies require customer acceptance of new and different technical approaches, the sales effort for new products 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. The Company has limited experience marketing and selling ultracapacitors and purification systems. To market 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. By entering into agreements with sales representatives, the Company may be substantially dependent upon the efforts of others in deriving commercial benefits from its products. See "Risk Factors -- Limited Sales and Marketing Experience." 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 two principal competitors in ultracapacitor products, Panasonic, a division of Matsushita 22 25 Electric Industries, Ltd., and SAFT, a unit of the Alcatel-Alsthom Group and a prominent international battery supplier. 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 power in the form of light to water treatment, food packaging or sterilization of medical or pharmaceutical products. Pulsed power 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 and their ability to be utilized in processing lines for food packaging or medical and pharmaceutical products without interruption of the industrial process and without producing hazardous wastes. The Company has one principal competitor in United States government funded pulsed power research and weapons effects simulation, Physics International, a unit of Primex Corporation. Contracts are awarded by the Department of Defense based on cost and technical expertise. The Company believes it has the required technical expertise in the area, and that it has streamlined its business so as to competitively bid for contracts while remaining profitable. 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 Company believes its patent, for mounting of the filter on 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 in markets for storage capacitors, medical and industrial applications and use in large systems by the United States government 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 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. In the Company's target markets for passive backplane based industrial computers and subsystems, its competitors include Texas Microsystems, Diversified Technology, Advantech, the Industrial Computer Source division of Dynatech, Teknor and Trenton, resulting in a highly fragmented market in which no one entrant is dominant. 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 for CompactPCI are very similar to passive backplane systems. 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 ability to make competitive bids to secure contracts. In commercial software, the JAMIS cost 23 26 accounting system competes principally with one similar government contract based software application produced by Deltek Systems, as well as with numerous off-the-shelf and customized accounting software products. The Company relies on superior performance and an attractive price point to secure market share. The Company has no significant competitors in the provision of real-time traffic reports over the Internet, but believes barriers to entry are low. 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 industrial computers and subsystems, pulsed power components and EMI filters. The Company has four manufacturing facilities in San Diego, California and one manufacturing facility in Carson City, Nevada. The Company's EMI filters are manufactured at the Carson City location. For two facilities in San Diego, the Company has obtained ISO 9001 certification and is 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. In fiscal 1998, the Company expects to begin volume manufacturing of ultracapacitors, and is preparing for volume manufacturing of PureBright water treatment 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 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 Company currently has a single qualified supplier for one component of ultracapacitors and is contractually obligated to qualify at least one additional supplier of such components. No assurance can be given that qualification will be completed in a timely manner. Additionally, 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. 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 facilities 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." 24 27 RESEARCH AND DEVELOPMENT The Company conducts internally-funded engineering, research and development to refine and expand its products and services. Approximately 25% 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 1997, 1996 and 1995, expenditures for internally-funded research and development were approximately $5,303,000, $5,081,000 and $5,038,000, respectively. A substantial portion of the Company's revenues in its Technology Programs and Systems business segment consists of customer-funded research and development activities. Additionally, in the Power Conversion Products business segment, certain large contracts accounted for approximately 25% of sales in the business segment in fiscal 1997, which contracts represented primarily various strategic partnership arrangements involving customer funding of research and product development as well as prototype sales. See "-- Strategy;" "-- Strategic Partnerships" and "-- Products." 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 consultants, 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 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 25 28 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, 1997, 1996 and 1995 amounted to approximately $39 million, $38 million and $38 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 $23 million, $28 million and $33 million at July 31, 1997, 1996 and 1995, respectively. GOVERNMENT BUSINESS A substantial portion of the Company's sales (approximately 33% in fiscal 1997, 40% in fiscal 1996 and 42% in fiscal 1995) 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 over the past several years have 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 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, and has nearly completed this task. The Company will continue to provide testing and analysis on the fourth simulation facility, after the closure of the other three simulation devices. The Company's funded government contracts are typically performable over a one-year period. 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 1993. 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, 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 77% and 82% of sales were derived from cost plus contracts in fiscal 1997 and 1996, respectively, and the balance of sales in such years were derived from fixed-price contracts. See "Risk Factors -- Risks Associated with Government Business." 26 29 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 preclinical 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 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. 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 10 of Notes to Consolidated Financial Statements. The Company operates in four business segments: Power Conversion Products (includes design, development and manufacture of electrical components and subsystems, including products that capitalize on pulsed power such as ultracapacitors, microbial purification systems, high voltage capacitors and other electrical components 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 primarily for OEMs), 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) and 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). The Company's operating subsidiaries are Maxwell Energy Products, Inc. (Power Conversion Products), 27 30 PurePulse Technologies, Inc. (Power Conversion Products), I-Bus, Inc. (Industrial Computers and Subsystems), Maxwell Federal Division, Inc. (Technology Programs and Systems), Maxwell Information Systems, Inc. (Information Products and Services) and Maxwell Business Systems, Inc. (Information Products and Services). See "Management's Discussion and Analysis of Financial Condition and Results of Operations." EMPLOYEES At July 31, 1997, the Company had 607 employees, including 43 employees with Ph.D degrees and 79 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." ITEM 2. PROPERTIES The Company owns a 45,600 square foot office and laboratory building, a 22,000 square foot manufacturing facility and a 35,000 square foot engineering and administrative support facility situated on approximately 8.9 acres of land located in San Diego, California. Approximately three-fourths of the 35,000 square foot building is leased by the Company to another company. The Company also leases five other facilities in the San Diego area. The Company utilizes its facilities in the following manner: corporate, sales and administrative (53,000 sq. ft.); manufacturing, assembly and testing, research and development laboratories and engineering (276,000 sq. ft.). The Company's leased facilities in San Diego, California are leased for varying terms and some of them contain options permitting the Company to extend the lease term. The Company leases or has commitments to lease office space in Reston and Sterling, Virginia; Orlando, Tallahassee and Sarasota, Florida; Albuquerque, New Mexico; and Mission Viejo, California. In addition, the Company owns a 12,400 square foot manufacturing facility on 2.6 acres of land located in Carson City, Nevada, utilizes on a rent-free basis 22,000 square feet at Kirtland 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 3.5%, 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. The Company has been named as a defendant in an action originally filed in June 1994, in the United States District Court for the Eastern District of Tennessee at Knoxville, Tennessee (Troy Murphy Morgan, et. 28 31 al. v. Brush Wellman, Inc., et. al.) by six individuals against the U.S. Government and four companies (Brush Wellman, Inc., Cabot Corporation, NGK Metals Corporation, and Ceradyne, Inc.) for injuries allegedly related to exposure to beryllium. Included as new defendants in addition to the Company are Lockheed Martin Beryllium Corporation, Microtechnologies, Inc., Cercom Quality Products, Inc., General Ceramics, Inc. and Eagle-Picher Industries, Inc. Plaintiffs claim that exposure to beryllium while working at the U.S. Government facility at Oak Ridge, Tennessee, has led to chronic beryllium disease and other illnesses and are demanding a total of $14,000,000 in compensatory damages and $5,000,000 in punitive damages. The Company was served with the complaint in early June and has tendered the matter to its insurance carriers. The Company has also been named as a defendant in two identical cases, each filed on behalf of one former employee and naming the same group of defendants as in the Morgan case. After conducting its own investigation into the matter, the Company does not believe that its products could have contributed to any beryllium exposure by the plaintiffs. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 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 1996 Quarter ended October 31, 1995......................... $ 5 7/8 $ 3 5/8 Quarter ended January 31, 1996......................... 5 1/2 4 1/1 Quarter ended April 30, 1996........................... 5 1/8 3 3/8 Quarter ended July 31, 1996............................ 7 5/8 4 11/1 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
The last reported sale price of the Common Stock on the Nasdaq National Market on September 26, 1997 was $30.50 per share. As of August 31, 1997, there were 505 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. RECENT SALES OF UNREGISTERED SECURITIES None. 29 32 ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated statement of operations data for the fiscal years ended July 31, 1995, 1996 and 1997, and consolidated balance sheet data at July 31, 1996 and 1997 are derived from the Consolidated Financial Statements of the Company and Notes thereto, which have been audited by Ernst & Young LLP, independent auditors, and are included elsewhere in this Annual Report on Form 10-K. The following selected consolidated statement of operations data for the years ended July 31, 1993 and 1994 and consolidated balance sheet data at July 31, 1993, 1994 and 1995 are derived from audited financial statements of the Company not included herein. 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 Form 10-K.
YEAR ENDED JULY 31, ------------------------------------------------------------- 1993 1994 1995 1996 1997 ------- ------- ------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Sales................................... $86,902 $85,463 $75,004 $ 80,911 $101,411 Cost of sales........................... 65,765 68,555 56,447 65,893 70,107 ------- ------- ------- -------- ------- Gross profit.......................... 21,137 16,908 18,557 15,018 31,304 Operating expenses: Selling, general and administrative expenses............................ 13,525 14,068 13,636 15,564 21,900 Research and development expenses..... 5,650 4,794 5,038 5,081 5,303 Restructure and asset impairment losses (1).......................... -- -- -- 5,703 -- Loss on closing of Brobeck division... -- 1,018 -- -- -- ------- ------- ------- -------- ------- Total operating expenses............ 19,175 19,880 18,674 26,348 27,203 ------- ------- ------- -------- ------- Operating income (loss)................. 1,962 (2,972) (117) (11,330) 4,101 Interest expense........................ 244 252 315 329 173 Other-net............................... (35) (589) (848) (398) (150) ------- ------- ------- -------- ------- Income (loss) before income taxes, minority interest and loss from cumulative effect of change in accounting principle.................. 1,753 (2,635) 416 (11,261) 4,078 Income tax expense (benefit)............ 683 (1,028) 15 1,296 -- Minority interest in net income of subsidiary............................ 48 80 86 50 54 Loss from cumulative effect of change in accounting principle (1).............. -- -- -- 2,569 -- ------- ------- ------- -------- ------- Net income (loss)....................... $ 1,022 $(1,687) $ 315 $(15,176) $ 4,024 ======= ======= ======= ======== ======= Earnings (loss) per share: Income (loss) per share before cumulative effect of change in accounting principle................ $ 0.19 $ (0.32) $ 0.06 $ (2.29) $ 0.60 Net income (loss) per share........... $ 0.19 $ (0.32) $ 0.06 $ (2.76) $ 0.60 ======= ======= ======= ======== =======
JULY 31, ------------------------------------------------------------- 1993 1994 1995 1996 1997 ------- ------- ------- -------- -------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Working capital......................... $20,142 $18,091 $17,855 $ 7,288 $ 10,908 Total assets............................ 55,086 54,322 52,370 40,724 47,120 Long-term debt, excluding current portion............................... 1,515 2,797 1,928 1,018 465 Total stockholders' equity.............. 36,645 34,960 35,364 20,745 27,410
- --------------- (1) See Note 8 of Notes to Consolidated Financial Statements. 30 33 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW From its roots as a pulsed power and advanced software applications company performing research and development primarily for the United States Department of Defense ("DOD"), Maxwell today has a portfolio of commercial products and services derived from the technologies and expertise accumulated from its long history of government funded pulsed power research and development. Although Maxwell is aggressively pursuing technology commercialization, government funded research and development continues as a significant part of the Company's business, with sales under United States government contracts comprising 33% of total sales in fiscal 1997. These efforts, and the technology advancements they produce, are important factors in the development of applications with commercial value. The Company sustained a net loss of $15.2 million in fiscal 1996, including charges totaling $14.4 million related to the following: (i) the adoption of FASB Statement No. 121; (ii) the fiscal 1996 reorganization of the Company including senior management related severance and recruitment charges and charges for facilities consolidations; (iii) the establishment of a valuation allowance for net deferred income tax assets and (iv) the establishment of certain contract, inventory, environmental and related reserves. See Note 8 of Notes to Consolidated Financial Statements. In implementing its business reorganization, the Company selected a new Chief Executive Officer, refocused or divested certain product lines, consolidated certain of its facilities and recast the Company into distinct business and operating units with new senior management for these business units (the "Reorganization"). As part of the Reorganization which became effective August 1, 1996, the Company placed its government focused operations into a single business unit. The Company's new business segments are as follows: - Power Conversion Products: Includes design, development and manufacture of electrical components and subsystems, including products that capitalize on pulsed power such as ultracapacitors, microbial purification systems, high voltage capacitors and other electrical components 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 primarily for OEMs. - 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. 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 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. A significant portion of the Company's product sales are to a relatively small number of OEMs. OEM sales are characterized by relatively long product life cycles and generally lower gross margins that can vary throughout product life cycles. Gross margins are typically lower in the early stages of product introduction before the Company has achieved a sufficient volume of sales to increase absorption of its fixed costs. In 31 34 addition, the Company may price its products aggressively in order to form new OEM relationships, introduce new products or achieve market penetration. The Company may receive product development funding from its OEM customers that could partially mitigate these impacts on gross margins. Gross margins on OEM sales are also particularly sensitive to changes in product and customer mix because of margin variances among individual products and the relative importance of a single large sale on overall operating results. 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, ------------------------------- 1995 1996 1997 ------- ------- ------- Sales......................................................... 100.0% 100.0% 100.0% Cost of sales................................................. 75.3 81.4 69.1 ------- ------- ------- Gross profit................................................ 24.7 18.6 30.9 Operating expenses: Selling, general and administrative expenses................ 18.2 19.3 21.6 Research and development expenses........................... 6.7 6.3 5.2 Restructure and asset impairment losses..................... -- 7.0 -- ------- ------- ------- Total operating expenses................................. 24.9 32.6 26.8 ------- ------- ------- Operating income (loss)....................................... (0.2) (14.0) 4.1 Interest expense.............................................. 0.4 0.4 0.2 Other-net..................................................... (0.11) (0.5) (0.2) ------- ------- ------- Income (loss) before income taxes, minority interest and loss from cumulative effect of change in accounting principle.... 0.5 (13.9) 4.1 Income tax expense............................................ -- 1.6 -- Minority interest in net income of subsidiary................. 0.1 0.1 0.1 Loss from cumulative effect of change in accounting principle................................................... -- 3.2 -- ------- ------- ------- Net income (loss)........................................... 0.4% (18.8)% 4.0% ======= ======= =======
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, ------------------------------- 1995 1996 1997 ------- ------- ------- ($ IN THOUSANDS) Power Conversion Products: Sales....................................................... $15,207 $16,448 $27,039 Gross profit............................................. 3,930 3,887 10,142 Gross profit as a percentage of sales.................... 25.8% 23.6% 37.5% Industrial Computers and Subsystems: Sales....................................................... $23,319 $26,131 $34,259 Gross profit............................................. 7,754 7,633 11,537 Gross profit as a percentage of sales.................... 33.3% 29.2% 33.7% Technology Programs and Systems: Sales....................................................... $31,064 $30,198 $31,087 Gross profit............................................. 6,232 5,659 6,246 Gross profit as a percentage of sales.................... 20.1% 18.7% 20.1% Information Products and Services: Sales....................................................... $ 5,414 $ 8,134 $ 9,026 Gross profit............................................. 641 (2,161) 3,379 Gross profit as a percentage of sales.................... 11.8% (26.6)% 37.4%
32 35 Sales In fiscal 1997, the Company's total sales increased $20.5 million, or 25.3%, to $101.4 million from $80.9 million in fiscal 1996. In fiscal 1996, sales increased $5.9 million, or 7.9%, to $80.9 million from $75.0 million in fiscal 1995. International sales amounted to $12.6 million in fiscal 1997, $7.6 million in fiscal 1996 and $7.3 million in fiscal 1995. The increase in international sales in fiscal 1997 was primarily attributable to increased international revenues from customer funded development in the Power Conversion Products business segment. Power Conversion Products. 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. In fiscal 1996, Power Conversion Products sales increased $1.2 million, or 8.2%, to $16.4 million from $15.2 million in fiscal 1995 as a result of higher sales of certain pulsed power components, the introduction in the last half of fiscal 1996 of the Company's EMI filters for implantable medical products and increased revenues from customer funded development of pulsed power purification systems. Industrial Computers and Subsystems. 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. 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 products. 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 for use in products that are nearing the conclusion of their product cycles. The Company does not currently expect that it will receive orders from this customer for its next generation products. However, the Company's products have recently been integrated into several new OEM products to be introduced by other OEM customers. The Company believes that orders for industrial computers and subsystems from these new OEM customers should largely offset the loss of sales described above. If sales of the OEMs' new products do not achieve the levels projected by the OEM, the Company may be unable to offset the expected loss of sales. In fiscal 1996, sales in this business segment increased $2.8 million, or 12.1%, to $26.1 million from $23.3 million in fiscal 1995. This increase was also due to increased shipments to OEM customers as a result of design wins on new OEM products. Technology Programs and Systems. 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 new 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. Revenues for fiscal 1997 included amounts related to the closure of three DOD pulsed power simulation facilities operated by the Company for many years in San Diego. These closures will be concluded in the first half of fiscal 1998 and the underlying contracts with the DOD will be completed. However, the Company has subsequently received additional long-term contracts from the DOD, including one for research on next-generation pulsed power switch technology for x-ray simulators. 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. 33 36 In fiscal 1996, sales in this business segment decreased $0.9 million, or 2.8%, to $30.2 million from $31.1 million in fiscal 1995 primarily as a result of reduced sales of chemical analytical services, partially offset by increased revenues from the two multi-year DOD contracts. Information Products and Services. 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 two large multi-year software development contracts for criminal justice information systems (the "CJIS Contracts"). Work on the CJIS Contracts is scheduled to be substantially completed in the first half of fiscal 1998. In fiscal 1996, sales in this business segment increased $2.7 million, or 50.2%, to $8.1 million from $5.4 million in fiscal 1995 principally due to revenues attributable to the commencement of work in fiscal 1996 on one of the CJIS Contracts. Gross Profit 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 was primarily due to the increased overall sales in fiscal 1997, resulting in improved overhead absorption, and an improved mix of products and services, particularly in the Power Conversion Products business segment. In fiscal 1996, the Company's gross profit was $15.0 million, or 18.6% of sales, compared to $18.6 million, or 24.7% of sales, in fiscal 1995. The decreases in fiscal 1996 were primarily attributable to the portion of the $14.4 million charge taken in fiscal 1996 that was recorded in cost of sales. Power Conversion Products. 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 an improved mix of products and services, including higher sales of EMI filters for implantable medical devices and greater revenues from funded research and development. 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. In fiscal 1996 and 1995, gross profits in this business segment were consistent at $3.9 million. As a percentage of sales, gross profit decreased to 23.6% in fiscal 1996 from 25.8% in fiscal 1995 primarily due to the portion of the $14.4 million charge taken in fiscal 1996 that was recorded in cost of sales. Industrial Computers and Subsystems. 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. In fiscal 1996, gross profit decreased $0.1 million, or 1.6%, to $7.6 million from $7.8 million in fiscal 1995. As a percentage of sales, gross profit decreased to 29.2% in fiscal 1996 from 33.3% in fiscal 1995 as a result of higher inventory write-offs in fiscal 1996 and the impact in fiscal 1996 of shipments on several large, competitively bid procurements that had lower profit margins. Technology Programs and Systems. Technology Programs and Systems gross profit was $6.2 million, $5.7 million and $6.2 million in fiscal years 1997, 1996 and 1995, respectively. As a percentage of sales, gross profit remained relatively constant at 20.1% in fiscal 1995, 18.7% in fiscal 1996 and 20.1% in fiscal 1997. The stability of gross profit as a percentage of sales resulted from the predominance of government cost plus contracts in this business segment. See "Business -- Government Business." Information Products and Services. 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 34 37 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 reflects a write-off of certain capitalized software development costs. To a lesser extent, the comparative improvement in fiscal 1997 is attributable to increased sales of the Company's higher margin job-cost accounting software products. In fiscal 1996, gross profit in this business segment decreased $2.8 million to $(2.2) million from $0.6 million in fiscal 1995. As a percentage of sales, gross profit decreased to (26.6)% in fiscal 1996 from 11.8% in fiscal 1995, reflecting the impact in fiscal 1996 of the reserves recorded on the CJIS Contracts and the write-off of certain capitalized software development costs. Selling, General and Administrative Expenses 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. In fiscal 1996, selling, general and administrative expenses increased $1.9 million, or 14.1%, to $15.6 million from $13.6 million in fiscal 1995. As a percentage of sales, selling, general and administrative expenses increased to 19.3% in fiscal 1996 from 18.2% in fiscal 1995. These increases were attributable primarily to a charge in fiscal 1996 of approximately $1.5 million for environmental and other matters and for amounts in connection with the Reorganization, as well as higher sales and marketing costs in support of the Company's commercial business initiatives. 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 $5.3 million, $5.1 million and $5.0 million for fiscal 1997, 1996 and 1995, respectively. 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. Because of the increased overall sales level, however, as a percentage of sales, research and development expenses decreased to 5.2% in fiscal 1997 from 6.3% in fiscal 1996 and 6.7% in fiscal 1995. Interest Expense In fiscal 1997, interest expense decreased to $173,000 from $329,000 in fiscal 1996 as a result of lower average borrowings. In fiscal 1996, interest expense remained relatively constant in comparison to fiscal 1995. Other-net In fiscal 1997, other-net was $150,000, compared to $398,000 in fiscal 1996 and $848,000 in fiscal 1995. The decrease in other-net primarily 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. In fiscal 1996 and fiscal 1995 other-net included $379,000 and $508,000 of such income, respectively, while none was included in fiscal 1997. The balance of other-net in all three fiscal years was principally interest income. 35 38 Income Tax Expense The Company has net operating loss carryforwards which offset the Company's provision for income taxes in fiscal 1997. Fiscal 1996 income tax expense is primarily due to the establishment of a valuation allowance of $1.1 million for the net deferred income tax assets of the Company due to the losses incurred in fiscal 1996. Income tax expense was incurred at an effective rate of 3.6% in fiscal 1995, which primarily reflects the non-taxable status of the $508,000 of amortization described above. 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 1997, the Company received approximately $2.5 million from the exercise of stock options and purchases under its stock purchase plans. Cash flow from operations in fiscal 1997 was $2.9 million, with net income plus depreciation and amortization of approximately $6.6 million partially offset by increases in accounts receivable and inventory in support of the higher fiscal 1997 sales. The Company's capital expenditures in fiscal 1997 increased to $4.7 million from $2.0 million in fiscal 1996, primarily for the acquisition of production and computer equipment and other assets needed to support growth of the Company's business units. The Company has currently budgeted capital expenditures of $7.0 million for fiscal 1998 to support growth, including expansion of manufacturing facilities for the EMI filter and ultracapacitor operations, and expansion in one of the Company's owned buildings. In addition, the Company will be addressing the need for high-volume manufacturing of ultracapacitors, and commitments may be made during fiscal 1998 toward meeting such needs. Alternatively, the Company may consider leasing facilities or manufacturing equipment or both or may satisfy volume manufacturing requirements through outsourcing or under licensing arrangements with third parties. If the Company decides to internally finance construction of such facilities, a significant amount of capital would be required. The Company re-negotiated its bank line of credit during fiscal 1997, converting the line of credit to a two year unsecured arrangement and increasing the amount available to $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, 1997, there were no outstanding borrowings under the line of credit. In addition to addressing the need for high volume manufacturing, the Company may also from time to time 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. SUBSIDIARY OPTION PROGRAMS The Company has implemented employee stock option plans at each of its five principal operating subsidiaries providing for the issuance of incentive and nonqualified stock options to purchase common stock of these companies by each subsidiary. The option plans are intended to encourage an entrepreneurial atmosphere in each business segment, providing focused rewards promoting growth. Options that are "in-the-money" at the subsidiary level 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 in-the-money subsidiary options. Except to the extent exercised, however, such subsidiary options will not affect the Company's consolidated net income as reported in its consolidated statement of operations. 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 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 36 39 these option plans could be up to 13% at each principal operating subsidiary (17% at one subsidiary). In addition, certain key employees of the Company's Maxwell Business Systems, Inc., subsidiary in the Information Products and Services business segment, currently own an aggregate of 20% and have the right to purchase up to an additional 29%, of that subsidiary. See "Risk Factors -- Potential Dilutive Impact of Employee Stock Option Programs at Subsidiaries" and "Management -- Executive Compensation." 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. ACCOUNTING PRINCIPLES In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share. Under Statement No. 128, the Company will be required to present basic net income per share, which excludes the effects of dilutive common stock equivalents, and diluted net income per share. Basic net income per share is expected to be higher than the currently presented primary net income per share in periods of positive earnings due to the exclusion of dilutive stock options in its computation. Diluted net income per share is not expected to be materially different from the earnings per share amounts which would be computed under the current method. The Company is required to adopt Statement No. 128 in its fiscal quarter ending January 31, 1998, and at that time all historical net income per share data presented will be restated to conform to the provisions of Statement No. 128. 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 The information set forth in Item 10, Item 11 and Item 12 herein is being filed herewith because the information included therein is being filed with the Securities and Exchange Commission as part of the Company's Registration Statement on Form S-3 filed under the Securities Act of 1933, as amended. The information included herewith under these items is not completely responsive to Regulation S-K as applicable to these items on Form 10-K. The information set forth in Item 10, Item 11, Item 12 and Item 13 is subject to supplement by the information to be reported in the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders which the Company anticipates will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of July 31, 1997, and which is incorporated herein by this reference. 37 40 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and senior management of the Company are set forth in the following table. The Company's Board of Directors, consisting of seven members, is divided into three classes with one class standing for election each year for a three-year term. The terms of directors in Class II expire at the 1997 annual meeting of stockholders.
NAME AGE POSITION - ------------------------- ---- ------------------------------------------------ Kenneth F. Potashner..... 39 Chairman, President, Chief Executive Officer, Chief Operating Officer and Director -- Class I R. Wayne Clark........... 59 Vice President, and President of PurePulse Technologies, Inc. Gary J. Davidson......... 41 Vice President -- Finance and Administration, Treasurer and Chief Financial Officer Thomas L. Horgan......... 37 Vice President and Director -- Class I Gregg L. McKee........... 54 Vice President, and President of Maxwell Energy Products, Inc. Donald M. Roberts........ 49 General Counsel and Secretary Walter P. Robertson...... 55 Vice President, and President of Maxwell Federal Division, Inc. Terrence M. Siegrist..... 47 Vice President, and President of Maxwell Information Systems, Inc. John D. Werderman........ 50 Vice President, and President of I-Bus, Inc. Lewis J. Colby, Jr. ..... 63 Director -- Class II(1)(2) Thomas B. Hayward........ 73 Director -- Class III(1)(2) Alan C. Kolb............. 68 Director -- Class III Karl M. Samuelian........ 65 Director -- Class III(1)(2) Donn A. Starry........... 72 Director -- Class II(2)
- --------------- (1) Member of the Audit Committe. (2) Member of the Compensation Committee. Mr. Potashner joined Maxwell in April 1996 as President, CEO, COO and Director and was appointed Chairman in April 1997. From 1994 to April 1996, he served as Executive Vice President, Operations, of Conner Peripherals. From 1991 through 1994 he was Vice President, Product Engineering, for Quantum Corporation. Mr. Clark was named Vice President in January 1997. Mr. Clark has been President of PurePulse Technologies, Inc., a majority-owned subsidiary of the Company, since its formation in 1988. Prior to becoming President of PurePulse, Mr. Clark held various executive positions with the Company. He joined the Company in 1973. 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 Maxwell in 1986, Mr. Davidson was a Senior Manager with Ernst & Young. Mr. Horgan joined the Company in June 1996 as Vice President, Business Development. From 1995 until joining Maxwell, he was Vice President, Customer Service, for Conner Peripherals and from 1993 to 1995 served as Director, Customer Service for Quantum Corporation. From 1991 to 1993 Mr. Horgan served as European Information Security Center Manager for Digital Equipment Corporation. Mr. McKee joined the Company in September 1996 as Vice President and President of Maxwell Energy Products, Inc. From 1990 until joining Maxwell he served Quantum Corporation in various capacities. From January 1995 until joining Maxwell he was President, Quantum Malaysia. From February 1993 to 38 41 December 1995, he served as Corporate Director of Malaysian Operations. From 1990 to January 1993 he was Director of the Customer Service Group. Mr. Roberts joined the Company as General Counsel 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 as an outside legal advisor to the Company for more than ten years. Mr. Robertson joined the Company in August 1996 as Vice President and President of Maxwell Federal Division, Inc. From April 1995 until joining Maxwell, he served BioSolutions Technologies, a start-up company, as President and Chief Executive Officer. From May 1994 through November 1994, Mr. Robertson was Transition Director for Martin Marietta. Prior to that, he served General Dynamics as Vice President and General Manager, Space Magnetics from 1992 through 1994 and as Vice President, Aircraft Production from 1991 through 1992. Mr. Siegrist joined the Company in March 1997, and was named President of Maxwell Information Systems, Inc. in May 1997. From 1990 through 1993, and again from 1994 until September 1996, Mr. Siegrist held management positions with Boole & Babbage, Inc., most recently as Director, International Business Operations. From 1993 to 1994, Mr. Siegrist was Director of Marketing for Interphase Corporation. From 1979 until joining Boole & Babbage in 1990, Mr. Siegrist served as Vice President of Sales and Marketing with Lemcom Systems, Inc. Mr. Werderman was named President of I-Bus, Inc. in July 1997. Previously, Mr. Werderman served as Chief Operating Officer of Maxwell Federal 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. Dr. Colby has been a director of the Company since December 1983. He was Senior Vice President -- Technology of Allied-Signal, Inc. from 1985 until his retirement on January 1, 1989, and held the same position with Allied Corporation from 1981 to 1985. Admiral Hayward (U.S. Navy, Ret.) is President of Thomas B. Hayward Associates, Inc., an executive consulting firm. Admiral Hayward served as the Chief of Naval Operations of the United States Navy from 1978 until his retirement from active service with the Navy in July 1982. He was appointed a director of the Company in October 1987. Dr. Kolb has been a director of the Company since 1970. He also served as a director from July 1965 to October 1967. From 1970 to 1996, Dr. Kolb served as Chief Executive Officer of the Company. He was President of the Company from 1970 until 1980 and again from 1992 until 1996. From 1980 to 1995, Dr. Kolb served as Chairman of the Board. Dr. Kolb stepped down from his positions as President and Chief Executive Officer in April 1996, and continues with the Company as a consultant. Mr. Samuelian has been a director of the Company since 1967 and served as Secretary from that time until June 1996. From 1978 to June 1980, he also held the office of Chairman of the Board of the Company. For more than five years, Mr. Samuelian has been a shareholder in the law firm of Parker, Milliken, Clark, O'Hara & Samuelian, A Professional Corporation, and a partner in the predecessor law partnership. The Company retained the firm of Parker, Milliken, Clark, O'Hara & Samuelian, a Professional Corporation to provide legal services during fiscal 1997 and said firm has been retained in fiscal year 1998. General Starry (U.S. Army, Ret.) has been a director of the Company since 1988, and served as Chairman of the Board from October 1995 until April 1997. General Starry retired from the Army in 1983 and joined Ford Aerospace Corporation. He retired as Executive Vice President of Ford Aerospace Corporation in 1990 and thereafter has served as consultant and advisor to industry and government in the United States and several foreign countries. 39 42 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain summary information concerning the compensation earned by the Company's Chief Executive Officer and its four other most highly compensated executive officers (the "Named Executive Officers") whose total salary and bonus for fiscal 1997 exceeded $100,000, for services rendered to the Company and its subsidiaries in all capacities during that fiscal year. No executive who would otherwise have been includable in such table on the basis of salary and bonus earned for fiscal 1997 has resigned or otherwise terminated employment during fiscal 1997. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION(1) --------------------------------------- ------------------------------ RESTRICTED STOCK OPTION GRANTS(4) ALL OTHER NAME AND POSITION YEAR SALARY BONUS OTHER(2) STOCK AWARD(3) (NO. OF SHARES) COMPENSATION(5) - ----------------------- ---- -------- -------- -------- -------------- ---------------------- --------------- Kenneth F. Potashner (6) 1997 $400,004 $400,000 $2,850 $190,000 50,000 $ 361,031 Chairman 1996 93,847 100,000 -0- 645,105 177,960 44,000 Chief Executive Officer, President, Chief Operating Officer, Director Thomas L. Horgan (6) 1997 180,083 81,630 -0- -0- 9,000 19,254 Vice President, 1996 19,615 -0- -0- -0- 60,000 -0- Director Gregg L. McKee. (6) 1997 167,990 82,617 -0- -0- 10,000 49,863 Vice President 1996 -0- -0- -0- -0- 60,000 -0- Walter P. Robertson (6) 1997 165,713 69,228 -0- -0- 69,000 -0- Vice President Donald M. Roberts 1997 158,111 78,606 4,671 -0- 8,000 -0- General Counsel & 1996 150,010 -0- 346 -0- 10,000 -0- Secretary 1995 150,010 -0- -0- -0- -0- -0-
- --------------- (1) Amounts shown include cash compensation earned and received by executive officers as well as amounts earned but deferred at the election of those officers under the Company's Savings Plan. (2) Amounts in this column consist of matching contributions made by the Company under its Savings Plan. They do not include the dollar value of certain perquisites and other personal benefits, securities or property the recipient received as personal benefits. Although such amounts cannot be determined precisely, the Company has concluded that the aggregate amount thereof does not exceed as to any of the named individuals the lesser of $50,000 and 10% of the total salary and bonus paid to such individual for fiscal 1997. (3) Mr. Potashner was awarded 10,000 shares of restricted stock in fiscal 1997 and 177,960 shares of restricted stock in fiscal 1996, which restricted shares vest 25% one year after grant and each month thereafter an additional 1/48 of the total number of shares granted become vested. Mr. Potashner has full voting power and dividend rights with respect to all of the restricted stock. At July 31, 1997, the aggregate value of such restricted stock based on the closing price of the Company's Common Stock on that date was $4,370,000. (4) Options shown in this column are options to purchase shares of Common Stock of Maxwell Technologies, Inc. granted under the Company's 1995 Stock Option Plan. Each individual in the table also received options in fiscal 1997 to purchase common stock in each of the Company's principal operating subsidiaries: Maxwell Energy Products, Inc., PurePulse Technologies, Inc., I-Bus, Inc., Maxwell Federal Division, Inc., and Maxwell Information Systems, Inc. See the following table under the heading "Option Grants in Last Fiscal Year" for the specific number of shares included in option grants by each such subsidiary for each individual. In addition, Mr. Potashner received options in fiscal 1996 to purchase 150,000 shares of PurePulse Technologies, Inc. common stock. (5) Represents amounts paid to Mr. Potashner in fiscal 1996 for consulting activities and in fiscal 1997 for relocation expenses including certain carrying and sale-related costs for his former residence, and tax offset payments. Represents amounts paid to Mr. Horgan and Mr. McKee in fiscal 1997 as 40 43 reimbursement of relocation expenses (including reimbursement of brokerage commissions on the sale of a residence). (6) Mr. Potashner and Mr. Horgan were hired as executive officers in fiscal 1996. Mr. McKee and Mr. Robertson were hired as executive officers in fiscal 1997. OPTION GRANTS IN LAST FISCAL YEAR The following table shows information on grants of stock options pursuant to the Company's 1995 Stock Option Plan, the 1994 Stock Option Plan of the Company's subsidiary, PurePulse Technologies, Inc. and the 1996 Stock Option Plans of the Company's other principal operating subsidiaries, Maxwell Energy Products, Inc., I-Bus, Inc., Maxwell Federal Division, Inc. and Maxwell Information Systems, Inc., to the Named Executive Officers. Pursuant to Securities and Exchange Commission rules, the table also shows the value of the options at the end of the five and ten year option terms if the stock price were to appreciate annually by 5% and 10%, respectively. These assumed values may not reflect actual value at the times indicated.
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF PERCENTAGE OF STOCK PRICE TOTAL OPTIONS APPRECIATION FOR GRANTED TO EXERCISE OPTION TERM OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------------- NAME AND ENTITY GRANTED(1) FY 1997(2) (PER SHARE) DATE 5% 10% - --------------------------------- ---------- ------------- ----------- ---------- -------- ---------- Kenneth F. Potashner Company........................ 50,000 12.95% $ 19.50 7/22/02 $613,170 $1,553,900 Energy Products................ 100,000 13.65 1.16 11/7/06 72,950 184,870 PurePulse...................... -0- -0- -0- -- -0- -0- I-Bus.......................... 100,000 15.17 1.15 11/7/06 72,320 183,280 Federal........................ 100,000 14.15 1.45 11/7/06 91,190 231,090 Information Systems............ 100,000 13.34 .26 11/7/06 16,350 41,440 Thomas L. Horgan Company........................ 9,000 2.33% $ 19.50 7/22/02 $ 48,490 $ 107,140 Energy Products................ 37,500 5.12 1.16 11/7/06 27,360 69,330 PurePulse...................... 33,750 10.15 .65 8/7/06 13,800 34,960 I-Bus.......................... 37,500 5.69 1.15 11/7/06 27,120 68,730 Federal........................ 37,500 5.31 1.45 11/7/06 34,200 86,660 Information Systems............ 37,500 5.00 .26 11/7/06 6,130 15,540 Gregg L. McKee Company........................ 10,000 2.59% $ 19.50 7/22/02 $ 53,870 $ 119,050 Energy Products................ 125,000 17.06 1.16 11/7/06 91,190 231,090 PurePulse...................... 22,500 6.77 .65 8/7/06 9,200 23,310 I-Bus.......................... 25,000 3.79 1.15 11/7/06 18,080 45,820 Federal........................ 25,000 3.54 1.45 11/7/06 22,800 57,770 Information Systems............ 25,000 3.33 .26 11/7/06 4,090 10,360 Walter P. Robertson Company........................ 9,000 2.33% $ 19.50 7/22/02 $ 48,490 $ 107,140 60,000 15.54 6.88 8/1/01 114,050 252,020 Energy Products................ 25,000 3.41 1.16 11/7/06 18,240 46,220 PurePulse...................... 22,500 6.77 .65 8/7/06 9,200 23,310 I-Bus.......................... 25,000 3.79 1.15 11/7/06 18,080 45,820 Federal........................ 100,000 14.15 1.45 11/7/06 91,190 231,090 Information Systems............ 25,000 3.33 .26 11/7/06 4,090 10,360 Donald M. Roberts Company........................ 8,000 2.07% $ 19.50 7/22/02 $ 43,100 $ 95,240 Energy Products................ 37,500 5.12 1.16 11/7/06 27,360 69,330 PurePulse...................... 33,750 10.15 .65 8/7/06 13,800 34,960 I-Bus.......................... 37,500 5.69 1.15 11/7/06 27,120 68,730 Federal........................ 37,500 5.31 1.45 11/7/06 34,200 86,660 Information Systems............ 37,500 5.00 .26 11/7/06 6,130 15,540
41 44 - --------------- (1) These options are either incentive stock options or non-qualified stock options and were granted at a purchase price equal to the fair market value of the underlying common stock at the date of grant. Fair market value of the Company's Common Stock was based on the trading price of such stock on the date of grant, and fair market value of the common stock of the subsidiaries was based on independent outside appraisals. The term of all options covering shares of common stock of the Company's subsidiaries is ten years. The term of options covering the Company's Common Stock is five years, with the exception of Mr. Potashner's options covering Company Common Stock which have ten year terms. The increments in which the options are exercisable are determined by the committees which administer the plans. (2) Total options for the Company include options covering 7,000 shares of Company Common Stock granted to directors of the Company under the Company's Director Stock Option Plan. The stock option plans of the Company's five principal operating subsidiaries permit options to be granted for an aggregate number of shares of common stock amounting to approximately 13% of the total outstanding shares of such stock on a fully-diluted basis (17.3% at one subsidiary). At August 31, 1997, the number of shares of common stock subject to outstanding options under the Company's subsidiary stock option plans was, in the case of each such subsidiary, 10.3% to 13.6% on a fully-diluted basis. FISCAL YEAR END OPTION VALUES Shown below is information on each Named Executive Officer with respect to the value of stock options, measured in terms of the closing price of the Company's Common Stock on the date of exercise, and with respect to the value of unexercised options to purchase the Company's Common Stock held by them and granted in fiscal 1997 and prior years under the Company's 1995 or 1985 Stock Option Plans, measured in terms of the closing price of the Company's Common Stock on July 31, 1997.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED OPTIONS HELD AT IN-THE-MONEY OPTIONS AT SHARES ACQUIRED JULY 31, 1997(1) JULY 31, 1997(1) ON EXERCISE VALUE ----------------------------- ----------------------------- NAME (NUMBER OF SHARES) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------- ------------------ ------------ ----------- ------------- ----------- ------------- Kenneth F. Potashner........... 34,000 $563,040 25,320 168,640 $ 498,424 $ 2,522,928 Thomas L. Horgan...... -0- -0- 18,000 51,000 328,500 800,250 Gregg L. McKee........ 5,000 63,750 13,000 52,000 208,000 709,500 Walter P. Robertson... -0- -0- -0- 69,000 -0- 1,015,950 Donald M. Roberts..... -0- -0- 11,000 17,000 210,750 196,750
- --------------- (1) Does not include options held by the Named Executive Officers to purchase shares of common stock in the Company's five principal operating subsidiaries under the stock option plans of such subsidiaries. All options held by these individuals under such stock option plans were granted in fiscal 1997 and are shown in the preceding table, except for options to purchase 150,000 shares of common stock of the Company's PurePulse Technologies, Inc. subsidiary granted to Mr. Potashner in fiscal 1996 as to which options for 37,500 shares were exercisable within 60 days of July 31, 1997. No public market exists for the common stock of any of the Company's subsidiaries. For purposes of the above table, no value has been attributed to the subsidiary stock options. EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS Employment Agreement. In March, 1996, the Company entered into an Employment Contract ("Contract") with Kenneth F. Potashner pursuant to which Mr. Potashner became the President and Chief Executive Officer of the Company effective April 26, 1996. The Contract, as amended, is for a term ending July 31, 2000, and requires Mr. Potashner to perform the duties associated with the office of chief executive of the Company plus such other duties or positions as the Board of Directors may require. Mr. Potashner is currently also performing the duties of the Company's chairman, president and chief operating officer. The Contract provides for a base salary for fiscal 1998 of $450,000 per year, reviewed annually, with an annual bonus opportunity of up to 200% of base salary, with a target bonus of 100% of base salary, to be determined 42 45 by the Board of Directors. Mr. Potashner has received a total of 187,960 shares of restricted stock under the Contract and options under the Company's 1995 Stock Option Plan for a total of 227,960 shares. Both the restricted shares and the options are subject to four-year vesting schedules. Under the Contract, Mr. Potashner will be immediately vested in the restricted shares and stock options, shall receive a payment equal to two years of his initial base salary plus his initial term target bonus, and shall continue for one year to receive benefits identical to those being received, in the event that a "change of control" occurs and either his compensation or responsibilities are reduced or the Company's headquarters are moved more than 30 miles. A "change of control" is defined as the acquisition by a person or group of a majority of the Company's stock by direct purchase or through a merger, the liquidation or sale of substantially all of the assets of the Company or a change in a majority of the members of the Board of Directors other than through membership changes determined by the Board itself. If Mr. Potashner is terminated without cause during the term of the Contract, he will be paid the base salary and target bonus remaining to be paid for the balance of the stated term of the Contract (but not less than one full year of such salary and bonus) and the restricted shares shall become free of any restrictions and stock options shall become fully vested. In the event Mr. Potashner voluntarily resigns or is terminated for cause, he shall be paid only such salary and accrued vacation pay as is then due to him and no acceleration of vesting or lifting of restrictions shall occur with respect to the restricted shares or stock options. Upon completion of a public offering of Common Stock, pursuant to the Contract, the Board will consider the grant of additional options to Mr. Potashner. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information with respect to the beneficial ownership of the Company's Common Stock as of July 31, 1997, by (i) each person (or group of affiliated persons) known by the Company to beneficially own more than five percent of the outstanding shares of Common Stock, (ii) each Selling Stockholder, (iii) each of the Company's directors, (iv) each of the Named Executive Officers and (v) all directors and executive officers of the Company as a group. Unless otherwise indicated, the address for each stockholder is 9275 Sky Park Court, San Diego, CA 92123.
SHARES OF COMMON STOCK BENEFICIALLY OWNED (1)(2)(3) NAME AND ADDRESS OF ------------------- BENEFICIAL OWNER NUMBER PERCENT - ------------------------------------------------------------------------ ------- ------- The TCW Group, Inc...................................................... 424,576 6.9% 865 South Figueroa Street Los Angeles, California 90017 Dimensional Fund Advisors, Inc.(4)...................................... 358,020 5.8 1299 Ocean Avenue, 11th Floor Santa Monica, California 90401 Kenneth F. Potashner.................................................... 254,698 4.1 Gregg L. McKee.......................................................... 13,000 * Walter P. Robertson..................................................... 18,100 * Thomas L. Horgan........................................................ 20,200 * Donald M. Roberts....................................................... 13,281 * Lewis J. Colby, Jr...................................................... 33,830 * Thomas B. Hayward....................................................... 19,334 * Alan C. Kolb............................................................ 194,496 3.2 Karl M. Samuelian....................................................... 22,174 * Donn A. Starry.......................................................... 16,181 * All directors and executive officers as a group (14 persons).......................................................... 651,471 10.6
43 46 - --------------- * Less than one percent. (1) Information with respect to beneficial ownership is based on information furnished to the Company by each shareholder included in the table or included in filings with the Securities and Exchange Commission. The Company understands that each individual person has sole voting and investment power for shares beneficially owned by him, subject to community property laws where applicable. (2) Shares of Common Stock subject to options or warrants which are currently exercisable or exercisable within 60 days of July 31, 1997, are deemed outstanding for computing the percentage of the person holding such options or warrants but are not deemed outstanding for computing the percentage of any other person. Percentage of ownership is based on 6,142,911 shares of Common Stock outstanding on July 31, 1997. (3) Shares of Common Stock beneficially owned include options exercisable within 60 days of July 31, 1997 to purchase 66,738 shares granted to Mr. Potashner, 13,000 shares granted to Mr. McKee, 18,000 shares granted to Mr. Robertson, 18,000 shares granted to Mr. Horgan, 11,000 shares granted to Mr. Roberts, 19,334 shares granted to Dr. Colby, 19,334 shares granted to Adm. Hayward, 19,334 shares granted to Mr. Samuelian, and 13,028 shares granted to Gen. Starry, respectively, and options to purchase 237,318 shares granted to all directors and officers as a group. (4) Dimensional Fund Advisors, Inc. ("Dimensional"), a registered investment advisor, is deemed to have beneficial ownership of 358,020 shares of the Company's Common Stock as of June 30, 1997, all of which shares are held in portfolios of DFA Investment Dimensions Group Inc., a registered open-end investment company, or in a series of the DFA Investment Trust Company, a Delaware Business Trust, or the DFA Group Trust and the DFA Participating Group Trust, investment vehicles for qualified employee benefit plans, all of which Dimensional Fund Advisors, Inc. serves as investment manager. Dimensional disclaims beneficial ownership of all such shares. Dimensional has sole dispositive power over all of such 358,020 shares and sole voting power over 257,938 of such shares. Persons who are officers of Dimensional Fund Advisors, Inc. also serve as officers of DFA Investment Dimensions Group Inc. (the "Fund") and the DFA Investment Trust Company (the "Trust"), each an open-end management investment company registered under the Investment Company Act of 1940. In their capacity as officers of the Fund and the Trust, these persons vote 58,892 additional shares which are owned by the Fund and 41,190 shares which are owned by the Trust (both included in sole dispositive power above). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS.
PAGE NUMBER ------ 1. Report of Ernst & Young LLP, Independent Auditors................ F-1 2. Consolidated Balance Sheets at July 31, 1997 and 1996............ F-2 3. Consolidated Statement of Operations for the Years Ended July 31, 1997, 1996 and 1995.............................................. F-3 4. Consolidated Statement of Stockholders' Equity for the Three Years Ended July 31, 1997........................................ F-4 5. Consolidated Statement of Cash Flows for the Years Ended July 31, 1997, 1996 and 1995.............................................. F-5 6. Notes to Consolidated Financial Statements....................... F-6
44 47 (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. 3.3 Bylaws of the Registrant as amended to date -- Exhibit 3.2 to the 1987 Form 10-K is incorporated by reference. 3.4+ Revised Article IV of the Bylaws of the Registrant. 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. 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. 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 Maxwell Laboratories, Inc. 1994 Employee Stock Purchase Plan -- Exhibit 10.4 to the 1995 Form 10-K is incorporated by reference. 10.6+ Amendment Number One to Maxwell Laboratories, Inc. 1995 Stock Option Plan, dated March 19, 1997. 10.7 Maxwell Laboratories, Inc. 1994 Director Stock Purchase Plan -- Exhibit 10.5 to the 1995 Form 10-K is incorporated by reference. 10.8 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. 10.9 Lease dated June 14, 1996, between the Registrant, as Lessor, and Ceimic Corporation, as Lessee -- Exhibit 10.7 to the Registrant's Form 10-K Annual Report for the year ended July 31, 1996 (the "1996 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.
45 48 10.12 Maxwell Laboratories, Inc. Executive Deferred Compensation Plan -- Exhibit 10.18 to the Registrant's Form 10-K Annual Report for the year ended July 31, 1983 is incorporated by reference. 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 1988 Form 10-K is incorporated by reference. 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 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. 10.17 Maxwell Laboratories, Inc. Special Severance Pay Plan -- Exhibit 10.22 to the 1989 Form 10-K is incorporated by reference. 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. 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. 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. 10.26+ Line of Credit Agreement dated January 31, 1997, between the Registrant and Sanwa Bank California and Amendment dated January 31, 1997 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. 10.30 Agreement of Purchase and Sale of Assets dated February 13, 1992 between Registrant, Sierra Aerospace Technology, Inc., Donald Pruett, Dick Ni and Annie Ni. Exhibit 10.32 to the 1992 Form 10-K is incorporated by reference.
46 49 10.31 Severance Agreement dated March 15, 1996, between the Registrant and Sean M. Maloy -- Exhibit 10.24 to the 1996 Form 10-K is incorporated by reference. 10.32+ Executive Bonus Plan for Fiscal 1998. 10.33 PurePulse Technologies, Inc. 1994 Stock Option Plan -- Exhibit 10.26 to the 1996 Form 10-K is incorporated by reference. 10.34+ Maxwell Federal Division, Inc. 1996 Stock Option Plan. 10.35+ Maxwell Energy Products, Inc. 1996 Stock Option Plan. 10.36+ I-Bus, Inc. 1996 Stock Option Plan. 10.37+ Maxwell Information Systems, Inc. 1996 Stock Option Plan. 10.38+ Amendment Number One to the Maxwell Laboratories, Inc. 1994 Employee Stock Purchase Plan, effective as of April 30, 1997. 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. The Registrant filed no Reports on Form 8-K during the fourth quarter of its fiscal year ended July 31, 1997. - --------------- + Filed herewith. 47 50 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Ernst & Young LLP, Independent Auditors..................................... F-2 Consolidated Balance Sheets at July 31, 1996 and 1997................................. F-3 Consolidated Statement of Operations for the Years Ended July 31, 1995, 1996 and 1997................................................................................ F-4 Consolidated Statement of Stockholders' Equity for the Three Years Ended July 31, 1997................................................................................ F-5 Consolidated Statement of Cash Flows for the Years Ended July 31, 1995, 1996 and 1997................................................................................ F-6 Notes to Consolidated Financial Statements............................................ F-7
F-1 51 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, 1996 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended July 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Maxwell Technologies, Inc., and subsidiaries at July 31, 1996 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended July 31, 1997, in conformity with generally accepted accounting principles. As discussed in Note 8 to the consolidated financial statements, in 1996 the Company changed its method of assessing the impairment of long-lived assets in accordance with the adoption of Statement of Financial Accounting Standards No. 121. /s/ ERNST & YOUNG LLP San Diego, California September 12, 1997 F-2 52 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
JULY 31, ------------------- 1996 1997 ------- ------- ASSETS Current assets: Cash and cash equivalents.............................................. $ 1,465 $ 826 Accounts receivable: Trade and other, less allowance for doubtful accounts of $440 and $350 at July 31, 1996 and 1997, respectively....................... 8,656 9,391 Long-term contracts (Note 2)........................................ 6,917 9,221 ------- ------- 15,573 18,612 Inventories and inventoried costs relating to long-term contracts (Note 11)................................................................. 6,808 8,722 Recoverable income taxes............................................... 740 -- Prepaid expenses....................................................... 548 1,203 Deferred income taxes.................................................. 161 161 ------- ------- Total current assets................................................ 25,295 29,524 Property, plant and equipment, net (Note 11)............................. 14,809 16,929 Deposits and other....................................................... 620 667 ------- ------- $40,724 $47,120 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable....................................................... $14,231 $13,640 Accrued employee compensation.......................................... 2,866 4,465 Current portion of long-term debt...................................... 910 511 ------- ------- Total current liabilities........................................... 18,007 18,616 Long-term debt (Note 3).................................................. 1,018 465 Minority interest and additional amounts contributed..................... 954 629 Commitments and contingencies (Notes 6 and 9) Stockholders' equity (Note 4): Common stock, $0.10 par value, 20,000 shares authorized, 5,687 and 6,143 shares issued and outstanding at July 31, 1996 and 1997, respectively........................................................ 568 614 Additional paid-in capital............................................. 19,752 22,364 Deferred compensation.................................................. (605) (622) Retained earnings...................................................... 1,030 5,054 ------- ------- Total stockholders' equity.......................................... 20,745 27,410 ------- ------- $40,724 $47,120 ======= =======
See accompanying notes. F-3 53 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JULY 31, --------------------------------- 1995 1996 1997 ------- -------- -------- Sales....................................................... $75,004 $ 80,911 $101,411 Cost of sales............................................... 56,447 65,893 70,107 ------- -------- -------- Gross profit.............................................. 18,557 15,018 31,304 Operating expenses: Selling, general and administrative expenses.............. 13,636 15,564 21,900 Research and development expenses......................... 5,038 5,081 5,303 Restructure and asset impairment losses (Note 8).......... -- 5,703 -- ------- -------- -------- Total operating expenses............................... 18,674 26,348 27,203 ------- -------- -------- Operating income (loss)..................................... (117) (11,330) 4,101 Interest expense............................................ 315 329 173 Other-net (Note 11)......................................... (848) (398) (150) ------- -------- -------- Income (loss) before income taxes, minority interest and loss from cumulative effect of change in accounting principle................................................. 416 (11,261) 4,078 Income tax expense (benefit) (Note 5)....................... 15 1,296 -- Minority interest in net income of subsidiary............... 86 50 54 Loss from cumulative effect of change in accounting principle (Note 8)........................................ -- 2,569 -- ------- -------- -------- Net income (loss)........................................... $ 315 $(15,176) $ 4,024 ======= ======== ======== Earnings (loss) per share: Income (loss) per share before cumulative effect of change in accounting principle....................... $ 0.06 $ (2.29) $ 0.60 ======= ======== ======== Net income (loss) per share............................ $ 0.06 $ (2.76) $ 0.60 ======= ======== ========
See accompanying notes. F-4 54 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
THREE YEARS ENDED JULY 31, 1997 ----------------------------------------------------------------- TOTAL COMMON ADDITIONAL DEFERRED RETAINED STOCKHOLDERS' STOCK PAID-IN CAPITAL COMPENSATION EARNINGS EQUITY ------ --------------- ------------ -------- ------------ Balance at August 1, 1994............... $534 $18,535 $ -- $ 15,891 $ 34,960 Issuance of 28,424 shares under stock purchase plans..................... 3 86 -- -- 89 Net income for the year............... -- -- -- 315 315 ---- ------- ----- -------- -------- Balance at July 31, 1995................ 537 18,621 -- 16,206 35,364 Issuance of 37,684 shares under stock option plans....................... 4 152 -- -- 156 Issuance of 93,112 shares under stock purchase plans..................... 9 352 -- -- 361 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 406,656 shares under stock option plans....................... 41 1,985 -- -- 2,026 Issuance of 39,129 shares under stock purchase plans..................... 4 438 -- -- 442 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 ==== ======= ===== ======== ========
See accompanying notes. F-5 55 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED JULY 31, -------------------------------- 1995 1996 1997 ------- -------- ------- Operating activities: Net income (loss)........................................... $ 315 $(15,176) $ 4,024 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization....................... 2,907 2,128 2,587 Restructure and asset impairment losses............. -- 5,960 -- Loss from cumulative effect of change in accounting principle......................................... -- 2,569 -- Provision for losses on accounts receivable......... 45 105 184 Loss on sales of property and equipment............. 122 118 10 Deferred income taxes............................... 820 1,124 -- Minority interest in net income of subsidiary....... 86 50 54 Deferred compensation............................... -- 40 173 Changes in operating assets and liabilities: Accounts receivable............................... (52) 252 (3,223) Inventories....................................... 369 (469) (1,914) Prepaid expenses and other........................ 150 614 (702) Accounts payable.................................. (525) 2,153 (683) Accrued employee compensation..................... (255) 185 1,599 Income taxes payable/recoverable.................. (797) 121 832 ------- -------- ------- Net cash provided by (used in) operating activities................................... 3,185 (226) 2,941 Investing activities: Purchases of property, plant and equipment.................. (2,951) (1,976) (4,725) Proceeds from sales of property and equipment............... 80 6 8 ------- -------- ------- Net cash used in investing activities.......... (2,871) (1,970) (4,717) Financing activities: Principal payments on long-term debt........................ (929) (909) (952) Proceeds from issuance of Company and subsidiary stock...... 89 517 2,502 Repurchase of subsidiary stock.............................. -- -- (413) ------- -------- ------- Net cash provided by (used in) financing activities................................... (840) (392) 1,137 ------- -------- ------- Decrease in cash and cash equivalents.......... (526) (2,588) (639) Cash and cash equivalents at beginning of year................ 4,579 4,053 1,465 ------- -------- ------- Cash and cash equivalents at end of year....... $ 4,053 $ 1,465 $ 826 ======= ======== =======
See accompanying notes. F-6 56 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- 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. Depreciation and amortization are provided over the estimated useful lives of the assets (three to thirty years). Depreciation and amortization of property, plant and equipment amounted to $3,415,000, $2,507,000 and $2,587,000 in fiscal 1995, 1996 and 1997, 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 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. Earnings (Loss) Per Share The computation of net income (loss) per share is based on the weighted average shares of Common Stock outstanding plus the dilutive effects of Common Stock equivalents arising from stock options. The weighted average number of Common and Common equivalent shares outstanding was 5,356,000, 5,494,000 and 6,644,000 in fiscal 1995, 1996 and 1997, respectively. Net income (loss) per share was unchanged on a fully-diluted basis. F-7 57 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Under Financial Accounting Standards Board Statement No. 128, Earnings Per Share, the Company must change the method used to compute earnings per share in fiscal 1998 and restate all prior periods. Under the new standard, the dilutive effect of stock options will be excluded from basic earnings per share. The impact is expected to result in the following basic net income (loss) per share for the three years ended July 31:
1995 1996 1997 ----- ------ ----- Primary net income (loss) per share, as reported... $0.06 $(2.76) $0.60 ----- ------ ----- Basic net income (loss) per share, as restated under Statement No. 128.......................... $0.06 $(2.76) $0.68 ===== ====== =====
The impact of Statement No. 128 on the calculation of diluted net income (loss) per share for the above periods is not expected to be material. 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, 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, earnings per share and weighted average number of share amounts from prior periods have been restated to reflect the stock split. NOTE 2 -- ACCOUNTS RECEIVABLE The following tabulation shows the component elements of accounts receivable from long-term contracts at July 31:
1996 1997 ------ ------ (IN THOUSANDS) U.S. Government: Amounts billed........................................... $2,832 $2,108 Amounts unbilled......................................... 427 1,326 Retainage due upon completion of contracts............... 312 287 Commercial customers: Amounts billed........................................... 988 2,693 Amounts unbilled......................................... 2,358 2,681 Retainage due upon completion of contracts............... -- 126 ------ ------ $6,917 $9,221 ====== ======
F-8 58 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- ACCOUNTS RECEIVABLE (CONTINUED) 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, 1997 are expected to become due and payable within the next year. NOTE 3 -- LONG-TERM DEBT AND CREDIT AGREEMENTS Long-term debt consisted of the following at July 31:
1996 1997 ------ ---- (IN THOUSANDS) Variable rate note payable to a bank, due $42,000 monthly plus interest............................................. $1,292 $750 10.0% fixed rate promissory note, due $3,000 monthly........ 236 226 7.75% fixed rate note payable to a bank, due $100,000 quarterly plus interest................................... 400 -- ------ ---- 1,928 976 Less current portion........................................ 910 511 ------ ---- $1,018 $465 ====== ====
The variable rate bank note is unsecured and bears interest at the bank's prime rate plus one-half of one percent (9% at July 31, 1997). This bank note contains certain restrictive covenants relating to net-worth, net-worth-ratio and quarterly operating results. Maturities of long-term debt for each of the five years ending July 31, 2002 are: 1998-$511,000; 1999-$263,000; 2000-$14,000; 2001-$16,000; and 2002-$17,000. The Company also has an unsecured two-year bank line of credit agreement under which the Company may borrow up to $10 million at the bank's prime rate, or at LIBOR plus 1.75%. At July 31, 1997, 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 PLANS 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, an additional 300,000 shares were reserved for future issuance. 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. The options granted under these plans are to purchase Common Stock at not less than fair market value at the date of grant. Employee options are generally exercisable in cumulative annual installments of 30 percent or 20 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-9 59 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- STOCK PLANS (CONTINUED) The following table summarizes Company stock option activity for the three years ended July 31, 1997.
NUMBER WEIGHTED OF SHARES AVERAGE PRICE --------- ------------- Balance at August 1, 1994............................ 771,758 $ 5.38 Granted............................................ 224,000 $ 3.77 Exercised.......................................... -- -- Expired or forfeited............................... (278,014) $ 5.49 -------- Balance at July 31, 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 -------- Outstanding at July 31, 1997......................... 1,054,680 $ 8.60 ======== Available for future grant under the 1995 Stock Option Plan........................................ 83,300 ======== Available for future grant under the Director Option Plan............................................... 124,584 ========
In addition, the Company has established separate stock option plans for its five principal operating subsidiaries. During fiscal 1997, options to purchase various shares of subsidiary stock were granted at the estimated fair value of the subsidiary shares, as determined by an independent outside appraisal. Options outstanding at July 31, 1997 amount to 10.3% to 13.6% of each subsidiary's outstanding common stock. The following table summarizes information concerning outstanding and exercisable stock options at July 31, 1997.
WEIGHTED WEIGHTED AVERAGE WEIGHTED AVERAGE REMAINING AVERAGE RANGE OF EXERCISE NUMBER EXERCISE CONTRACTUAL NUMBER EXERCISE PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE - ----------------- ----------- -------- ----------- ----------- -------- $ 3.56 - 5.00 476,400 $ 3.96 6.4 years 169,875 $ 4.08 $ 5.12 - 7.25 266,580 $ 6.23 3.7 years 164,580 $ 5.73 $11.00 - 20.63 311,700 $15.73 5.0 years -- $ -- --------- ------- 1,054,680 334,455 ========= =======
The Company has adopted the disclosure-only provisions of Financial Accounting Standards Board 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 cost has been recognized for stock options in 1996 or 1997. If the Company had elected to recognize compensation cost F-10 60 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- STOCK PLANS (CONTINUED) 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 -------- ------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Net income (loss) As reported........................................... $(15,176) $4,024 Pro forma............................................. (15,305) 3,405 Net income (loss) per share As reported........................................... $ (2.76) $ 0.60 Pro forma............................................. (2.78) 0.51
The impact of outstanding non-vested stock options granted prior to 1996 has been excluded from the pro forma calculations; accordingly, the 1996 and 1997 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 date of grant was estimated using the Black-Scholes option-pricing model with assumptions for both 1996 and 1997 as follows: 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 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 and 1997 was $1.74 and $7.33 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 1996 and 1997, 93,112 and 39,129 shares were issued under the two plans for an aggregate of $361,000 and $442,000, respectively. At July 31, 1997, 339,335 shares are reserved for future issuance under these plans. 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. F-11 61 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- STOCK PLANS (CONTINUED) Deferred Compensation In 1996 and 1997, one of the executive officers of the Company was granted shares of the Company's Common Stock subject to certain restrictions. The shares vest over four year periods, and at the respective grant dates, the shares issued in fiscal 1996 had a value of approximately $645,000, while the shares issued in fiscal 1997 had a value of approximately $190,000. Those values, net of accumulated amortization, are shown as deferred compensation in the stockholder's equity section of the Balance Sheet. The deferred compensation is being amortized to expense over the four year vesting periods, and such amortization totaled $40,000 and $173,000 in fiscal 1996 and 1997, respectively. NOTE 5 -- INCOME TAXES Income taxes (credit) are as follows for the years ended July 31:
1995 1996 1997 ----- ------ ------ (IN THOUSANDS) Federal: Current......................................... $(634) $ 128 $ -- Deferred........................................ 604 814 -- ------ ------ ------ (30) 942 -- State: Current......................................... (171) 44 -- Deferred........................................ 216 310 -- ------ ------ ------ 45 354 -- ------ ------ ------ $ 15 $1,296 $ -- ====== ====== ======
F-12 62 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -- INCOME TAXES (CONTINUED) 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:
1995 1996 1997 ------ ------- ------- (IN THOUSANDS) Deferred tax assets: Uniform capitalization, contract and inventory-related reserves........................................... $ 723 $ 1,542 $ 1,465 Environmental and restructure reserves................ 495 1,606 1,195 Asset write-downs under FASB Statement No. 121........ -- 1,062 943 Accrued vacation...................................... 551 506 594 Allowance for doubtful accounts....................... 217 259 321 Other................................................. 239 426 313 NOL carryforwards..................................... 300 2,500 1,800 Valuation allowance................................... (300) (7,015) (5,814) ------ ------- ------- Total deferred tax assets..................... 2,225 886 817 ------ ------- ------- Deferred tax liabilities: Tax over book depreciation............................ 802 617 656 Deferred contract income recognition.................. 134 108 -- Other................................................. 4 -- -- ------ ------- ------- Total deferred tax liabilities................ 940 725 656 ------ ------- ------- Net deferred tax assets....................... $1,285 $ 161 $ 161 ====== ======= =======
As the Company cannot carry losses back to prior years, and had a loss in the prior year, a valuation allowance is provided on the net operating loss carryforwards and net deferred income tax assets of the parent company. The valuation allowance at July 31, 1997 includes approximately $700,000 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. As of July 31, 1997, the Company has net operating loss carryforwards for federal and state income tax purposes of approximately $4,300,000 and $3,400,000, respectively. The federal loss carryforward expires in fiscal year 2011, while the state loss carryforwards expire in fiscal years 1999 through 2001. The effective income tax rate varied from the statutory federal income tax rate as follows:
1995 1996 1997 ----- ----- ----- Statutory federal income tax rate................... 34.0% (34.0)% 34.0% State income taxes, net of federal tax benefit...... 7.3 (6.0) 6.0 Utilization of net operating loss carryforwards..... -- -- (40.0) Amortization of minority interest................... (41.5) (1.1) -- Valuation allowance and other items................. 3.8 52.6 -- ----- ----- ----- Effective income tax rate........................... 3.6% 11.5% --% ===== ===== =====
F-13 63 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 -- LEASES Rental expense amounted to $2,110,000, $1,992,000 and $1,831,000 in fiscal 1995, 1996 and 1997, respectively, and was incurred primarily for building rental. Future minimum rental commitments as of July 31, 1997, are as follows (in thousands): 1998............................................... $ 2,126 1999............................................... 2,063 2000............................................... 1,827 2001............................................... 1,587 2002............................................... 1,117 Thereafter......................................... 2,672 ------- $11,392 =======
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. 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 $568,000, $541,000 and $592,000 in fiscal 1995, 1996 and 1997, respectively. NOTE 8 -- IMPAIRMENT LOSSES, RESTRUCTURING AND OTHER CHARGES In fiscal 1996, the Company recorded $14.4 million of pre-tax charges primarily in the second and third quarters. 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. The $4.9 million charge in the third quarter resulted primarily from costs associated with management changes and a restructuring of the Company's business units. Of the first and second quarter charge, $4.1 million is attributable to the January 1996 adoption of FASB Statement No. 121. Statement 121 requires that the carrying amount of certain long-lived assets be written down if an impairment in value is determined to exist and the assets are not supported by adequate anticipated future cash flows, as defined by the FASB. Upon adoption of Statement 121, the Company recorded impairment losses to reflect the difference between pre-adoption carrying values and the estimated fair values of the assets subject to review, of which approximately $2.6 million was recorded in restated first quarter results as the cumulative effect of a change in accounting principle, and the balance of $1.5 million impacted second quarter results. These assets included primarily facilities and equipment associated with the chemical analytical services group, and certain other equipment not currently in substantive use. The chemical analytical services business was not profitable in fiscal 1996, and the Company began exploring its possible sale during the first quarter of fiscal 1996. The business was sold in June 1996. The estimated fair values of the assets were determined by reference to comparable asset sales, lease values, or estimated discounted future cash flows. The facilities subject to the impairment loss are corporate assets, and the chemistry group F-14 64 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- IMPAIRMENT LOSSES, RESTRUCTURING AND OTHER CHARGES (CONTINUED) equipment as well as the majority of the under-utilized equipment subject to impairment are from the Company's Technology Programs and Systems business segment. NOTE 9 -- 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 3.5%, 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. NOTE 10 -- 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 and subsystems, including products that capitalize on pulsed power such as ultracapacitors, microbial purification systems, high voltage capacitors and other electrical components 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 primarily for OEMs. 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. F-15 65 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- BUSINESS SEGMENTS (CONTINUED) Business segment financial data for the three years ended July 31 is as follows:
1995 1996 1997 ------- -------- -------- (IN THOUSANDS) Sales: Power Conversion Products................................. $15,207 $ 16,448 $ 27,039 Industrial Computers and Subsystems....................... 23,319 26,131 34,259 Technology Programs and Systems........................... 31,064 30,198 31,087 Information Products and Services......................... 5,414 8,134 9,026 ------- -------- -------- Consolidated total................................ $75,004 $ 80,911 $101,411 ======= ======== ======== Operating profit (loss): Power Conversion Products................................. $ (561) $ (752) $ 2,482 Industrial Computers and Subsystems....................... 2,287 1,078 2,417 Technology Programs and Systems........................... 1,550 2,131 1,804 Information Products and Services......................... (1,097) (3,680) (2,886) ------- -------- -------- Total operating profit (loss)..................... 2,179 (1,223) 3,817 Corporate expenses and revenues........................... (1,448) (9,709) 434 Interest expense.......................................... (315) (329) (173) ------- -------- -------- Income (loss) before income taxes, minority interest and cumulative effect of change in accounting principle............................ $ 416 $(11,261) $ 4,078 ======= ======== ======== Identifiable assets: Power Conversion Products................................. $13,932 $ 11,253 $ 12,299 Industrial Computers and Subsystems....................... 8,000 9,166 12,167 Technology Programs and Systems........................... 12,640 7,586 8,298 Information Products and Services......................... 3,893 3,136 5,920 Corporate................................................. 13,905 9,583 8,436 ------- -------- -------- Consolidated total................................ $52,370 $ 40,724 $ 47,120 ======= ======== ======== Depreciation and amortization: Power Conversion Products................................. $ 1,138 $ 763 $ 887 Industrial Computers and Subsystems....................... 260 316 469 Technology Programs and Systems........................... 1,563 994 647 Information Products and Services......................... 61 162 258 Corporate................................................. 393 272 326 ------- -------- -------- Consolidated total................................ $ 3,415 $ 2,507 $ 2,587 ======= ======== ======== Capital expenditures: Power Conversion Products................................. $ 1,078 $ 670 $ 1,768 Industrial Computers and Subsystems....................... 337 529 992 Technology Programs and Systems........................... 1,034 240 424 Information Products and Services......................... 435 482 1,231 Corporate................................................. 67 55 310 ------- -------- -------- Consolidated total................................ $ 2,951 $ 1,976 $ 4,725 ======= ======== ========
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 in fiscal 1996 F-16 66 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- BUSINESS SEGMENTS (CONTINUED) include certain restructuring costs and asset writedowns relating 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. 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, certain telecommunications, computers and networking equipment of the Company . Sales under United States government contracts and subcontracts are primarily in the Technology Programs and Systems business segment, and aggregated $32,120,000, $32,622,000 and $33,526,000, in fiscal 1995, 1996, and 1997, respectively. The portion of such sales to the United States Air Force in fiscal 1997 amounted to 14.0% of total Company sales in that year. A customer of the Industrial Computers and Subsystems business segment represented 11.9% of total sales of the Company in fiscal 1997. International sales amounted to $7,318,000, $7,555,000 and $12,609,000 in fiscal 1995, 1996, and 1997, respectively, principally to countries in Europe and the Pacific Rim. NOTE 11 -- SUPPLEMENTARY FINANCIAL INFORMATION Inventories and inventoried costs relating to long-term contracts are classified as follows at July 31:
1996 1997 ------- ------- (IN THOUSANDS) Finished goods................................... $ 714 $ 1,793 Costs under long-term contracts.................. 226 -- Work in process.................................. 1,610 882 Raw materials and purchased parts................ 4,258 6,047 ------- ------- $ 6,808 $ 8,722 ======= =======
Property, plant and equipment consist of the following at July 31:
1996 1997 ------- ------- (IN THOUSANDS) Land and land improvements....................... $ 3,470 $ 3,470 Buildings and building improvements.............. 7,448 7,581 Machinery and equipment.......................... 23,267 25,939 Office furniture and equipment................... 7,249 7,861 Leasehold improvements........................... 3,347 3,462 ------- ------- 44,781 48,313 Less allowances for depreciation and amortization................................... 30,192 32,113 ------- ------- 14,589 16,200 Construction in progress......................... 220 729 ------- ------- $14,809 $16,929 ======= =======
Accounts payable consist of the following at July 31:
1996 1997 ------- ------- (IN THOUSANDS) Accounts payable and accrued expenses............ $11,618 $10,516 Environmental reserves........................... 1,620 1,252 Customer advances................................ 993 1,872 ------- ------- $14,231 $13,640 ======= =======
F-17 67 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 -- SUPPLEMENTARY FINANCIAL INFORMATION (CONTINUED) Included in Other-net in fiscal 1995 and 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 $508,000 and $379,000 in fiscal 1995 and 1996, respectively. Also included in Other-net is interest income of $358,000, $128,000 and $147,000 in fiscal 1995, 1996 and 1997, respectively. 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:
1995 1996 1997 ---- ---- ----- (IN THOUSANDS) Cash paid (refunded) for: Interest................................... $315 $329 $ 173 Income taxes............................... $(11) $152 $(831) Non-cash activities: Issuance of Common Stock in connection with deferred compensation agreement......... $ -- $645 $ 190
F-18 68 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 30th day of September, 1997. 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 September 30, 1997 - --------------------------------------------- Officer, President and Kenneth F. Potashner Director (Principal Executive Officer) /s/ GARY J. DAVIDSON Vice President-Finance and September 30, 1997 - --------------------------------------------- Administration, Treasurer Gary J. Davidson and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ DONN A. STARRY Director September 30, 1997 - --------------------------------------------- Donn A. Starry /s/ LEWIS J. COLBY, JR. Director September 30, 1997 - --------------------------------------------- Lewis J. Colby, Jr. /s/ THOMAS L. HORGAN Director September 30, 1997 - --------------------------------------------- Thomas L. Horgan /s/ ALAN C. KOLB Director September 30, 1997 - --------------------------------------------- Alan C. Kolb /s/ KARL M. SAMUELIAN Director September 30, 1997 - --------------------------------------------- Karl M. Samuelian /s/ THOMAS B. HAYWARD Director September 30, 1997 - --------------------------------------------- Thomas B. Hayward
II-1 EX-3.2 2 EXHIBIT 3.2 1 EXHIBIT 3.2 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF MAXWELL TECHNOLOGIES, INC. ADOPTED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 242 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE The undersigned, Kenneth F. Potashner, President, and Donald M. Roberts, Secretary, of MAXWELL TECHNOLOGIES, INC., a corporation existing under the laws of the State of Delaware (hereinafter referred to as the "Corporation"), do hereby certify as follows: FIRST: That the Restated Certificate of Incorporation of the Corporation was filed in the Office of the Secretary of State of Delaware on February 17, 1987. SECOND: That Article FOURTH of the Restated Certificate of Incorporation is amended to read as follows: "The total number of shares of all classes of stock which the Corporation shall have authority to issue is Twenty Million (20,000,000) shares, consisting of Twenty Million (20,000,000) shares of Common Stock, par value $0.10 per share (the "Common Stock"). THIRD: That such amendment has been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to its Restated Certificate of Incorporation to be executed on its behalf by its President and Secretary this 22nd day of November, 1996. /s/ KENNETH F. POTASHNER ------------------------------- Kenneth F. Potashner, President /s/ DONALD M. ROBERTS ------------------------------- Donald M. Roberts, Secretary 2 STATE OF DELAWARE PAGE 1 OFFICE OF THE SECRETARY OF STATE I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF "MAXWELL TECHNOLOGIES, INC.", FILED IN THIS OFFICE ON THE TWENTY-SECOND DAY OF NOVEMBER, A.D. 1996, AT 9 O'CLOCK A.M. A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING. [SECRETARY'S OFFICE /s/ Edward J. Freel SEAL] ---------------------------------------- Edward J. Freel, Secretary of State AUTHENTICATION: 2105646 8100 8206070 DATE: 960342383 11-22-96 EX-3.4 3 EXHIBIT 3.4 1 EXHIBIT 3.4 EXHIBIT A - REVISED BYLAWS ARTICLE IV Officers Section 4.01. DESIGNATION, ELECTION AND TERM OF OFFICE. The Corporation shall have a Chairman of the Board, a Chief Executive Officer, a President, and such Vice Presidents as the Board of Directors deems appropriate, a Secretary and a Treasurer. Any number of offices may be held by the same person. These officers shall be elected annually by the Board of Directors at an organizational meeting immediately following the annual meeting of stockholders, and each officer shall serve at the pleasure of the Board of Directors, to hold office until the corresponding meeting of the Board of Directors in the next year, and until his successor shall have been elected and qualified, or until his earlier resignation, death or removal. Any vacancy in any of the above offices may be filled for the unexpired portion of the term by the Board of Directors at any regular or special meeting. Section 4.02a CHAIRMAN OF THE BOARD. The Chairman of the Board shall have the general powers and duties of management usually vested in the office of the Chairman of the Board and shall, in addition, be the Chief Executive Officer of the Corporation with all the powers and duties vested in the office of the CEO as prescribed in Section 4.02b of this Article IV unless the Board of Directors elects another individual to fill such office. He shall, if present, preside at all meetings of the Board of Directors and at all meetings of the stockholders and he shall be ex-officio a member of all standing committees, if any, of the Board of Directors. The Chairman of the Board shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. Subject to such limitations as may be imposed by the Board of Directors, any powers or duties vested in the Chairman of the Board may be delegated by him to such subordinates as he may choose. Section 4.02b. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall provide senior level executive leadership to the Corporation. He shall have the general powers and duties of management usually vested in the office of the Chief Executive of a corporation, and shall have in addition such other powers and duties as may be prescribed by the Chairman of the Board or these Bylaws. In the absence of the Chairman of the Board, he shall preside at all meetings of the stockholders and at all meetings of the Board of Directors. He shall be ex-officio a member of all standing committees, if any, of the Board of Directors. Subject to such limitations as may be imposed by the Chairman, any powers or duties vested in the Chief Executive Officer may be delegated by him to such subordinates as he may choose. If there is no President, the CEO shall, in addition, be the President of the Corporation and shall have the powers and duties vested in the office of the President, as prescribed in Section 4.03 of this Article IV. Section 4.03. PRESIDENT. Subject to the control of the Chief Executive Officer and to the general oversight powers of the Chairman, the President shall provide general supervision, direction and control of the business and operations of the Corporation. He shall have the general powers and duties of management usually vested in the office of President of a corporation and shall have, in addition, such other powers and duties as may be prescribed by the CEO. Subject to such limitations as may be imposed by the CEO, any powers and duties vested in the President may be delegated by him to such subordinates as he may choose. Section 4.04. VICE PRESIDENTS. Vice Presidents and Executive Vice Presidents of the Corporation who are elected by the Board of Directors shall perform such duties as may be assigned to them from time to time by the Board of Directors, Chairman of the Board, President, or by these Bylaws. EX-4.2 4 EXHIBIT 4.2 1 Exhibit 4.2 [MAXWELL TECHNOLOGIES LETTERHEAD] April 2, 1997 ChaseMellon Shareholder Services, L.L.C. as Rights Agent as successor to First Interstate Bank 400 South Hope Street, Fourth Floor Los Angeles, CA 90071 RE: Amendment to Rights Agreement Ladies and Gentlemen: The Rights Agreement by and between Maxwell Technologies and First Interstate Bank (which was acquired by ChaseMellon Shareholder Services, L.L.C. ("Successor Agent")], dated February 1, 1990, is hereby amended as follows: Section 21 of the Rights Agreement is hereby modified and amended by deleting the fifth sentence in its entirety and replacing it with: Any successor Rights Agent, whether appointed by the Company or by such a court, shall be either (a) a corporation organized and doing business under the laws of the United States or of any state of the United States, in good standing, which is authorized under such laws to exercise corporate trust powers and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $100,000,000 or (b) an affiliate of such a corporation. In executing and delivering this amendment, the Successor Agent shall be entitled to all the privileges and immunities afforded to the Rights Agent under the terms and conditions of the Rights Agreement. MAXWELL TECHNOLOGIES, INC. By: /s/ DONALD M. ROBERTS --------------------------------------- Donald M. Roberts General Counsel and Secretary CHASEMELLON SHAREHOLDER SERVICES, L.L.C. as successor Rights Agent By: /s/ SHARON KNEPPER - ----------------------------- Name: Sharon Knepper Title: Assistant Vice President EX-10.2 5 EXHIBIT 10.2 1 EXHIBIT 10.2 AMENDMENT NUMBER ONE TO MAXWELL LABORATORIES, INC. DIRECTOR STOCK OPTION PLAN The Maxwell Laboratories, Inc. Director Stock Option Plan (the "Plan") is hereby amended in the following respects: 1. Name. The name of the Plan is hereby changed to Maxwell Technologies, Inc. Director Stock Option Plan. 2. Stock Split Adjustments. (a) Section 5 entitled, Stock Subject to the Plan, which sets forth the stock subject to the Plan consisting of 120,000 shares of the $.10 par value Common Stock, is hereby adjusted to 240,000 shares of the $.10 par value Common Stock, to reflect the 2 for 1 stock split which occurred on December 17, 1996. (b) Section 6(B) entitled, Number of Shares, which sets forth the initial grant of options to each eligible director at 3,000 shares of Common Stock and thereafter each annual grant to each eligible director at 1,000 shares of Common Stock is hereby adjusted to 6,000 shares of Common Stock and 2,000 shares of Common Stock, respectively, to reflect the 2 for 1 stock split which occurred on December 17, 1996. 3. Elimination of Sixty (60) Day Provision. Section 6(E), Period of Option, is hereby amended to delete in its entirety the last sentence thereof. 4. Effect of Amendments. These amendments to the Plan shall be effective as of January 22, 1997. Except to the extent specifically modified herein, the Plan shall remain in full force and effect. MAXWELL TECHNOLOGIES, INC. By: /s/ Donald M. Roberts ---------------------------- Donald M. Roberts, Secretary Date: February 7, 1997 -------------------------- EX-10.6 6 EXHIBIT 10.6 1 EXHIBIT 10.6 AMENDMENT NUMBER ONE TO MAXWELL LABORATORIES, INC. 1995 STOCK OPTION PLAN The Maxwell Laboratories, Inc. 1995 Stock Option Plan (the "Plan") is hereby amended in the following respects: 1. Name. The name of the Plan is hereby changed to Maxwell Technologies, Inc. 1995 Stock Option Plan. 2. Common Stock Subject to Options. (a) Paragraph 4 entitled Common Stock Subject to Options, which sets forth the maximum number of shares of the Company's Common Stock subject to the Plan consisting of 250,000 shares of Common Stock, is hereby adjusted to a maximum of 400,000 shares of the Company's Common Stock. Reflecting a two for one stock split effected in December, 1996, the maximum number of shares subject to the Plan is hereby established at 800,000 shares of the Company's Common Stock. 3. Effect of Amendments. These amendments to the Plan shall be effective as of January 22, 1997. Except to the extent specifically modified herein, the Plan shall remain in full force and effect. MAXWELL TECHNOLOGIES, INC. By: /s/ Donald M. Roberts ---------------------------- Donald M. Roberts, Secretary Date: 3/19/97 --------------------------- EX-10.11 7 EXHIBIT 10.11 1 EXHIBIT 10.11 FIRST AMENDMENT TO INDUSTRIAL REAL ESTATE LEASE This First Amendment to Lease is entered into this 30th day of June, 1995, by and between ELKHORN RANCH, INC., A CALIFORNIA CORPORATION (hereinafter referred to as "Landlord"), and MAXWELL LABORATORIES, INC., A DELAWARE CORPORATION, formerly a California Corporation (hereinafter referred to as "Tenant"). WHEREAS, Landlord and Tenant entered into that certain Lease dated February 28, 1986, with leased premises of approximately 67,950 square feet, more commonly known as a single-story concrete tilt-up building on approximately 3.47 acres at 4949 Greencraig Lane, San Diego, California; Tax Assessor's Parcel Nos. 369-181-32, -33 and -34 (the "Lease"); and WHEREAS, Tenant has accepted the premises and currently occupies the premises; and WHEREAS, Landlord and Tenant desire to amend the terms and conditions of the Lease in certain respects; NOW, THEREFORE, in consideration of the foregoing and intending to be legally bound, Tenant and Landlord agree as follows: 1. The new term of the Lease shall be eleven and one-half (11 1/2) years, commencing July 1, 1995, and ending December 31, 2006. 2. Tenant's base rent, on a net of expenses basis,for the new term shall be as follows: July 1, 1995-June 30, 1996 $.5153 per square foot per month ($420,175.62 annually) July 1, 1996-June 30, 1997 $.5333 per square foot per month ($434,881.76 annually) July 1, 1997-June 30, 1998 $.5520 per square foot per month ($450,102.62 annually) July 1, 1998-June 30, 1999 $.5713 per square foot per month ($465,856.21 annually) July 1, 1999-June 30, 2000 $.5913 per square foot per month ($482,161.18 annually) July 1, 2000-June 30, 2001 $.6120 per square foot per month ($499,036.82 annually) July 1, 2001-June 30, 2002 $.6334 per square foot per month ($516,503.11 annually) July 1, 2002-June 30, 2003 $.6556 per square foot per month ($534,580.72 annually) July 1, 2003-June 30, 2004 $.6785 per square foot per month ($553,291.04 annually) July 1, 2004-June 30, 2005 $.6785 per square foot per month ($553,291.04 annually) July 1, 2005-June 30, 2006 $.6785 per square foot per month ($553,291.04 annually) July 1, 2006-December 31, 2006 $.6785 per square foot per month ($276,645.52 total for 6 months)
3. $37,858.00 of the Tenant's existing security deposit ($53,051.00 per Section 1.1 and Paragraphs 3.03 and 13.03(c) of the Lease) shall be amortized over the new 11 1/2-year lease term (reflected in the above rental schedule), and at the beginning of Month 13 (July 1, 1996), the remaining $15,193.00 portion of the security deposit shall be returned to Tenant by Landlord. 4. Addendum Paragraph 20.1, Grant of Option, shall be modified to reflect that Landlord grants to Tenant one (1) option (the "Option") to extend the Lease Term for an additional term of five (5) years (the "Extension"). The remainder of Paragraph 20.1 and Paragraph 20.2, Personal Options, is unchanged and shall remain in full force and effect. Paragraph 20.3, Fair Rental Value Adjustment, shall be modified to reflect that the Base Rent shall be increased on the first day of the first month of the Extension of the Lease Term (the "Rental Adjustment Date") to the "fair rental value" of the Property. The remainder of Paragraph 20.3 is unchanged and shall remain in full force and effect. 5. Landlord will assist in any manner with the County of San Diego Tax Assessor's office to try and establish a lower property tax payment for the property. Any expenses incurred in this process will be Tenant's responsibility. 6. Landlord will use its best efforts to have the existing and/or any new lender on the property execute a Non-Disturbance and Attornment Agreement in a form and content acceptable to Tenant. 7. Any required ADA improvements or upgrades to the property during the term of the Lease will be the Tenant's responsibility and at Tenant's sole expense. 8. No commission shall be payable by Landlord for the negotiation of this Amendment or in the event Tenant exercises the five-year option to renew. All other terms and conditions of the Lease remain unchanged. To the extent that anything contained in this First Amendment to Industrial Real Estate Lease is contrary or inconsistent with the Lease, the verbiage of this First Amendment shall govern. IN WITNESS WHEREOF, the parties hereto have executed this document as of the date first written above. LANDLORD: ELKHORN RANCH, INC., TENANT: MAXWELL LABORATORIES, INC., A CALIFORNIA CORPORATION A DELAWARE CORPORATION By: /s/ H. WILLS BOOTH III By: /s/ SEAN M. MALOY ------------------------------------- --------------------------------------- H. Wills Booth III, Managing Partner Sean M. Maloy, Executive Vice President and Chief Operating Officer By: /s/ DEBORAH W. BOOTH ------------------------------------- Deborah Booth Date: 1/15/96 -------------------------------------- By: /s/ KATHLEEN BOOTH RANDOL ------------------------------------- Kathleen Booth Randol Date: 8/29/95 -----------------------------------
2 BOOTH BUSINESS PARK KEARNY MESA, CA BASE RENT 1. July 1, 1995-June 30, 1996 $.5153 per square foot per month ($420,175.62 annually) 2. July 1, 1996-June 30, 1997 $.5333 per square foot per month ($434,851.76 annually) 3. July 1, 1997-June 30, 1998 $.5520 per square foot per month ($450,102.62 annually) 4. July 1, 1998-June 30, 1999 $.5713 per square foot per month ($465,856.21 annually) 5. July 1, 1999-June 30, 2000 $.5913 per square foot per month ($487,161.18 annually) 6. July 1, 2000-June 30, 2001 $.6120 per square foot per month ($499,036.82 annually) 7. July 1, 2001-June 30, 2002 $.6334 per square foot per month ($516,503.11 annually) 8. July 1, 2002-June 30, 2003 $.6556 per square foot per month ($534,560.72 annually) 9. July 1, 2003-June 30, 2004 $.6785 per square foot per month ($553,291.04 annually) 10. July 1, 2004-June 30, 2005 $.6785 per square foot per month ($553.291.04 annually) 11. July 1, 2005-June 30, 2006 $.6785 per square foot per month ($553.291.04 annually) 12. July 1, 2006-December 31, 2006 $.6785 per square foot per month ($276,645.52 total for 6 months)
EX-10.16 8 EXHIBIT 10.16 1 EXHIBIT 10.16 [CB COMMERCIAL LOGO] AMENDED AND RESTATED INDUSTRIAL REAL ESTATE LEASE (MULTI-TENANT FACILITY) CB COMMERCIAL REAL ESTATE GROUP, INC. BROKERAGE AND MANAGEMENT LICENSED REAL ESTATE BROKER ARTICLE ONE: BASIC TERMS This Article One contains the Basic Terms of this Amended and Restated Lease between the Landlord and Tenant named below. Other Articles, Sections and Paragraphs of the Lease referred to in this Article One explain and define the Basic Terms and are to be read in conjunction with the Basic Terms. Section 1.01. DATE OF LEASE: January 1, 1997 Section 1.02. LANDLORD (INCLUDE LEGAL ENTITY): EQUUS 9177, LLC Address of Landlord: 2635 Camino del Rio South, Suite 208 San Diego, California 92108 Section 1.03. TENANT (INCLUDE LEGAL ENTITY): I-Bus, Inc., a California corporation Address of Tenant: 9174 Sky Park Court, San Diego, California 92123 See First Lease Rider Recitals and Item 17. Section 1.04. PROPERTY: The Property is part of Landlord's multi-tenant real property development known as Sky Park Center (the "Project"). The Project includes the land, the buildings and all other improvements located on the land, and the common areas described in Paragraph 4.05(a). The Property is (include street address, approximate square footage and description) 9173 and 9174 Sky Park Court, San Diego, California, approximately 57,648 square feet as further described in Exhibits B, C, D, and H. The Expansion Space which consists of approximately 5,589 sq. ft. shall be built out as described in Article 15 of the First Lease Rider. The Additional Space which consists of approximately 14,074 sq. ft. is described in Exhibit H. See First Lease Rider, Item 1. Section 1.05. LEASE TERM: Four (4) years two (2) months BEGINNING ON January 1, 1997 or such other date as is specified in this Lease, and ENDING ON February 29, 2001 Section 1.06. PERMITTED USES: (See Article Five) Engineering, Research & Development, Light Manufacturing, Assembly, Distribution and Administrative offices. Section 1.07. TENANT'S GUARANTOR: (if none, so state) None Section 1.08. BROKERS: (See Article Fourteen) (if none, so state) Landlord's Broker: See First Lease Rider, Item 11. Tenant's Broker: Section 1.09. COMMISSION PAYABLE TO LANDLORD'S BROKER: (See Article Fourteen) $ See First Lease Rider, Item 11. Section 1.10. INITIAL SECURITY DEPOSIT: (See Section 3.03) $ None Section 1.11. VEHICLE PARKING SPACES ALLOCATED TO TENANT: (See Section 4.05) See First Lease Rider, Item 2. Section 1.12. RENT AND OTHER CHARGES PAYABLE BY TENANT: (a) BASE RENT: See First Lease Rider, Item 3. Dollars ($ ) per month for the first months, as provided in Section 3.01, and shall be increased on the first day of the month(s) after the Commencement Date, either (i) as provided in Section 3.02, or (ii) . (If (ii) is completed, then (i) and Section 3.02 are inapplicable.) (b) OTHER PERIODIC PAYMENTS: (i) Real Property Taxes (See Section 4.02); (ii) Utilities (See Section 4.03); (iii) Insurance Premiums (See Section 4.04); (iv) Tenant's Initial Pro Rata Share of Common Area Expenses % (See Section 4.05); (v) Impounds for Insurance Premiums and Property Taxes (See Section 4.08); (vi) Maintenance, Repairs and Alterations (See Article Six). See First Lease Rider, Item 4. Section 1.13. LANDLORD'S SHARE OF PROFIT ON ASSIGNMENT OR SUBLEASE: (See Section 9.05) See First Lease Rider, Item 9(B). percent ( %) of the Profit (the "Landlord's Share"). Section 1.14. RIDERS: The following Riders are attached to and made a part of this Lease: (if none, so state) First Lease Rider Exhibit A - Specifications Exhibit B - Floor plans Exhibit C - Expansion Space Exhibit D - Project Site Plan Exhibit E - Building Rules and Regulations Exhibit F - Work Letter Agreement Exhibit G - Tenant's Use of Hazardous Mat. Exhibit H - Additional Space Copyright 1988 Southern California Chapter [LOGO] of the Society of Industrial and Office Realtors(R), Inc. 1 (Multi-Tenant Net Form) 2 ARTICLE TWO: LEASE TERM Section 2.01. LEASE OF PROPERTY FOR LEASE TERM. Landlord leases the Property to Tenant and Tenant leases the Property from Landlord for the Lease Term. The Lease Term is for the period stated in Section 1.05 above and shall begin and end on the dates specified in Section 1.05 above, unless the beginning or end of the Lease Term is changed under any provision of this Lease. The "Commencement Date" shall be the date specified in Section 1.05 above for the beginning of the Lease Term, unless advanced or delayed under any provision of this Lease. Section 2.02. DELAY IN COMMENCEMENT. Landlord shall not be liable to Tenant if Landlord does not deliver possession of the Expansion Space to Tenant on the Commencement Date. Landlord's non-delivery of the Expansion Space to Tenant on that date shall not affect this Lease or the obligations of Tenant under this Lease except that the payment of the increase in Base Rent and Other Periodic Payments as described in paragraph ?(c) and ?(B) of the First Lease Rider shall be delayed until Landlord delivers possession of the Expansion Space to Tenant. Section 2.04. HOLDING OVER. Tenant shall vacate the Property upon the expiration or earlier termination of this Lease. Tenant shall reimburse Landlord for and indemnify Landlord against all damages which Landlord incurs from Tenant's delay in vacating the Property. If Tenant does not vacate the Property upon the expiration or earlier termination of the Lease and Landlord thereafter accepts rent from Tenant, Tenant's occupancy of the Property shall be a "month-to-month" tenancy, subject to all of the terms of this Lease applicable to a month-to-month tenancy, except that the Base Rent then in effect shall be increased by twenty-five percent (25%). ARTICLE THREE: BASE RENT Section 3.01. TIME AND MANNER OF PAYMENT. Upon execution of this Lease, Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph 1.12(a) above for the first month of the Lease Term. On the first day of the second month of the Lease Term and each month thereafter, Tenant shall pay Landlord the Base Rent, in advance, without offset, deduction or prior demand. The Base Rent shall be payable at Landlord's address or at such other place as Landlord may designate in writing. Section 3.02. COST OF LIVING INCREASES. The Base Rent shall be increased on each date (the "Rental Adjustment Date") stated in Paragraph 1.12(a) above in accordance with the increase in the United States Department of Labor, Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers (all items for the geographical Statistical Area in which the Property is located on the basis of 1982-1984 = 100) (the "Index") as follows: (a) The Base Rent (the "Comparison Base Rent") in effect immediately before each Rental Adjustment Date shall be increased by the percentage that the Index has increased from the date (the "Comparison Date") on which payment of the Comparison Base Rent began through the month in which the applicable Rental Adjustment Date occurs. The Base Rent shall not be reduced by reason of such computation. Landlord shall notify Tenant of each increase by a written statement which shall include the Index for the applicable Comparison Date, the Index for the applicable Rental Adjustment Date, the percentage increase between those two indices, and the new Base Rent. Any increase in the Base Rent provided for in this Section 3.02 shall be subject to any minimum or maximum increase as described in "First Lease Rider", Item 3. (b) Tenant shall pay the new Base Rent from the applicable Rental Adjustment Date until the next Rental Adjustment Date. Landlord's notice may be given after the applicable Rental Adjustment Date of the increase, and Tenant shall pay Landlord the accrued rental adjustment for the months elapsed between the effective date of the increase and Landlord's notice of such increase within ten (10) days after Landlord's notice. If the format or components of the Index are materially changed after the Commencement Date, Landlord shall substitute an Index which is published by the Bureau of Labor Statistics or similar agency and which is most nearly equivalent to the Index in effect on the Commencement Date. The substitute Index shall be used to calculate the increase in the Base Rent unless Tenant objects to such index in writing within fifteen (15) days after receipt of Landlord's notice. If Tenant objects, Landlord and Tenant shall submit the selection of the substitute index for binding arbitration in accordance with the rules and regulations of the American Arbitration Association at its office closest to the Property. The costs of arbitration shall be borne equally by Landlord and Tenant. (c) 1988 Southern California Chapter 2 Initials /s/ JP ?? of the Society of Industrial ----------- Realtors,(R) Inc. [LOGO] Reprinted under license (Multi-Tenant Form) 3 Section 3.04. TERMINATION; ADVANCE PAYMENTS. Upon termination of this Lease under Article Seven (Damage or Destruction), Article Eight (Condemnation) or any other termination not resulting from Tenant's default, and after Tenant has vacated the Property in the manner required by this Lease, Landlord shall refund or credit to Tenant (or Tenant's successor) any advance rent or other advance payments made by Tenant to Landlord. ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT Section 4.01. ADDITIONAL RENT. All charges payable by Tenant other than Base Rent are called "Additional Rent." Unless this Lease provides otherwise. Tenant shall pay all Additional Rent then due with the next monthly installment of Base Rent. The term "rent" shall mean Base Rent and Additional Rent. Section 4.02. PROPERTY TAXES. (a) REAL PROPERTY TAXES. Tenant shall pay all real property taxes on the Property (including any fees, taxes or assessments against, or as a result of, any tenant improvements installed on the Property by or for the benefit of Tenant) during the Lease Term. Subject to Paragraph 4.02(c) and Section 4.08 below, such payment shall be made at least ten (10) days prior to the delinquency date of the taxes. Within such ten (10) -day period, Tenant shall furnish Landlord with satisfactory evidence that the real property taxes have been paid. Landlord shall reimburse Tenant for any real property taxes paid by Tenant covering any period of time prior to or after the Lease Term. If Tenant fails to pay the real property taxes when due, Landlord may pay the taxes and Tenant shall reimburse Landlord for the amount of such tax payment as Additional Rent. See First Lease Rider, Item 4. (b) DEFINITION OF "REAL PROPERTY TAX." "Real property tax" means: (i) any fee, license fee, license tax, business license fee, commercial rental tax, levy, charge, assessment, penalty or tax imposed by any taxing authority against the Property; (ii) any tax on the Landlord's right to receive, or the receipt of, rent or income from the Property or against Landlord's business of leasing the Property; (iii) any tax or charge for fire protection, streets, sidewalks, road maintenance, refuse or other services provided to the Property by any governmental agency; (iv) any tax imposed upon this transaction or based upon a re-assessment of the Property due to a change of ownership, as defined by applicable law, or other transfer of all or part of Landlord's interest in the Property; and (v) any charge or fee replacing any tax previously included within the definition of real property tax. "Real property tax" does not, however, include Landlord's federal or state income, franchise, inheritance or estate taxes. (c) JOINT ASSESSMENT. If the Property is not separately assessed, Landlord shall reasonably determine Tenant's share of the real property tax payable by Tenant under Paragraph 4.02(a) from the assessor's worksheets or other reasonably available information. Tenant shall pay such share to Landlord within fifteen (15) days after receipt of Landlord's written statement. (d) PERSONAL PROPERTY TAXES. (i) Tenant shall pay all taxes charged against trade fixtures, furnishings, equipment or any other personal property belonging to Tenant. Tenant shall try to have personal property taxed separately from the Property. (ii) If any of Tenant's personal property is taxed with the Property, Tenant shall pay Landlord the taxes for the personal property within fifteen (15) days after Tenant receives a written statement from Landlord for such personal property taxes. Section 4.03. UTILITIES. Tenant shall pay, directly to the appropriate supplier, the cost of all natural gas, heat, light, power, sewer service, telephone, water, refuse disposal and other utilities and services supplied to the Property and the immediately surrounding area including the parking area all of which are separately metered. Section 4.04. INSURANCE POLICIES. (a) LIABILITY INSURANCE. During the Lease Term, Tenant shall maintain a policy of commercial general liability insurance (sometimes known as broad form comprehensive general liability insurance) insuring Tenant against liability for bodily injury, property damage (including loss of use of property) and personal injury arising out of the operation, use or occupancy of the Property. Tenant shall name Landlord as an additional insured under such policy. The initial amount of such insurance shall be One Million Dollars ($1,000,000) per occurrence. The liability insurance obtained by Tenant under this Paragraph 4.04(a) shall (i) be primary; and (iii) insure Landlord against Tenant's performance under Section 5.05, if the matters giving rise to the indemnity under Section 5.05 result from the negligence of Tenant. The amount and coverage of such insurance shall not limit Tenant's liability nor relieve Tenant of any other obligation under this Lease. Landlord may also obtain comprehensive public liability insurance in an amount and with coverage determined by Landlord insuring Landlord against liability arising out of ownership, operation, use or occupancy of the Property. The policy obtained by Landlord shall not be contributory and shall not provide primary insurance. (b) PROPERTY AND RENTAL INCOME INSURANCE. During the Lease Term, Landlord shall maintain policies of insurance covering loss of or damage to the Property in the full amount of its replacement value. Such policy shall contain an Inflation Guard Endorsement and shall provide protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, special extended perils (all risk), sprinkler leakage and any other perils which Landlord deems reasonably necessary. Landlord shall have the right to obtain flood and earthquake insurance if required by any lender holding a security interest in the Property. Landlord shall not obtain insurance for Tenant's fixtures or equipment or building improvements installed by Tenant on the Property. During the Lease Term, Landlord shall also maintain a rental income insurance policy, with loss payable to Landlord, in an amount equal to one year's Base Rent, plus estimated real property taxes and insurance premiums. Tenant shall not do or permit anything to be done which invalidates any such insurance policies. See First Lease Rider, Item 5. (c) PAYMENT OF PREMIUMS. Subject to Section 4.08, Tenant shall pay all premiums for the insurance policies described in Paragraphs 4.04(a) and (b) (whether obtained by Landlord or Tenant) within fifteen (15 days after Tenant's receipt of a copy of the premium statement or other evidence of the amount due, except Landlord shall pay all premiums for non-primary comprehensive public liability insurance which Landlord elects to obtain as provided in Paragraph 4.04(a). For insurance policies (c) 1988 Southern California Chapter 3 of the Society of Industrial Realtors,(R) Inc. [LOGO] Reprinted under license (Multi-Tenant Form) 4 maintained by Landlord which cover improvements on the entire Project, Tenant shall pay Tenant's prorated share of the premiums, in accordance with the formula in Paragraph 4.05(e) for determining Tenant's share of Common Area costs. If insurance policies maintained by Landlord cover improvements on real property other than the Project, Landlord shall deliver to Tenant a statement of the premium applicable to the Property showing in reasonable detail how Tenant's share of the premium was computed. If the Lease Term expires before the expiration of an insurance policy maintained by Landlord, Tenant shall be liable for Tenant's prorated share of the insurance premiums. Before the Commencement Date, Tenant shall deliver to Landlord a copy of any policy of insurance which Tenant is required to maintain under this Section 4.04. At least thirty (30) days prior to the expiration of any such policy, Tenant shall deliver to Landlord a renewal of such policy. As an alternative to providing a policy of insurance, Tenant shall have the right to provide Landlord a certificate of insurance, executed by an authorized officer of the insurance company, showing that the insurance which Tenant is required to maintain under this Section 4.04 is in full force and effect and containing such other information which Landlord reasonably requires. See First Lease Rider, Item 4. (d) GENERAL INSURANCE PROVISIONS. (i) Any insurance which Tenant is required to maintain under this Lease shall include a provision which requires the insurance carrier to give Landlord not less than thirty (30) days' written notice prior to any cancellation or modification of such coverage that materially affects insurance required under this Lease. (ii) If Tenant fails to deliver any policy, certificate or renewal to Landlord required under this Lease within the prescribed time period or if any such policy is cancelled or modified in a way that materially affects insurance required under this Lease. During the Lease Term without Landlord's consent, Landlord may obtain such insurance, in which case Tenant shall reimburse Landlord for the cost of such insurance within fifteen (15) days after receipt of a statement that indicates the cost of such insurance. (iii) Tenant shall maintain all insurance required under this Lease with companies holding a "General Policy Rating" of A-12 or better, as set forth in the most current issue of "Best Key Rating Guide". Landlord and Tenant acknowledge the insurance markets are rapidly changing and that insurance in the form and amounts described in this Section 4.04 may not be available in the future. Tenant acknowledges that the insurance described in this Section 4.04 is for the primary benefit of Landlord. If at any time during the Lease Term, Tenant is unable to maintain the insurance required under the Lease, Tenant shall nevertheless maintain insurance coverage which is customary and commercially reasonable in the insurance industry for Tenant's type of business, as that coverage may change from time to time. Landlord makes no representation as to the adequacy of such insurance to protect Landlord's or Tenant's interests. Therefore, Tenant shall obtain any such additional property or liability insurance which Tenant deems necessary to protect Landlord and Tenant. (iv) Unless prohibited under any applicable insurance policies maintained, Landlord and Tenant each hereby waive any and all rights of recovery against the other, or against the officers, employees, agents or representatives of the other, for loss of or damage to its property or the property of others under its control, if such loss or damage is covered by any insurance policy in force (whether or not described in this Lease) at the time of such loss or damage. Upon obtaining the required policies of insurance, Landlord and Tenant shall give notice to the insurance carriers of this mutual waiver of subrogation. Section 4.05. COMMON AREAS; USE, MAINTENANCE AND COSTS. (a) COMMON AREAS. As used in this Lease, "Common Areas" shall mean all areas within the Project which are available for the common use of tenants of the Project and which are not leased or held for the exclusive use of Tenant or other tenants, including, but not limited to, parking areas, driveways, sidewalks, loading areas, access roads, corridors, landscaping and planted areas. Landlord, from time to time, may change the size, location, nature and use of any of the Common Areas, convert Common Areas into leaseable areas, construct additional parking facilities (including parking structures) in the Common Areas, and increase or decrease Common Area land and/or facilities. Tenant acknowledges that such activities may result in inconvenience to Tenant. Such activities and changes are permitted if they do not materially affect Tenant's use of the Property. (b) USE OF COMMON AREAS. Tenant shall have the nonexclusive right (in common with other tenants and all others to whom Landlord has granted or may grant such rights) to use the Common Areas for the purposes intended, subject to such reasonable rules and regulations as Landlord may establish from time to time. Tenant shall abide by such rules and regulations and shall use its best effort to cause others who use the Common Areas with Tenant's express or implied permission to abide by Landlord's rules and regulations. At any time, Landlord may close any Common Areas to perform any acts in the Common Areas as, in Landlord's judgment, are desirable to improve the Project. Tenant shall not interfere with the rights of Landlord, other tenants or any other person entitled to use the Common Areas. (c) SPECIFIC PROVISION RE: VEHICLE PARKING. Tenant shall be entitled to use the number of vehicle parking spaces in the Project allocated to Tenant in Section 1.11 of the Lease without paying any additional rent. Tenant's parking shall not be reserved except as described in First Lease Rider, Item 2 and shall be limited to vehicles no larger than standard size automobiles or pickup utility vehicles. Tenant shall not cause large trucks or other large vehicles to be parked within the Project or on the adjacent public streets. Temporary parking of large delivery vehicles in the Project may be permitted by the rules and regulations established by Landlord. Vehicles shall be parked only in striped parking spaces and not in driveways, loading areas or other locations not specifically designated for parking. Handicapped spaces shall only be used by those legally permitted to use them. If Tenant habitually parks more vehicles in the parking area than the number set forth in Section 1.11 of this Lease, and fails to cure after written notice from Landlord, such conduct shall be a material breach of this Lease. In addition to Landlord's other remedies under the Lease, Tenant shall pay a daily charge determined by Landlord for each such additional vehicle. (d) MAINTENANCE OF COMMON AREAS. Landlord shall maintain the Common Areas in good order, condition and repair and shall operate the Project, in Landlord's sole discretion, as a first-class industrial/commercial real property development. Tenant shall pay Tenant's pro rata share (as determined below) of all costs incurred by Landlord for the operation and maintenance of the Common Areas. Common Area costs include, but are not limited to, costs and expenses for the following: gardening and landscaping; utilities, water and sewage charges; maintenance of signs (other than tenant's signs); premiums for liability, property damage, fire and other types of casualty insurance on the Common Areas and worker's compensation insurance; all property taxes and assessments levied on or attributable to the Common Areas and all Common Area improvements; all personal property taxes levied on or attributable to personal property used in connection with the Common Areas; straight-line depreciation on personal property owned by Landlord which is consumed in the operation or maintenance of the Common Areas; rental or lease payments paid by Landlord for rented or leased personal property used in the operation or maintenance (c) 1988 Southern California Chapter 4 of the Society of Industrial Realtors,(R) Inc. [LOGO] Reprinted under license (Multi-Tenant Form) 5 of the Common Areas: fees for required licenses and permits; repairing, resurfacing, repaving, maintaining, painting, lighting, cleaning, refuse removal, security and similar items; reserves for roof replacement and exterior painting and other appropriate reserves; and a reasonable allowance to Landlord for Landlord's supervision of the Common Areas (not to exceed five percent (5%) of the gross rents of the Project for the calendar year). Landlord may cause any or all of such services to be provided by third parties and the cost of such services shall be included in Common Areas costs. Common Area costs shall not include depreciation of real property which forms part of the Common Areas. See First Lease Rider, Item 4. (e) TENANT'S SHARE AND PAYMENT. Tenant shall pay Tenant's annual pro rata share of all Common Area costs (prorated for any fractional month) upon written notice from Landlord that such costs are due and payable, and in any event prior to delinquency. Tenant's pro rata share shall be calculated by dividing the square foot area of the Property, as set forth in Section 1.04 of the Lease, by the aggregate square foot area of the Project which is leased or held for lease by tenants, as of the date on which the computation is made. Tenant's initial pro rata share is set out in Paragraph 1.12(b). Any changes in the Common Area costs and/or the aggregate area of the Project leased or held for lease during the Lease Term shall be effective on the first day of the month after such change occurs. Landlord may, at Landlord's election, estimate in advance and charge to Tenant as Common Area costs, all real property taxes for which Tenant is liable under Section 4.02 of the Lease, all insurance premiums for which Tenant is liable under Section 4.04 of the Lease, all maintenance and repair costs for which Tenant is liable under Section 6.04 of the Lease, and all other Common Area costs payable by Tenant hereunder. At Landlord's election, such statements of estimated Common Area costs shall be delivered monthly, quarterly or at any other periodic intervals to be designated by Landlord. Landlord may adjust such estimates at any time based upon Landlord's experience and reasonable anticipation of costs. Such adjustments shall be effective as of the next rent payment date after notice to Tenant. Within sixty (60) days after the end of each calendar year of the Lease Term, Landlord shall deliver to Tenant a statement prepared in accordance with generally accepted accounting principles setting forth, in reasonable detail, the Common Area costs paid or incurred by Landlord during the preceding calendar year and Tenant's pro rata share. Upon receipt of such statement, there shall be an adjustment between Landlord and Tenant, with payment to or credit given by Landlord (as the case may be) so that Landlord shall receive the entire amount of Tenant's share of such costs and expenses for such period. See First Lease Rider, Item 4. Section 4.06. LATE CHARGES. Tenant's failure to pay rent promptly may cause Landlord to incur unanticipated costs. The exact amount of such costs are impractical or extremely difficult to ascertain. Such costs may include, but are not limited to, processing and accounting charges and late charges which may be imposed on Landlord by any ground lease, mortgage or trust deed encumbering the Property. Therefore, if Landlord does not receive any rent payment within ten (10) days after it becomes due, Tenant shall pay Landlord a late charge equal to five percent (5%) of the overdue amount. The parties agree that such late charge represents a fair and reasonable estimate of costs Landlord will incur by reason of such late payment. Section 4.07. INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Tenant to Landlord which is not paid when due shall bear interest at the rate of twelve percent (12%) per annum from the due date of such amount. However, interest shall not be payable on late charges to be paid by Tenant under this Lease. The payment of interest on such amounts shall not excuse or cure any default by Tenant under this Lease. If the interest rate specified in this Lease is higher than the rate permitted by law, the interest rate is hereby decreased to the maximum legal interest rate permitted by law. Section 4.08. IMPOUNDS FOR INSURANCE PREMIUMS AND REAL PROPERTY TAXES. If requested by any ground lessor or lender to whom Landlord has granted a security interest in the Property, or if Tenant is more than ten (10) days late in the payment of rent more than once in any consecutive twelve (12)-month period, at Landlord's option. Tenant shall pay Landlord a sum equal to one-twelfth (1/12) of the annual real property taxes and insurance premiums payable by Tenant under this Lease, together with each payment of Base Rent. Landlord shall hold such payments in a non-interest bearing impound account. If unknown, Landlord shall reasonably estimate the amount of real property taxes and insurance premiums when due. Tenant shall pay any deficiency of funds in the impound account to Landlord upon written request. If Tenant defaults under this Lease, Landlord may apply any funds in the impound account to any obligation then due under this Lease. See First Lease Rider, Item 5. ARTICLE FIVE: USE OF PROPERTY Section 5.01. PERMITTED USES. Tenant may use the Property only for the Permitted Uses set forth in Section 1.06 above. Section 5.02. MANNER OF USE. Tenant shall not cause or permit the Property to be used in any way which constitutes a violation of any law, ordinance, or governmental regulation or order, which annoys or interferes with the rights of tenants of the Project, or which constitutes a nuisance or waste. Tenant shall take all actions necessary to comply with all applicable statutes, ordinances, rules, regulations, orders and requirements regulating the use by Tenant of the Property, including the Occupational Safety and Health Act. Section 5.03. HAZARDOUS MATERIALS. As used in this Lease, the term "Hazardous Material" means any flammable items, explosives, radioactive materials, hazardous or toxic substances, material or waste or related materials, including any substances defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials" or "toxic substances" now or subsequently regulated under any applicable federal, state or local laws or regulations, including without limitation petroleum-based products, paints, solvents, lead, cyanide, DDT, printing inks, acids, pesticides, ammonia compounds, and other chemical products, asbestos, PCBs and similar compounds, and including any different products and materials which are subsequently found to have adverse effects on the environment or the health and safety of persons. Tenant shall not cause or permit any Hazardous Material to be generated, produced, brought upon, used, stored, treated or disposed of in or about the Property by Tenant, its agents, employees, contractors, sublessees or invitees without prior written consent of Landlord. Landlord shall be entitled to take into account such other factors or facts as Landlord may reasonably determine to be relevant in determining whether to grant or withhold consent to Tenant's proposed activity with respect to Hazardous Material. In no event, however, shall Landlord be required to consent to the installation or use of any storage tanks on the Property. See First Lease Rider, Item 6. Section 5.04. SIGNS AND AUCTIONS. Tenant shall not place any signs on the Property without Landlord's prior written consent. Tenant shall not conduct or permit any auctions or sheriff's sales at the Property. See First Lease Rider, Item 7. Section 5.05. INDEMNITY. Tenant shall indemnify Landlord against and hold Landlord harmless from any and all costs, claims or liability arising from: (a) Tenant's use of the Property; (b) the conduct of Tenant's business or anything else done or (c) 1988 Southern California Chapter 5 of the Society of Industrial Realtors,(R) Inc. [LOGO] Reprinted under license (Multi-Tenant Form) 6 permitted by Tenant to be done in or about the Property, including any contamination of the Property or any other property resulting from the presence or use of Hazardous Material caused or permitted by Tenant; (c) any breach or default in the performance of Tenant's obligations under this Lease; (d) any misrepresentation or breach of warranty by Tenant under this Lease; or (e) other acts or omissions of Tenant constituting gross-negligence, Tenant shall defend Landlord against any such cost, claim or liability at Tenant's expense with counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant shall reimburse Landlord for any legal fees or costs incurred by Landlord in connection with any such claim. As a material part of the consideration to Landlord, Tenant assumes all risk of damage to property or injury to persons in or about the Property arising from any cause, and Tenant hereby waives all claims in respect thereof against Landlord, except for any claim arising out of Landlord's gross negligence or willful misconduct. As used in this Section, the term "Tenant" shall include Tenant's employees, agents, contractors and invitees, if applicable. Section 5.06. LANDLORD'S ACCESS. Landlord or its agents may enter the Property at all reasonable times within at least 24 hours notice to show the Property to potential buyers, investors or tenants or other parties; to do any other act or to inspect and conduct tests in order to monitor Tenant's compliance with all applicable environmental laws and all laws governing the presence and use of Hazardous Material; or for any other purpose Landlord deems necessary. Landlord shall give Tenant reasonable prior notice of such entry, except in the case of an emergency. Landlord may place customary "For Lease" signs on the Property provided, upon notice of vacation of premises by Tenant, such signage shall prominently display "Tenant Relocating." Section 5.07. QUIET POSSESSION. If Tenant pays the rent and complies with all other terms of this Lease, Tenant may occupy and enjoy the Property for the full Lease Term, subject to the provisions of this Lease. ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS Section 6.01. EXISTING CONDITIONS. Tenant accepts the Property in its condition as of the execution of the Lease, such as provided in First Lease Rider, Item 8 and Item 12, subject to all recorded matters, laws, ordinances, and governmental regulations and orders. Except as provided herein, Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation as to the condition of the Property or the suitability of the Property for Tenant's intended use. Tenant represents and warrants that Tenant has made its own inspection of and inquiry regarding the condition of the Property and is not relying on any representations of Landlord or any Broker with respect thereto. If Landlord or Landlord's Broker has provided a Property Information Sheet or other Disclosure Statement regarding the Property, a copy is attached as an exhibit to the Lease. Section 6.02. EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not be liable for any damage or injury to the person, business (or any loss of income therefrom), goods, wares, merchandise or other property of Tenant, Tenant's employees, invitees, customers or any other person in or about the Property, whether such damage or injury is caused by or results from: (a) fire, steam, electricity, water, gas, or rain; (b) the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures or any other cause; (c) conditions arising in or about the Property or upon other portions of the Project, or from other sources or places; or (d) any act or omission of any other tenant of the Project. Landlord shall not be liable for any such damage or injury even though the cause of or the means of repairing such damage or injury are not accessible to Tenant. The provisions of this Section 6.02 shall not, however, exempt Landlord from liability for Landlord's gross negligence or willful misconduct. Section 6.03. LANDLORD'S OBLIGATIONS. (a) Except as provided in Article Seven (Damage or Destruction) and Article Eight (Condemnation), Landlord shall keep the following in good order, condition and repair: the foundations, exterior walls and roof of the Property (including painting the exterior surface of the exterior walls of the Property not more often than once every five (5) years, if necessary) and all components of electrical, mechanical, plumbing, heating and air conditioning systems and facilities located in the Property which are concealed or used in common by tenants of the Project. However, Landlord shall not be obligated to maintain or repair windows, doors, plate glass or the interior surfaces of exterior walls. Landlord shall make repairs under this Section 6.03 within a reasonable time after receipt of written notice from Tenant of the need for such repairs. (b) Tenant shall pay or reimburse Landlord for all costs Landlord incurs under Paragraph 6.03(a) above as Common Area costs as provided for in Section 4.05 of the Lease. Section 6.04. TENANT'S OBLIGATIONS. (a) Except as provided in Section 6.03, Article Seven (Damage or Destruction) and Article Eight (Condemnation), Tenant shall keep all portions of the Property (including structural, nonstructural, interior, systems and equipment) in good order, condition and repair (including interior repainting and refinishing, as needed). If any portion of the Property or any system or equipment in the Property which Tenant is obligated to repair cannot be fully repaired or restored, Tenant shall promptly replace such portion of the Property or system or equipment in the Property, regardless of whether the benefit of such replacement extends beyond the Lease Term; but if the benefit or useful life of such replacement extends beyond the Lease Term (as such term may be extended by exercise of any options), the useful life of such replacement shall be prorated over the remaining portion of the Lease Term (as extended), and Tenant shall be liable only for that portion of the cost which is applicable to the Lease Term (as extended). Tenant shall maintain a preventive maintenance contract providing for the regular inspection and maintenance of the heating and air conditioning system by a licensed heating and air conditioning contractor, unless Landlord maintains such equipment under Section 6.03 above. If any part of the Property or the Project is damaged by any act or omission of Tenant, Tenant shall pay Landlord the cost of repairing or replacing such damaged property, whether or not Landlord would otherwise be obligated to pay the cost of maintaining or repairing such property. It is the intention of Landlord and Tenant that at all times Tenant shall maintain the portions of the Property which Tenant is obligated to maintain in an attractive, first-class and fully operative condition. See First Lease Rider, Item 8. (b) Tenant shall fulfill all of Tenant's obligations under this Section 6.04 at Tenant's sole expense. If Tenant fails to maintain, repair or replace the Property as required by this Section 6.04, Landlord may, upon ten (10) days' prior notice to Tenant (except that no notice shall be required in the case of emergency), enter the Property and perform such maintenance or repair (including replacement, as needed) on behalf of Tenant. In such case, Tenant shall reimburse Landlord for all costs incurred in performing such maintenance or repair immediately upon demand. (c) 1988 Southern California Chapter 6 of the Society of Industrial Realtors,(R) Inc. [LOGO] Reprinted under license (Multi-Tenant Form) 7 Section 6.05. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS. (a) Tenant shall not make any alterations, additions, or improvements to the Property without Landlord's prior written consent, except for non-structural alterations which do not exceed Ten Thousand Dollars ($10,000) in cost cumulatively over the Lease Term and which are not visible from the outside of any building of which the Property is part. Landlord may require the Lease Term and which are not visible from the outside of any building of which the Property is part. Landlord may require Tenant to provide demolition and/or lien and completion bonds in form and amount satisfactory to Landlord. Tenant shall promptly remove any alterations, additions, or improvements constructed in violation of this Paragraph 6.05(a) upon Landlord's written request. All alterations, additions, and improvements shall be done in a good and workmanlike manner, in conformity with all applicable laws and regulations, and by a contractor approved by Landlord. Upon completion of any such work, Tenant shall provide Landlord with "as built" plans, copies of all construction contracts, and proof of payment for all labor and materials. (b) Tenant shall pay when due all claims for labor and material furnished to the Property. Tenant shall give Landlord at least twenty (20) days' prior written notice of the commencement of any work on the Property, regardless of whether Landlord's consent to such work is required. Landlord may elect to record and post notices of non-responsibility on the Property. Section 6.06. CONDITION UPON TERMINATION. Upon the termination of the Lease, Tenant shall surrender the Property to Landlord, broom clean and in the same condition as received except for ordinary wear and tear which Tenant was not otherwise obligated to remedy under any provision of this Lease. However, Tenant shall not be obligated to repair any damage which Landlord is required to repair under Article Seven (Damage or Destruction). In addition, Landlord may require Tenant to remove any alterations, additions or improvements (whether or not made with Landlord's consent) prior to the expiration of the Lease and to restore the Property to its prior condition, all at Tenant's expense. All alterations, additions and improvements which Landlord has not required Tenant to remove shall become Landlord's property and shall be surrendered to Landlord upon the expiration or earlier termination of the Lease, except that Tenant may remove any of Tenant's machinery or equipment which can be removed without material damage to the Property. Tenant shall repair, at Tenant's expense, any damage to the Property caused by the removal of any such machinery or equipment. In no event, however, shall Tenant remove any of the following materials or equipment (which shall be deemed Landlord's property) without Landlord's prior written consent: any power wiring or power panels; lighting or lighting fixtures; wall coverings; drapes, blinds or other window coverings; carpets or other floor coverings; heaters, air conditioners or any other heating or air conditioning equipment; fencing or security gates; or other similar building operating equipment and decorations. ARTICLE SEVEN: DAMAGE OR DESTRUCTION Section 7.01. PARTIAL DAMAGE TO PROPERTY. (a) Tenant shall notify Landlord in writing immediately upon the occurrence of any damage to the Property. If the Property is only partially damaged (i.e., less than fifty percent (50%) of the Property is untenantable as a result of such damage or less than fifty percent (50%) of Tenant's operations are materially impaired) and if the proceeds received by Landlord from the insurance polices described in Paragraph 4.04(b) are sufficient to pay for the necessary repairs, this Lease shall remain in effect and Landlord shall repair the damage as soon as reasonably possible. Landlord may elect (but is not required) to repair any damage to Tenant's fixtures, equipment, or improvements. (b) If the insurance proceeds received by Landlord are not sufficient to pay the entire cost of repair, or if the cause of the damage is not covered by the insurance policies which Landlord maintains under Paragraph 4.04(b), Landlord may elect either to (i) repair the damage as soon as reasonably possible, in which case this Lease shall remain in full force and effect, or (ii) terminate this Lease as of the date the damage occurred. Landlord shall notify Tenant within thirty (30) days after receipt of notice of the occurrence of the damage whether Landlord elects to repair the damage or terminate the Lease. If Landlord elects to repair the damage, Tenant shall pay Landlord, if the damage was due to an act or omission of Tenant, or Tenant's employees, agents, contractors or invitees, the difference between the actual cost of repair and any insurance proceeds received by Landlord provided the repairs are to return the Property to the original and/or like condition. If Landlord elects to terminate the Lease, Tenant may elect to continue this Lease in full force and effect, in which case Tenant shall repair any damage to the Property and any building in which the Property is located. Tenant shall pay the cost of such repairs, except that upon satisfactory completion of such repairs, Landlord shall deliver to Tenant any insurance proceeds received by Landlord for the damage repaired by Tenant. Tenant shall give Landlord written notice of such election within ten (10) days after receiving Landlord's termination notice. (c) If the damage to the Property occurs during the last six (6) months of the Lease Term and such damage will require more than thirty (30) days to repair, either Landlord or Tenant may elect to terminate this Lease as of the date the damage occurred, regardless of the sufficiency of any insurance proceeds. The party electing to terminate this Lease shall give written notification to the other party of such election within thirty (30) days after the Tenant's notice to the Landlord of the occurrence of the damage. Section 7.02. SUBSTANTIAL OR TOTAL DESTRUCTION. If the Property is substantially or totally destroyed in such a way that Tenant is prevented from operating its business by any cause whatsoever (i.e., the damage to the Property is greater than partial damage as described in Section 7.01), and regardless of whether Landlord receives any insurance proceeds, this Lease shall terminate as of the date the destruction occurred. Notwithstanding the preceding sentence, if the Property can be rebuilt within six (6) months after the date of destruction. Landlord may elect to rebuild the Property at Landlord's own expense, in which case this Lease shall remain in full force and effect. Landlord shall notify Tenant of such election within thirty (30) days after Tenant's notice of the occurrence of total or substantial destruction. Should Landlord so elect, Landlord would bear the reasonable costs of providing temporary facilities, including costs of moving to and from said temporary replacement facilities. If Landlord so elects, Landlord shall rebuild the Property at Landlord's sole expense. Section 7.03. TEMPORARY REDUCTION OF RENT. If the Property is destroyed or damaged and Landlord or Tenant repairs or restores the Property pursuant to the provisions of this Article Seven, any rent payable during the period of such damage, repair and/or restoration shall be reduced according to the degree, if any, to which Tenant's use of the Property is impaired. Except for such possible reduction in Base Rent, Tenant shall not be entitled to any compensation, reduction, or reimbursement from Landlord as a result of any damage, destruction, repair, or restoration of or to the Property. ** and from said temporary replacement facilities (c) 1988 Southern California Chapter 7 of the Society of Industrial Realtors,(R) Inc. [LOGO] Reprinted under license (Multi-Tenant Form) 8 Section 7.04. WAIVER. Tenant waives the protection of any statute, code or judicial decision which grants a tenant the right to terminate a lease in the event of the substantial or total destruction of the leased property. Tenant agrees that the provisions of Section 7.02 above shall govern the rights and obligations of Landlord and Tenant in the event of any substantial or total destruction to the Property. ARTICLE EIGHT: CONDEMNATION If all or any portion of the Property is taken under the power of eminent domain or sold under the threat of that power (all of which are called "Condemnation"), this Lease shall terminate as to the part taken or sold on the date the condemning authority takes title or possession, whichever occurs first. If more than twenty percent (20%) of the floor area of the building in which the Property is located, or which is located on the Property, is taken, either Landlord or Tenant may terminate this Lease as of the date the condemning authority takes title or possession, by delivering written notice to the other within ten (10) days after receipt of written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority takes title or possession). If neither Landlord nor Tenant terminates this Lease, this Lease shall remain in effect as to the portion of the Property not taken, except that the Base Rent and Additional Rent shall be reduced in proportion to the reduction in the floor area of the Property. Any Condemnation award or payment shall be distributed in the following order: (a) first, to any ground lessor, mortgagee or beneficiary under a deed of trust encumbering the Property, the amount of its interest in the Property; (b) second, to Tenant, only the amount of any award specifically designated for loss of or damage to Tenant's trade fixtures or removable personal property; and (c) third, to Landlord, the remainder of such award, whether as compensation for reduction in the value of the leasehold, the taking of the fee, or otherwise. If this Lease is not terminated, Landlord shall repair any damage to the Property caused by the Condemnation, except that Landlord shall not be obligated to repair any damage for which Tenant has been reimbursed by the condemning authority. If the severance damages received by Landlord are not sufficient to pay for such repair, Landlord shall have the right to either terminate this Lease or make such repair at Landlord's expense. ARTICLE NINE: ASSIGNMENT AND SUBLETTING Section 9.01. LANDLORD'S CONSENT REQUIRED. See First Rider Lease, Item 9. Section 9.02. TENANT AFFILIATE. See First Rider Lease, Item 10. Section 9.03. NO RELEASE OF TENANT. No transfer permitted by this Article Nine, whether with or without Landlord's consent, shall release Tenant or change Tenant's primary liability to pay the rent and to perform all other obligations of Tenant under this Lease. Landlord's acceptance of rent from any other person is not a waiver of any provision of this Article Nine. Consent to one transfer is not a consent to any subsequent transfer. If Tenant's transferee defaults under this Lease, Landlord may proceed directly against Tenant without pursuing remedies against the transferee. Landlord may consent to subsequent assignments or modifications of this Lease by Tenant's transferee, without notifying Tenant or obtaining its consent. Such action shall not relieve Tenant's liability under this Lease. Section 9.04. OFFER TO TERMINATE. If Tenant desires to assign the Lease or sublease the Property, Tenant shall have the right to offer, in writing, to terminate the Lease as of a date specified in the offer. If Landlord elects in writing to accept the offer to terminate within twenty (20) days after notice of the offer, the Lease shall terminate as of the date specified and all the terms and provisions of the Lease governing termination shall apply. If Landlord does not so elect, the Lease shall continue in effect until otherwise terminated and the provisions of Section 9.05 with respect to any proposed transfer shall continue to apply. Section 9.05. LANDLORD'S CONSENT. (a) Tenant's request for consent to any transfer described in Section 9.01 shall set forth in writing the details of the proposed transfer, including the name, business and financial condition of the prospective transferee, financial details of the proposed transfer (e.g., the term of and the rent and security deposit payable under any proposed assignment or sublease), and any other information Landlord deems relevant. Landlord shall have the right to withhold consent, if reasonable, or to grant consent, based on the following factors: (i) the business of the proposed assignee or subtenant and the proposed use of the Property; (ii) the net worth and financial reputation of the proposed assignee or subtenant; (iii) Tenant's compliance with all of its obligations under the Lease; and (iv) such other factors as Landlord may reasonably deem relevant. If Landlord objects to a proposed assignment solely because of the net worth and/or financial reputation of the proposed assignee, Tenant may nonetheless sublease (but not assign), all or a portion of the Property to the proposed transferee, but only on the other terms of the proposed transfer. (b) If Tenant assigns or subleases, the following shall apply: (i) Tenant shall pay to Landlord as Additional Rent under the Lease the Landlord's Share (stated in Section 1.13) of the Profit (defined below) on such transaction as and when received by Tenant, unless Landlord gives written notice to Tenant and the assignee or subtenant that Landlord's Share shall be paid by the assignee or subtenant to Landlord directly. The "Profit" means (A) all amounts paid to Tenant for such assignment or sublease, including "key" money, monthly rent in excess of the monthly rent payable under the Lease, and all fees and other consideration paid for the assignment or sublease, including fees under any collateral agreements, less (B) costs and expenses directly incurred by Tenant in connection with the execution and performance of such assignment or sublease for real estate broker's commissions and costs of renovation or construction of tenant improvements required under such assignment or sublease. Tenant is entitled to recover such costs and expenses before Tenant is obligated to pay the Landlord's Share to Landlord. The Profit in the *--Rent and other reasonable charges hereunder paid by Tenant after vacating the Property and before commencement of Rent payments by a subtenant or assignee and (c) 1988 Southern California Chapter 8 of the Society of Industrial Realtors,(R) Inc. [LOGO] Reprinted under license (Multi-Tenant Form) 9 case of a sublease of less than all the Property is the rent allocable to the subleased space as a percentage on a square footage basis. (ii) Tenant shall provide Landlord a written statement certifying all amounts to be paid from any assignment or sublease of the Property within thirty (30) days after the transaction documentation is signed, and Landlord may inspect Tenant's books and records to verify the accuracy of such statement. On written request, Tenant shall promptly furnish to Landlord copies of all the transaction documentation, all of which shall be certified by Tenant to be complete, true and correct. Landlord's receipt of Landlord's Share shall not be a consent to any further assignment or subletting. The breach of Tenant's obligation under this Paragraph 9.05(b) shall be a material default of the Lease. Section 9.06. NO MERGER. No merger shall result from Tenant's sublease of the Property under this Article Nine, Tenant's surrender of this Lease or the termination of this Lease in any other manner. In any such event, Landlord may terminate any or all subtenancies or succeed to the interest of Tenant as sublandlord under any or all subtenancies. ARTICLE TEN: DEFAULTS; REMEDIES Section 10.01. COVENANTS AND CONDITIONS. Tenant's performance of each of Tenant's obligations under this Lease is a condition as well as a covenant. Tenant's right to continue in possession of the Property is conditioned upon such performance. Time is of the essence in the performance of all covenants and conditions. Section 10.02. DEFAULTS. Tenant shall be in material default under this Lease: (a) If Tenant abandons the Property or if Tenant's vacation of the Property results in the cancellation of any insurance described in Section 4.04; (b) If Tenant fails to pay rent or any other charge when due; (c) If Tenant fails to perform any of Tenant's non-monetary obligations under this Lease for a period of thirty (30) days after written notice from Landlord; provided that if more than thirty (30) days are required to complete such performance, Tenant shall not be in default if Tenant commences such performance within the thirty (30)-day period and thereafter diligently pursues its completion. However, Landlord shall not be required to give such notice if Tenant's failure to perform constitutes a non-curable breach of this Lease. The notice required by this Paragraph is intended to satisfy any and all notice requirements imposed by law on Landlord and is not in addition to any such requirement. (d) (i) If Tenant makes a general assignment or general arrangement for the benefit of creditors; (ii) if a petition for adjudication of bankruptcy or for reorganization or rearrangement is filed by or against Tenant and is not dismissed within thirty (30) days; (iii) if a trustee or receiver is appointed to take possession of substantially all of Tenant's assets located at the Property or of Tenant's interest in this Lease and possession is not restored to Tenant within thirty (30) days; or (iv) if substantially all of Tenant's assets located at the Property or of Tenant's interest in this Lease is subjected to attachment, execution or other judicial seizure which is not discharged within thirty (30) days. If a court of competent jurisdiction determines that any of the acts described in this subparagraph (d) is not a default under this Lease, and a trustee is appointed to take possession (or if Tenant remains a debtor in possession) and such trustee or Tenant transfers Tenant's interest hereunder, then Landlord shall receive, as Additional Rent, the excess, if any, of the rent (or any other consideration) paid in connection with such assignment or sublease over the rent payable by Tenant under this Lease. Section 10.03. REMEDIES. On the occurrence of any material default by Tenant, Landlord may, at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of any right or remedy which Landlord may have: (a) Terminate Tenant's right to possession of the Property by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Property to Landlord. In such event, Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant's default, including (i) the worth at the time of the award of the unpaid Base Rent, Additional Rent and other charges which Landlord had earned at the time of the termination; (ii) the worth at the time of the award of the amount by which the unpaid Base Rent, Additional Rent and other charges which Landlord would have earned after the termination until the time of the award exceeds the amount of such rental loss that Tenant proves Landlord could have reasonably avoided; (iii) the worth at the time of the award of the amount by which the unpaid Base Rent, Additional Rent and other charges which Tenant would have paid for the balance of the Lease Term after the time of award exceeds the amount of such rental loss that Tenant proves Landlord could have reasonably avoided; and (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under the Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, any costs or expenses Landlord incurs in maintaining or preserving the Property after such default, the cost of recovering possession of the Property, expenses of reletting, including necessary renovation or alteration of the Property, Landlord's reasonable attorneys' fees incurred in connection therewith, and any real estate commission paid or payable. As used in subparts (i) and (ii) above, the "worth at the time of the award" is computed by allowing interest on unpaid amounts at the rate of fifteen percent (15%) per annum, or such lesser amount as may then be the maximum lawful rate. As used in subpart (iii) above, the "worth at the time of the award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus one percent (1%). If Tenant has abandoned the Property, Landlord shall have the option of (i) retaking possession of the Property and recovering from Tenant the amount specified in this Paragraph 10.03(a), or (ii) proceeding under Paragraph 10.03(b); (b) Maintain Tenant's right to possession, in which case this Lease shall continue in effect whether or not Tenant has abandoned the Property. In such event, Landlord shall be entitled to enforce all of Landlord's rights and remedies under this Lease, including the right to recover the rent as it becomes due; (c) Pursue any other remedy now or hereafter available to Landlord under the laws or judicial decisions of the state in which the Property is located. Section 10.04. REPAYMENT OF "FREE" RENT. If this Lease provides for a postponement of any monthly rental payments, a period of "free" rent or other rent concession, such postponed rent or "free" rent is called the "Abated Rent". Tenant shall (C) 1988 Southern California Chapter of the Society of Industrial Realtors,(R) Inc. Reprinted under license (Net Form) 9 10 be credited with having paid all of the Abated Rent on the expiration of the Lease Term only if Tenant has fully, faithfully, and punctually performed all of Tenant's obligations hereunder, including the payment of all rent (other than the Abated Rent) and all other monetary obligations and the surrender of the Property in the physical condition required by this Lease. Tenant acknowledges that its right to receive credit for the Abated Rent is absolutely conditioned upon Tenant's full, faithful and punctual performance of its obligations under this Lease. If Tenant defaults and does not cure within any applicable grace period, the Abated Rent shall immediately become due and payable in full and this Lease shall be enforced as if there were no such rent abatement or other rent concession. In such case Abated Rent shall be calculated based on the full initial rent payable under this Lease. Section 10.05. AUTOMATIC TERMINATION. Notwithstanding any other term or provision hereof to the contrary, the Lease shall terminate on the occurrence of any act which affirms the Landlord's intention to terminate the Lease as provided in Section 10.03 hereof, including the filing of an unlawful detainer action against Tenant. On such termination, Landlord's damages for default shall include all costs and fees, including reasonable attorneys' fees that Landlord incurs in connection with the filing, commencement, pursuing and/or defending of any action in any bankruptcy court or other court with respect to the Lease; the obtaining of relief from any stay in bankruptcy restraining any action to evict Tenant; or the pursuing of any action with respect to Landlord's right to possession of the Property. All such damages suffered (apart from Base Rent and other rent payable hereunder) shall constitute pecuniary damages which must be reimbursed to Landlord prior to assumption of the Lease by Tenant or any successor to Tenant in any bankruptcy or other proceeding. Section 10.06. CUMULATIVE REMEDIES. Landlord's exercise of any right or remedy shall not prevent it from exercising any other right or remedy. ARTICLE ELEVEN: PROTECTION OF LENDERS Section 11.01. SUBORDINATION. Landlord shall have the right to subordinate this Lease to any ground lease, deed of trust or mortgage encumbering the Property, any advances made on the security thereof and any renewals, modifications, consolidations, replacements or extensions thereof, whenever made or recorded. Tenant shall cooperate with Landlord and any lender which is acquiring a security interest in the Property or the Lease. Tenant shall execute such further documents and assurances as such lender may require, provided that Tenant's obligations under this Lease shall not be increased in any material way (the performance of ministerial acts shall not be deemed material), and Tenant shall not be deprived of its rights under this Lease. Tenant's right to quiet possession of the Property during the Lease Term shall not be disturbed if Tenant pays the rent and performs all of Tenant's obligations under this Lease and is not otherwise in default. Section 11.02. ATTORNMENT. If Landlord's interest in the Property is acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or successor to Landlord's interest in the Property and recognize such transferee or successor as Landlord under this Lease. Tenant waives the protection of any statute or rule of law which gives or purports to give Tenant any right to terminate this Lease or surrender possession of the Property upon the transfer of Landlord's interest. See First Lease Rider, Item 15. Section 11.03. SIGNING OF DOCUMENTS. Tenant shall sign and deliver any instrument or documents necessary or appropriate to evidence any such attornment or subordination or agreement to do so. If Tenant fails to do so within ten (10) days after written request, Tenant hereby makes, constitutes and irrevocably appoints Landlord, or any transferee or successor of Landlord, the attorney-in-fact of Tenant to execute and deliver any such instrument or document. Section 11.04. ESTOPPEL CERTIFICATES. (a) Upon Landlord's written request, Tenant shall execute, acknowledge and deliver to Landlord a written statement certifying: (i) that none of the terms or provisions of this Lease have been changed (or if they have been changed, stating how they have been changed); (ii) that this Lease has not been cancelled or terminated; (iii) the last date of payment of the Base Rent and other charges and the time period covered by such payment; (iv) that Landlord is not in default under this Lease (or, if Landlord is claimed to be in default, stating why); and (v) such other representations or information with respect to Tenant or the Lease as Landlord may reasonably request or which any prospective purchaser or encumbrancer of the property may require. Tenant shall deliver such statement to Landlord within ten (10) days after Landlord's request. Landlord may give any such statement by Tenant to any prospective purchaser or encumbrancer of the Property. Such purchaser or encumbrancer may rely conclusively upon such statement as true and correct. (b) If Tenant does not deliver such statement to Landlord within such ten (10) -day period, Landlord, and any prospective purchaser or encumbrancer, may conclusively presume and rely upon the following facts: (i) that the terms and provisions of this Lease have not been changed except as otherwise represented by Landlord; (ii) that this Lease has not been cancelled or terminated except as otherwise represented by Landlord; (iii) that not more than one month's Base Rent or other charges have been paid in advance; and (iv) that Landlord is not in default under the Lease. In such event, Tenant shall be estopped from denying the truth of such facts. Section 11.05. TENANT'S FINANCIAL CONDITION. Within ten (10) days after written request from Landlord, Tenant shall deliver to Landlord such financial statements as Landlord reasonably requires to verify the net worth of Tenant or any assignee, subtenant, or guarantor of Tenant. In addition, Tenant shall deliver to any lender designated by Landlord any financial statements required by such lender to facilitate the financing or refinancing of the Property. Tenant represents and warrants to Landlord that each such financial statement is a true and accurate statement as of the date of such statement. All financial statements shall be confidential and shall be used only for the purposes set forth in this Lease. ARTICLE TWELVE: LEGAL COSTS Section 12.01. LEGAL PROCEEDINGS. If Tenant or Landlord shall be in breach or default under this Lease, such party (the "Defaulting Party") shall reimburse the other party (the "Nondefaulting Party") upon demand for any costs or expenses that the Nondefaulting Party incurs in connection with any breach or default of the Defaulting Party under this Lease, whether or not suit is commenced or judgment entered. Such costs shall include legal fees and costs incurred for the negotiation of a (c) 1988 Southern California Chapter 10 of the Society of Industrial Realtors,(R) Inc. [LOGO] Reprinted under license (Multi-Tenant Form) 11 settlement, enforcement of rights or otherwise. Furthermore, if any action for breach of or to enforce the provisions of this Lease is commenced, the court in such action shall award to the party in whose favor a judgment is entered, a reasonable sum as attorneys' fees and costs. The losing party in such action shall pay such attorneys' fees and costs. Tenant shall also indemnify Landlord against and hold Landlord harmless from all costs, expenses, demands and liability Landlord may incur if Landlord becomes or is made a party to any claim or action (a) instituted by Tenant against any third party, or by any third party against Tenant, or by or against any person holding any interest under or using the Property by license of or agreement with Tenant; (b) for foreclosure of any lien for labor or material furnished to or for Tenant or such other person; (c) otherwise arising out of or resulting from any act or transaction of Tenant or such other person; or (d) necessary to protect Landlord's interest under this Lease in a bankruptcy proceeding, or other proceeding under Title 11 of the United States Code, as amended. Tenant shall defend Landlord against any such claim or action at Tenant's expense with counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant shall reimburse Landlord for any legal fees or costs Landlord incurs in any such claim or action. ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS Section 13.01. NON-DISCRIMINATION. Tenant promises, and it is a condition to the continuance of this Lease, that there will be no discrimination against, or segregation of, any person or group of persons on the basis of race, color, sex, creed, national origin or ancestry in the leasing, subleasing, transferring, occupancy, tenure or use of the Property or any portion thereof. Section 13.02. LANDLORD'S LIABILITY; CERTAIN DUTIES. (a) As used in this Lease, the term "Landlord" means only the current owner or owners of the fee title to the Property or Project or the leasehold estate under a ground lease of the Property or Project at the time in question. Each Landlord is obligated to perform the obligations of Landlord under this Lease only during the time such Landlord owns such interest or title. Any Landlord who transfers its title or interest is relieved of all liability with respect to the obligations of Landlord under this Lease to be performed on or after the date of transfer. However, each Landlord shall deliver to its transferee all funds that Tenant previously paid if such funds have not yet been applied under the terms of this Lease. (b) Tenant shall give written notice of any failure by Landlord to perform any of its obligations under this Lease to Landlord and to any ground lessor, mortgagee or beneficiary under any deed of trust encumbering the Property whose name and address have been furnished to Tenant in writing. Landlord shall not be in default under this Lease unless Landlord (or such ground lessor, mortgagee or beneficiary) fails to cure such non-performance within thirty (30) days after receipt of Tenant's notice. However, if such non-performance reasonably requires more than thirty (30) days to cure, Landlord shall not be in default if such cure is commenced within such thirty (30)-day period and thereafter diligently pursued to completion. (c) Notwithstanding any term or provision herein to the contrary, the liability of Landlord for the performance of its duties and obligations under this Lease is limited to landlord's interest in the Property and the Project, and neither the Landlord nor its partners, shareholders, officers or other principals shall have any personal liability under this Lease. Section 13.03. SEVERABILITY. A determination by a court of competent jurisdiction that any provision of this Lease or any part thereof is illegal or unenforceable shall not cancel or invalidate the remainder of such provision or this Lease, which shall remain in full force and effect. Section 13.04. INTERPRETATION. The captions of the Articles or Sections of this Lease are to assist the parties in reading this Lease and are not a part of the terms or provisions of this Lease. Whenever required by the context of this Lease, the singular shall include the plural and the plural shall include the singular. The masculine, feminine and neuter genders shall each include the other. In any provision relating to the conduct, acts or omissions of Tenant, the term "Tenant" shall include Tenant's agents, employees, contractors, invitees, successors or others using the Property with Tenant's expressed or implied permission. Section 13.05. INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. This Lease is the only agreement between the parties pertaining to the lease of the Property and no other agreements are effective. All amendments to this Lease shall be in writing and signed by all parties. Any other attempted amendment shall be void. Section 13.06. NOTICES. All notices required or permitted under this Lease shall be in writing and shall be personally delivered or sent by certified mail, return receipt requested, postage prepaid. Notices to Tenant shall be delivered to the address specified in Section 1.03 above, except that upon Tenant's taking possession of the Property, the Property shall be Tenant's address for notice purposes. Notices to Landlord shall be delivered to the address specified in Section 1.02 above. All notices shall be effective upon delivery. Either party may change its notice address upon written notice to the other party. Section 13.07. WAIVERS. All waivers must be in writing and signed by the waiving party. Landlord's failure to enforce any provision of this Lease or its acceptance of rent shall not be a waiver and shall not prevent Landlord from enforcing that provision or any other provision of this Lease in the future. No statement on a payment check from Tenant or in a letter accompanying a payment check shall be binding on Landlord. Landlord may, with or without notice to Tenant, negotiate such check without being bound to the conditions of such statement. Section 13.08. NO RECORDATION. Tenant shall not record this Lease without prior written consent from Landlord. However, either Landlord or Tenant may require that a "Short Form" memorandum of this Lease executed by both parties be recorded. The party requiring such recording shall pay for all transfer taxes and recording fees. Section 13.09. BINDING EFFECT; CHOICE OF LAW. This Lease binds any party who legally acquires any rights or interest in this Lease from Landlord or Tenant. However, Landlord shall have no obligation to Tenant's successor unless the rights or interests of Tenant's successor are acquired in accordance with the terms of this Lease. The laws of the state in which the Property is located shall govern this Lease. Section 13.10. CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. If Tenant is a corporation, each person signing this Lease on behalf of Tenant represents and warrants that he has full authority to do so and that this Lease binds the corporation. Within thirty (30) days after this Lease is signed. Tenant shall deliver to Landlord a certified copy of a resolution of Tenant's Board of Directors authorizing the execution of this Lease or other evidence of such authority reasonably acceptable to Landlord. (c) 1988 Southern California Chapter 11 of the Society of Industrial Realtors,(R) Inc. [LOGO] Reprinted under license (Multi-Tenant Form) 12 Section 13.11. JOINT AND SEVERAL LIABILITY. All parties signing this Lease as Tenant shall be jointly and severally liable for all obligations of Tenant. Section 13.12. FORCE MAJEURE. If Landlord cannot perform any of its obligations due to events beyond Landlord's control, the time provided for performing such obligations shall be extended by a period of time equal to the duration of such events. Events beyond Landlord's control include, but are not limited to, acts of God, war, civil commotion, labor disputes, strikes, fire, flood or other casualty, shortages of labor or material, government regulation or restriction and weather conditions. Section 13.13. EXECUTION OF LEASE. This Lease may be executed in counterparts and, when all counterpart documents are executed, the counterparts shall constitute a single binding instrument. Landlord's delivery of this Lease to Tenant shall not be deemed to be an offer to lease and shall not be binding upon either party until executed and delivered by both parties. Section 13.14. SURVIVAL. All representations and warranties of Landlord and Tenant shall survive the termination of this Lease. ARTICLE FOURTEEN: BROKERS See First Lease Rider, Item 11. ARTICLE FIFTEEN: COMPLIANCE The parties hereto agree to comply with all applicable federal, state and local laws, regulations, codes, ordinances and administrative orders having jurisdiction over the parties, property or the subject matter of this Agreement, including, but not limited to, the 1964 Civil Rights Act and all amendments thereto, the Foreign Investment In Real Property Tax Act, the Comprehensive Environmental Response Compensation and Liability Act, and The Americans With Disabilities Act. ADDITIONAL PROVISIONS MAY BE SET FORTH IN A RIDER OR RIDERS ATTACHED HERETO OR IN THE BLANK SPACE BELOW. IF NO ADDITIONAL PROVISIONS ARE INSERTED, PLEASE DRAW A LINE THROUGH THE SPACE BELOW. FIRST LEASE RIDER (c) 1988 Southern California Chapter 12 of the Society of Industrial Realtors,(R) Inc. [LOGO] Reprinted under license (Multi-Tenant Form) 13 Landlord and Tenant have signed this Lease at the place and on the dates specified adjacent to their signatures below and have initialled all Riders which are attached to or incorporated by reference in this Lease, "LANDLORD" Signed on February 11, 1997 EQUUS 9177, LLC, a California limited ----------- -- ------------------------------------- at San Diego, California liability company ------------------------ ------------------------------------- By: /s/ David Bourne --------------------------------- Its: David Bourne, Manager -------------------------------- By: --------------------------------- Its: Chad Carpenter, Manager -------------------------------- "TENANT" Signed on February 5, 1997 I-BUS, INC., a California corporation ---------- -- ------------------------------------- at San Diego, California ------------------------ ------------------------------------- By: --------------------------------- Its: V.P. Finance -------------------------------- By: /s/ Donald M. Robert --------------------------------- Its: Secretary -------------------------------- IN ANY REAL ESTATE TRANSACTION, IT IS RECOMMENDED THAT YOU CONSULT WITH A PROFESSIONAL, SUCH AS A CIVIL ENGINEER, INDUSTRIAL HYGIENIST OR OTHER PERSON WITH EXPERIENCE IN EVALUATING THE CONDITION OF THE PROPERTY, INCLUDING THE POSSIBLE PRESENCE OF ASBESTOS, HAZARDOUS MATERIALS AND UNDERGROUND STORAGE TANKS. THIS PRINTED FORM LEASE HAS BEEN DRAFTED BY LEGAL COUNSEL AT THE DIRECTION OF THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND OFFICE REALTORS(R), INC. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND OFFICE REALTORS(R), INC., ITS LEGAL COUNSEL, THE REAL ESTATE BROKERS NAMED HEREIN, OR THEIR EMPLOYEES OR AGENTS, AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT OR TAX CONSEQUENCES OF THIS LEASE OR OF THIS TRANSACTION. LANDLORD AND TENANT SHOULD RETAIN LEGAL COUNSEL TO ADVISE THEM ON SUCH MATTERS AND SHOULD RELY UPON THE ADVICE OF SUCH LEGAL COUNSEL. "ORIGINAL TENANT" Signed on February 5, 1997 MAXWELL TECHNOLOGIES, INC., a Delaware ----------------- corporation at San Diego, California. By: /s/ Donald M. Robert ------------------------------- Its: General Counsel and Secretary ------------------------------ (c) 1988 Southern California Chapter 13 Initials /s/ JP ?? of the Society of industrial [SIOR LOGO] ------------ and Office Realtors(R) Inc. (Multi-Tenant Net Form) 14 FIRST LEASE RIDER EQUUS 9177, LLC, AS LANDLORD AND I-BUS, INC., AS TENANT This First Lease Rider to Amended and Restated Industrial Real Estate Lease ("Rider") is entered into concurrently with and made a part of the Amended and Restated Industrial Real Estate Lease between EQUUS 9177, LLC ("Landlord"), and I-BUS, INC. ("Tenant"), dated January 1, 1997, for the premises located at 9173 and 9174 Sky Park Court, San Diego, California, as more particularly described therein (the "Lease"). Except as otherwise defined herein, all capitalized terms have the same defined meanings as in the Lease. Recitals. A. On or about April 17, 1995, Cody Three, Inc., a Wyoming corporation, predecessor-in-interest to Landlord ("Cody"), and Maxwell Laboratories, Inc., a Delaware corporation, I-Bus Division ("Original Tenant"), entered into that certain Industrial Real Estate Lease (the "Original Lease"), with respect to that certain real property commonly known as 9174 Sky Park Court, San Diego, California, consisting of approximately 35,417 square feet as more particularly described in the Lease (the "Original Premises"). B. On or about January 22, 1996, Cody and Original Tenant entered into that certain First Amendment to the Lease which, among other things, increased the size of the Original Premises by 2,568 square feet (the "Increased Space") for a total of 37,985 square feet. C. Tenant, the successor-in-interest to Original Tenant, has assumed all of the duties and obligations of Original Tenant under the Original Lease, as amended, and Landlord accepts Tenant; provided, however, Original Tenant is not released from its obligations under the Original Lease, as amended. Original Tenant now desires to reaffirm its continuing duties and obligations under the Original Lease, as amended and restated by this Amended and Restated Lease, although it has changed its name to Maxwell Technologies, Inc., and to acknowledge that Tenant and Original Tenant shall be jointly and severally liable for all obligations of Tenant. D. Landlord and Tenant also now desire to amend and restate the terms and provisions of the Original Lease, as amended, as set forth in this Amended and Restated Lease, and this Amended and Restated Lease is intended to supersede and supplant in all respects the Original Lease, as amended. 1. Section 1.04 Square Footage of Premises. The Original Premises consist of approximately 35,417 square feet, the Increased Space consists of approximately 2,568 square feet, the Expansion Space (as defined in Article 15 below) consists of approximately 5 589 square feet, and the Additional Space (as defined in Exhibit H) consists of approximately 14,074 square feet, for a total of 57,648 square feet (the "Amended Premises"). 2. Sections 1.11 and 4.05(c) Parking: Effective as of the Commencement Date of this Lease, Tenant will have 192 parking spaces available of which four (4) are reserved, and the remaining 188 will be unreserved. Upon Tenant's occupancy of the Expansion Space, Tenant will have an additional 21 unreserved parking spaces for a total of 213 parking spaces, consistent with a ratio of 3.7/1000 square feet of net rental area. 3. Sections 1.12(a) and 3.02(a) Base Rent: A. Commencing on January 1, 1997, Base Rent shall be the sum of $21,272.00; provided, however, such amount is subject to the cost of living increase described in Section 3.02 of the Lease. Landlord will notify Tenant of the amount of such increase as soon as such information is available, and such increase shall be applied retroactively. B. The Base Rent (as increased by subsections C. and D. below) shall also be increased on the first day of the 13th, 25th, and 37th months after the Commencement Date as provided in Section 3.02 of the Lease. The minimum amount of such increases will be two percent (2%) per year and the maximum amount of such increases will be five percent (5%) per year. C. Commencing upon the completion of the Tenant Improvements for the Expansion Space, the Base Rent shall be increased to the sum of $24,401.44, as such amount 1 15 shall be increased by the cost of living increase described above. D. Commencing on April 1, 1997, Base Rent shall be increased by the sum of $10,555.50 in connection with the Additional Space. 4. Sections 1.12(b), 4.02(a), 4.04(c), 4.05(d) and (e) Other Periodic Payments: A. In connection with the Original Premises and the Increased Space, commencing on January 1, 1997, notwithstanding anything to the contrary set forth in the Lease, Tenant's obligation for (a) Real Property Taxes pursuant to Section 4.02, (b) insurance policy premiums pursuant to Section 4.04(c), and (c) Tenant's share of Common Area costs pursuant to Section 4.05 (collectively, "Triple Net Costs"), shall be $4,558.00 per month. The foregoing amount of Triple Net Costs shall be increased effective as of January 1, 1997, and on the same date of each year thereafter, by the same percentage of cost of living increase by which Base Rent is increased pursuant to Sections 3.01 and 3.02. B. Commencing upon the completion of the Tenant Improvements for the Expansion Space, notwithstanding anything to the contrary set forth in the Lease, Tenant's obligation for Triple Net Costs shall be $5228.88, as such amount shall be increased by the cost of living increase discussed above. C. In connection with the Additional Space, commencing on January 1, 1997, Tenant shall pay all of the Triple Net Costs. Tenant's pro-rata share of Common Area Expenses is 13%. Notwithstanding any provision in the Lease to the contrary, there is no cap on Tenant's share of the Triple Net Costs relating to the Additional Space. 5. Sections 4.04(b) and 4.08 Insurance: Both parties intend for the Landlord's insurance to provide primary or contributing insurance, as appropriate, in situations in which the Landlord is responsible for the insurable event. Impounds: The provisions set forth in Section 4.08 of the Lease shall not apply to the Original Premises, the Increased Space, or the Expansion Space during the initial term of the Lease. 6. Section 5.03 Hazardous Materials: Tenant has set forth on Exhibit G a list of Hazardous Materials currently used, stored and/or disposed of in the course of Tenant's business as presently conducted, and Landlord hereby consents to such use, storage and/or disposal. Except as provided in the following sentence, Tenant may use, store and/or dispose of Hazardous Material, in addition to that listed on Exhibit G, required in the normal course of its business as presently conducted, after giving Landlord prior written notice thereof and supplementing Exhibit G. In the event that Tenant shall propose to introduce use, store and/or dispose of additional Hazardous Material on the Property of such kind or in such quantities that Tenant would be subject to reporting obligations under applicable federal, state or local law or regulation, or in the event that Tenant shall propose to increase its use, storage and/or disposal of the materials on Exhibit G such that said reporting obligations would apply thereto, then Tenant shall be required to obtain the prior written consent of Landlord for such action. Landlord shall exercise this consent right on a reasonable basis, taking into account the level of environmental risk posed, the importance of the material to Tenant's business, and the adequacy of Tenant's environmental compliance procedures. The provisions of this Item 6 shall apply to Tenant but not any assignee or subtenant of Tenant. Nothing in this agreement concerning Landlord's agreement to Tenant's use of Hazardous Materials, or to the notice provisions, shall be construed to shift to Landlord, or to eliminate, any liability, payment or other responsibility owed by Tenant in connection with the use, storage and/or disposal of Hazardous Materials. These provisions have been included solely for the purpose of providing Landlord with information about the operations of Tenant on the Property, for the purpose of assuring Landlord that Tenant is taking all possible care in connection with its use, storage and/or disposal of Hazardous Materials at the Property and for the purpose of establishing an understanding regarding the parameters of the necessity of Landlord's prior written consent under certain conditions. Tenant also acknowledges and agrees that its responsibility for such payments or liabilities extends to Tenant 2 16 directly in the event insurance does not cover these payments or liabilities. 7. Section 5.04 Signs: Tenant shall have the right to place a sign, which must be approved by the Landlord, on the premises, in conformity with all CC&R's and all applicable City of San Diego codes and regulations. All costs relating to the design, installation and removal of said signage will be the responsibility of the Tenant. Landlord's approval shall not be unreasonably withheld or delayed. 8. Sections 6.01 and 6.04(a) Condition of Property: Landlord shall deliver the premises, excluding the Expansion Space, in a condition that meets all codes and regulations, the Americans With Disabilities Act (ADA), and any Title 24 requirements as the aforementioned existed as of April 17, 1995. Tenant shall be responsible for costs associated with compliance with the ADA only for those interior items of the premises, excluding the Expansion Space, that have become or may become required subsequent to April 17, 1995. See Article 15 below regarding the Expansion Space. To the best of Landlord's knowledge, as of April 17, 1995, the building did not contain, nor had it ever contained, asbestos containing materials; and there was no use, storage or disposal of significant quantities of hazardous materials on the site. Tenant's Obligations: Notwithstanding any provision to the contrary set forth in the Lease, during the initial term of the Lease only, in connection with the Original Premises, the Increased Space, and the Expansion Space only, Tenant shall have no obligation (i) to keep the heating, ventilation, or air conditioning equipment or the structural portions of such space in good order, condition, and repair, or (ii) to maintain a preventive maintenance contract providing for the regular inspection and maintenance of the heating and air conditioning system. 9. Section 9.01 Assignment and Subletting: A. Tenant may assign this Lease or sublease any portion of the Property to any unaffiliated subtenant with the Landlord's written consent, which shall not be unreasonably withheld or delayed, as provided in Section 9.05 of this Lease. Any attempted transfer without consent shall be void and shall constitute a non-curable breach of this Lease. B. Landlord's share of the Profit (as defined in the Lease) on assignment or sublease of the Original Premises, the Increased Space, or the Expansion Space shall be zero percent (0%). However, if Tenant assigns or subleases the Additional Space to any unaffiliated party, then Tenant shall pay to Landlord as Additional Rent under the Lease fifty percent (50%) of the Profit on such transaction as and when received by Tenant; provided, however, that if Landlord so elects, and if the amount of Profit has been agreed to by both Landlord and Tenant in writing, then upon written notice to Tenant and the assignee or subtenant, the Profit shall be paid by the assignee or subtenant to Landlord directly. 10. Section 9.02 Assignment and Subletting- Tenant Affiliate: Tenant may assign this Lease or sublease any portion of the Property to any parent corporation, subsidiary or affiliated entity without Landlord's consent provided the entity shares at least fifty percent (50%) common ownership with Tenant ("Tenant's Affiliate"). In such case, any Tenant's Affiliate shall assume in writing all of Tenant's obligations under this Lease. 11. Article 14 Brokers: A. In connection with the Expansion Space and the Additional Space, Landlord and Tenant each warrant that they have dealt with no other real estate broker other than CB Commercial Real Estate Group, Inc., which represents both Landlord and Tenant, and that no other broker is entitled to any commission on account of the lease of such space. Landlord and Tenant hereby confirm that they were timely advised of the dual representation of CB Commercial Real Estate Group, Inc., and that they consent to the same, and that they do not expect said broker to disclose to either of them confidential information of the other party. In connection with the Expansion Space, CB Commercial Real Estate Group, Inc., shall be entitled to a commission in the amount of $4,376.50. In connection with the Additional Space, CB Commercial Real Estate Group, Inc., shall be entitled to a commission in accordance with the terms of that certain Listing Agreement dated June 15, 1996, 3 17 entered into by and between Landlord and CB Commercial Real Estate Group, Inc., as amended. B. CB Commercial Real Estate Group, Inc., hereby acknowledges and agrees that it (i) is not entitled to a commission in connection with this Lease other than as set forth in Paragraph 11 (A) above, and (ii) shall not be entitled to a commission in connection with any future renewal, extension, amendment, or restatement of the Lease. 12. Article 15 Tenant Improvements: Landlord agrees to improve the expansion space as shown and described on Exhibit "C" attached hereto and made a part hereof (the "Expansion Space") in accordance with the applicable specifications and conditions set forth in Exhibits "A" and "F" to this Lease, attached hereto and made a part hereof. Any additional improvements to the Amended Premises not specifically addressed therein shall be the sole responsibility of the Tenant. Should Tenant request that additional improvements not contained therein be provided by Landlord, such request must be in writing from a duly authorized representative of Tenant and agreed to by Landlord. Landlord shall then advise Tenant in writing of the cost associated with said additional improvements and shall not proceed to provide said additional improvements until authorized to do so in writing by the duly authorized representative of Tenant. Within thirty (30) days of completion of the Tenant Improvements in their entirety, Tenant shall pay to Landlord the costs of all such additional improvements. The Tenant Improvements shall be deemed complete upon issuance of a "Certificate of Occupancy" (or its local equivalent) by the appropriate local governmental agency or agencies. Landlord shall represent, warrant and provide evidence that the air handling systems within the Expansion Space are of a satisfactory air quality. Such air quality testing shall include analyzing the Expansion Space air handling system to ensure that any toxin-containing materials or fibers are not circulated or vented into the Expansion Space. Landlord will be responsible for payment for tests of the system upon completion of tenant improvements and will be responsible for the repairs and/or replacement of equipment and/or ducting and/or venting as necessary to accomplish the foregoing. Landlord shall warrant that all tenant improvement work performed in the Expansion Space, and electrical and plumbing systems and equipment in the Expansion Space are in good working order as of the date of the completion of such tenant improvements. In addition, Landlord shall deliver the Expansion Space in a condition that meets all codes and regulations, the ADA, and any Title 24 requirements as the aforementioned existed as of date of this Lease. Tenant will be responsible for costs associated with compliance with the ADA only for those interior items of the Expansion Space that may become required subsequent to the date of the lease. Landlord will be responsible for any such costs associated with compliance with the ADA on the grounds outside of the premises. Landlord will not assume responsibility for making the mezzanine level wheelchair accessible. 13. Article 16 Option to Renew: If Tenant is not in default on any of the terms, conditions or covenants of this Lease, both on the date Tenant gives Landlord the renewal notice required below and at the end of the primary term of this Lease, Tenant shall have the right to renew this Lease for one (1) additional five (5) year term upon the same terms and conditions contained in this Lease except: (a) the renewal term will contain one (1) further renewal option for one (1) additional five (5) year term; (b) no tenant finish or tenant improvement allowance will be provided to Tenant during the renewal term unless expressly granted by Landlord in writing; (c) the Base Rent shall be at the then prevailing fair market rate and increased annual according to Article Three of this Lease; and (d) the Triple Net Costs shall not be limited as set forth in Section 4 above. If Tenant desires to renew this Lease, Tenant will notify Landlord of its intention to renew not less than four (4) months prior to the expiration date of the primary term of this Lease. If Tenant is not in default on any of the terms, conditions or covenants of this Lease, both on the date Tenant gives Landlord the renewal notice required below and at the end of the first option term of this Lease, Tenant shall have the right to renew this Lease for (1) additional five (5) year term upon the same terms and conditions contained in this Lease except: (a) the renewal term will not contain any further renewal option; (b) no tenant finish or tenant improvement allowance will be provided 4 18 to Tenant during the renewal term unless expressly granted by Landlord in writing; (c) the Base Rent shall be at 90% of the then prevailing fair market rate increased according to Article Three of this Lease; and (d) the Triple Net Costs shall not be limited as set forth in Section 4 above. If Tenant desires to renew this Lease, Tenant will notify Landlord of its intention to renew not less than four (4) months prior to the expiration date of the first option term of this Lease. 14. Article 17 Intentionally Omitted. 15. Article 18 Non-Disturbance: Should the Property be financed, refinanced, or sold during the Lease Term, Landlord shall provide, upon written request by Tenant, a duly executed Non-Disturbance Agreement for the benefit of Tenant from Landlord's mortgagee or Landlord's successor-in-interest. 16. Article 19 Right of Opportunity. Tenant shall have the first right of opportunity to lease any portion of the remainder of the building located at 9173 Sky Park Court that becomes available for lease under terms and conditions to be mutually agreed upon by both Tenant and Landlord. 17. Article 20 Reaffirmation of Duties of Original Tenant. Tenant hereby acknowledges and agrees that it has assumed all of the duties and obligations of Original Tenant under the Original Lease, as amended, and Landlord hereby accepts Tenant. Original Tenant hereby acknowledges and agrees that it is not released from its duties and obligations under the Original Lease, as amended, and hereby reaffirms its duties and obligations under the Original Lease, as amended and restated by this Amended and Restated Lease. Tenant and Original Tenant acknowledge and agree that they shall be jointly and severally liable for all obligations of Tenant hereunder. The undersigned hereby consents and agrees to the provisions of Article 14 of this Amended and Restated Lease as set forth in the First Lease Rider. CB Commercial Real Estate Group, Inc. By: /s/ [NAME ILLEGIBLE] --------------------------------- E.V.P./EXEC. MANAGING OFFICER --------------------------------- By: --------------------------------- --------------------------------- By: --------------------------------- --------------------------------- 5 19 EXHIBIT "A" SPECIFICATIONS FOR 9174 SKY PARK COURT, SAN DIEGO I-BUS TENANT IMPROVEMENTS DESCRIPTION OF ITEMS ON THE DRAWINGS AT EXHIBIT "B" TO BE COMPLETED AS PART OF THE TENANT IMPROVEMENTS AT THE ABOVE ADDRESS. THE STATED WORK TO BE PERFORMED IS BASED UPON PLANS BY ARCHITECTURE ONE. ALL MATERIALS AND WORKMANSHIP SHALL BE IN ACCORDANCE WITH THE LATEST UNIFORM BUILDING CODE EDITION, WITH AMENDMENTS AND ALL APPLICABLE LOCAL STANDARDS. ALL WORK SHALL BE PERFORMED AS PER ACCEPTABLE INDUSTRY STANDARDS. 01. DEMOLITION: A. REMOVAL OF ALL WALLS, CEILING GRID, FLOOR COVERINGS, ETC. IN ORDER TO BUILD SAID PLANS. B. SAVE FOR POSSIBLE RE-USE: 1. ALL LIGHTING AND CEILING TILES; 2. DOORS, LOCKS AND FRAMES; 3. HVAC DUCTWORK, THERMOSTATS AND GRILLS; 4. SPEAKERS, FIRE SYSTEM PARTS AND EQUIPMENT; 5. CABINETS (2 SINK COUNTERS, 1 FRONT RECEPTION COUNTER). C. REMOVAL OF EXISTING UNISEX RESTROOM IN THE WAREHOUSE SPACE. THE REMAINING FOUR EXISTING MEN'S AND WOMEN'S RESTROOMS TO REMAIN AS IS (TO BE CLEANED AS PART OF CONSTRUCTION CLEAN-UP). 0.2 EXISTING AREAS TO BE RETAINED AND PROTECTED FROM DAMAGE DURING CONSTRUCTION: A. EXISTING FIRE CORRIDOR TO REMAIN AND BE MODIFIED PER PLANS AND CODE REQUIREMENTS. B. EXISTING ELECTRIC ROOMS, ELECTRIC PANELS, PHONE ROOMS AND PHONE PANELS TO REMAIN FOR POSSIBLE REUSE AS PER PLANS AND CODE. C. EXISTING STAIRCASES TO REMAIN. MODIFICATION AS PER PLANS AND CODE. D. NO DEMOLITION OR MODIFICATIONS SHALL BE PROVIDED FOR THE EXTERIOR OF THE BUILDING, THE SAN DIEGO GAS & ELECTRIC ROOM, THE OUTSIDE GROUNDS OR THE PARKING LOT AS PART OF THESE TENANT IMPROVEMENTS UNLESS STATED HEREIN OR AS PART OF ADDITIONAL WORK ELECTED TO BE PERFORMED AND PAID FOR BY TENANT AS AN OPTION AS OUTLINED IN ITEM 18. 03. VENTILATION: A. POWERED EXHAUST FAN(S), THERMOSTATICALLY CONTROLLED, FOR STOCK AREA #76 AND RECEIVING AREA #75 AS PER PLANS AND CODES. B. EXHAUST VENTING FOR ROOMS #43 AND #51 (750-1000 CFM). C. THERMOSTATICALLY CONTROLLED EXHAUST VENTING FOR ROOMS #68 AND #71. D. FORCED DRAFT VENTILATION FOR UPPER LEVEL RESTROOMS (AIR CHANGE EVERY 5 MINUTES). E. EXISTING ROOF EXHAUST FAN ON UPPER LEVEL TO REMAIN, TO BE THERMOSTATICALLY CONTROLLED (LOCATION TO BE DETERMINED BY BUILDING OWNER). F. HOOK UP OF TENANT'S ESS CHAMBER VENTING (ROOM #70) TO ROOF VENT. 04. AIR CONDITIONING AND HEATING, TO BE INSTALLED IN ACCORDANCE WITH THE LOCAL HVAC CODE REQUIREMENTS AND S.M.A.C.N.A.: A. EXISTING HEAT PUMP UNITS TO BE REDUCTED AS PER PLANS AND CODES. B. EXISTING SUPPLY AND RETURN GRILLS TO BE CLEANED AND REPAINTED AS NECESSARY, THEN REUSED WHERE POSSIBLE ON FIRST LEVEL ONLY. C. EXISTING THERMOSTATS TO BE RELOCATED WHERE POSSIBLE ON FIRST LEVEL. D. ROOFTOP GAS HEAT PUMP UNIT(S) FOR NEW OCCUPIED AREAS, THERMOSTATICALLY CONTROLLED. SYSTEM(S) SHALL BE DESIGNED FOR LOADS AND IN ACCORDANCE WITH ASHRAE AND TITLE 24 STANDARDS WITH INSULATED SUPPLY AND RETURN DUCT WORK AND ALL NECESSARY GRILLS AND REGISTERS AS PER PLANS AND CODES. E. GAS HEAT UNIT(S) FOR RECEIVING AREA #75 AND STOCK AREA #76 AS PER PLANS AND CODES. F. GAS HEAT UNIT(S) FOR BURN IN ROOMS #68 AND #71 AS PER PLANS AND CODES. G. DEDICATED UNIT(S) OR ZONES FOR AQ LAB ROOM #36, ENGINEERING LAB ROOM #40, CAFETERIA #39 AND NETWORK ROOM #21 (ONE SUPPLY DUCT TO ROOM #67 FROM ROOM #21) AS PER PLANS AND CODES. H. GAS PIPING TO NEEDED LOCATIONS AS PER PLANS AND CODES. I. NO SUPPLY OR RETURN DUCTING TO HALLWAYS. J. NO AIR CONDITIONING TO STOCK AREA #76 OR RECEIVING AREA #75. K. STANDARD HUMIDITY CONTROL FOR AREAS #72, #73 AND #74. 05. INSULATION: A. R19 INSULATION UNDER THE ROOF FOR STOCK AREA #76 AND RECEIVING AREA #75. B. R11 INSULATION ABOVE CEILING TILES IN AREAS #73 AND #74. C. R11 INSULATION FOR NEW AREA SEPARATION WALLS. D. R11 INSULATION IN NEW WALLS FOR ROOMS #21, #36, #40, #68, #70 AND #71. E. R11 INSULATION IN NEW WALLS FOR WINDOW OFFICES, CONFERENCE ROOM, RESTROOMS AND WALLS SEPARATING UNOCCUPIED AREA ON THE UPPER LEVEL. F. R19 INSULATION UNDER THE ROOF ABOVE THE UPPER LEVEL OCCUPIED SPACE. G. R11 INSULATION ABOVE THE CEILING TILES IN ANY OTHER OFFICE AREAS OPEN TO THE ROOF. H. INSULATION PLACED AROUND THE DRAIN PIPING WITHIN THE WALLS IN ORDER TO REDUCE THE NOISE IN CONFERENCE ROOMS #28 AND #104. 06. FIRE SPRINKLERS: A. REPIPE UPPER AND LOWER LEVELS AS PER PLANS AND CODE REQUIREMENTS. B. HONEYWELL PROTECTION SERVICES/HONEYWELL, INC. (OR APPROVED COMPANY) TO TEST AND MONITOR IRE SPRINKLING SYSTEM UPON COMPLETION AND ON A REGULAR BASIS (TO BE PAID FOR BY BUILDING OWNER). THIS DOES NOT INCLUDE TENANT'S SECURITY OR FIRE SYSTEM(S). 07. SUSPENDED CEILINGS: A. APPROXIMATELY 24,000 SQUARE FEET OF NEW CEILING GRID. B. ALL NEW TILES IN UPPER FLOOR AREAS (#769 CORTEGA TILES BY ARMSTRONG). REUSE OF EXISTING CEILING TILES AND REMAINING NEW TILES ON LOWER LEVEL. C. TEN (10) FOOT CEILING GRID HEIGHT IN AREAS #73 AND #74 AS PER PLANS AND CODES. D. AREA #72 TO BE LEFT OPEN TO THE FLOOR ABOVE. CEILING GRID DROP DOWN TO AREA #73 (TEN (10) FOOT) TO BE MADE AT LOCATION OF THE END OF THE MEZZANINE LEVEL ABOVE. 20 EXHIBIT A PAGE 2 E. ALL OTHER LOWER LEVEL AREAS TO REMAIN AT EXISTING HEIGHT AS PER PLANS AND CODES. F. CEILING GRID TO BE AT AN EIGHT(8) FOOT HEIGHT (OR AS CLOSE AS POSSIBLE) ON THE UPPER LEVEL, BOXING IN ANY BEAMS OR DRAINS FALLING BELOW THE GRID. G. CEILING GRID TO BE CONTINUOUS WITH WALLS CONSTRUCTED UNDER THE GRID EXCEPT IN FIRE CORRIDORS OR AS PLANS OR CODES DIRECT. H. LOBBY AREA #66 AND UPPER FLOOR HALLWAYS TO BE AN UPGRADED 2X4 CEILING TILE AS AGREED UPON BY BOTH PARTIES. 08. WALLS: A. PART OF EXISTING FIRE CORRIDOR TO REMAIN AS PER PLANS AND CITY CODE REQUIREMENTS. B. FLOOR TO ROOF WALLS THAT DIVIDE AREAS TO REMAIN AS PER PLANS AND CODES. C. WALLS AROUND RESTROOMS AND STAIRCASES TO REMAIN AS PER PLANS AND CODES. D. EXISTING WALLS TO REMAIN SHALL BE PATCHED AND PAINTED AS PER PLANS. E. WALLS TO BE BUILT UNDER CEILING GRID EXCEPT IN FIRE CORRIDORS, OR AS PLANS AND CODES DIRECT. F. WALLS TO BE OF STANDARD BUILDING CONSTRUCTION AS PER PLANS AND CODES. 09. PLUMBING: A. EXISTING RESTROOM PLUMBING TO REMAIN AS IS. B. SUPPLY WATER AND WASTE LINES TO BE PIPED TO CAFETERIA ROOM #39. EXISTING SINK COUNTER TO BE INSTALLED AND CONNECTED WITH A GARBAGE DISPOSAL AS PER PLANS AND CODES. C. SUPPLY WATER AND WASTE LINES TO BE PIPED TO BREAK AREA ROOM #109. EXISTING SINK COUNTER TO BE INSTALLED AND CONNECTED WITH A GARBAGE DISPOSAL AS PER PLANS AND CODES. D. SUPPLY WATER AND WASTE LINES TO BE PIPED TO UPPER LEVEL RESTROOMS AS PER PLANS AND CODES. E. SUPPLY AND INSTALL IN UPPER LEVEL RESTROOMS: 5 - WATER CLOSETS, 1 - URINAL, 2-FLOOR DRAINS, 2 - SINKS/COUNTERS (UPGRADED FIXTURES). F. SUPPLY AND INSTALL WATER LINES, WASTE LINES AND DRINKING FOUNTAIN TO ONE LOCATION ON THE LOWER LEVEL AND TO ONE LOCATION ON THE UPPER LEVEL AS PER PLANS AND CODES. G. PLUMBING, PIPING, BACKFLOW PREVENTION, INDUSTRIAL WASTE DEVICES, EQUIPMENT, KITCHEN APPLIANCES, INSTALLATION AND CONNECTIONS FOR ANY MECHANICAL EQUIPMENT ARE NOT INCLUDED IN THIS AGREEMENT UNLESS SHOWN ON EXHIBIT "B" OR SPECIFIED HEREIN. 10. ELECTRICAL: A. EXISTING ELECTRIC ROOM, SUB PANELS AND SAN DIEGO GAS & ELECTRIC AREAS TO REMAIN AND BE USED AS PER PLANS AND CODE REQUIREMENTS. B. EXISTING ELECTRICAL OUTLETS IN UTILIZED WALLS TO REMAIN AND BE USED AS PER PLANS AND CODES. C. SUPPLY AND INSTALL BUILDING STANDARD SWITCHES AS NEEDED AND CONVENIENCE OUTLETS WITH A MINIMUM OF 3 OUTLETS PER STANDARD SIZE OFFICE AS INDICATED ON PLANS. SUPPLY AND INSTALL ALL REQUIRED CIRCUITS, WIRING, CONDUIT, AND PANELS IN STRICT ACCORDANCE WITH APPLICABLE CODES AND REGULATORY AGENCIES. D. WIRING AND HOOK UP TO NEW HEAT PUMPS AND EXHAUST FANS PER PLANS AND CODES. E. WIRING AND HOOK UP TO EXISTING AND NEW LIGHT FIXTURES AS PER PLANS AND CODES. F. SUPPLY 110V HOOK UP FOR TENANTS U.P.S. SYSTEM AS PER PLANS AND CODES. G. DISCONNECT AND HOOK UP TENANTS 480 TRANSFORMER TO ESS CHAMBER AS PER PLANS AND CODES. H. SUPPLY AND HOOK UP ONE (1) - 112 KVA - 208 TO 230 TRANSFORMER WITH ONE (1) 200 AMP 3 PHASE 4 WIRE 120V TO 230V PANEL TO SUPPLY POWER TO THE QA LAB #36, BURN IN ROOM #68, AT&T BURN IN ROOM #71, SHIPPING IN AREA #72, HIPOT TEST & TEST RACKS IN AREA #73, SUB-ASSEMBLY IN AREA #74, RMA IN AREA #75. I. DISCONNECT AND HOOK UP TENANTS AIR COMPRESSOR TO 208V AS PER PLANS AND CODES. J. SUPPLY 208V HOOK UP TO TENANTS FORKLIFT CHARGERS (THREE (3) MAXIMUM) AS PER PLANS AND CODES. K. SUPPLY AND INSTALL ONE (1) DUPLEX AT EACH DRINKING FOUNTAIN LOCATION (2). L. SUPPLY ONE (1) DEDICATED 15 AMP CIRCUIT AND ONE (1) 20 AMP CIRCUIT WITH STANDARD OUTLET FOR COPY MACHINES AT LOCATIONS PER PLANS. M. SUPPLY A MINIMUM OF ONE 1/2" RIGID CONDUIT DROP FOR EACH OFFICE AND EACH AREA IN LOCATIONS SPECIFIED ON PLANS FOR TELEPHONE AND NETWORK CABLING, NOT TO EXCEED 200 DROPS. N. ELECTRICAL / TELEPHONE CHASEWAY FOR THE UPPER LEVEL TO BE LOCATED NEAR LOBBY STAIRWELL. NEW ELECTRICAL SUB PANEL TO BE SIZED FOR FUTURE OFFICE OCCUPATION OF UPPER LEVEL. O. MECHANICAL EQUIPMENT, APPLIANCES, INSTALLATION AND CONNECTIONS FOR ANY MECHANICAL EQUIPMENT OR APPLIANCES ARE NOT INCLUDED IN THIS AGREEMENT UNLESS SHOWN ON DRAWINGS OR SPECIFIED HEREIN. P. UPON COMPLETION OF CONSTRUCTION, ALL CIRCUIT BREAKERS ARE TO BE LABELED. Q. ADDITIONAL ELECTRICAL SPECIAL HOOK UPS SUPPLIED AS FOLLOWS: 1. NETWORK ROOM #21 7 - 110V QUAD BOXES MOUNTED 4 FEET OFF THE FLOOR, 7 CIRCUITS, 20 AMP BREAKERS OR AS PLANS OR CODES REQUIRE. 2. QA LAB #36 20 - 110V QUAD BOXES MOUNTED 4 FEET OFF THE FLOOR, 20 CIRCUITS, 20 AMP BREAKERS OR AS PLANS OR CODES REQUIRE. 2 - 230V QUAD BOXES MOUNTED 4 FEET OFF THE FLOOR, 2 CIRCUITS, 20 AMP BREAKERS OR AS PLANS OR CODES REQUIRE. 3. ENGINEERING LAB #40 9 - 110V 10V QUAD BOXES MOUNTED 4 FEET OFF THE FLOOR, 6 CIRCUITS, 20 AMP BREAKERS OR AS PLANS OR CODES REQUIRE. 1 - 110V DEDICATED CIRCUIT WITH A DUPLEX BOX MOUNTED 4 FEET OFF THE FLOOR 1 CIRCUIT, 30 AMP BREAKER OR AS PLANS OR CODES REQUIRE. 4. PRINTER PLOTTER ROOM #51 4 - 110V QUAD BOXES MOUNTED 4 FEET OFF THE FLOOR, 4 CIRCUITS, 15 AMP BREAKERS OR AS PLANS OR CODES REQUIRE. POWER AS NEEDED FOR EXHAUST FANS AS PER PLANS AND CODES. 5. PHONE ROOM #67 4 - 110V QUAD BOXES MOUNTED 4 FEET OFF THE FLOOR, 4 CIRCUITS, 15 AMP BREAKERS OR AS PLANS OR CODES REQUIRE. 21 EXHIBIT A PAGE 3 6. BURN IN AT AT&T ROOM #71 20 - 110V DUPLEX BOXES MOUNTED UNDER CONVEYOR LINE, 20 CIRCUITS, 20 AMP BREAKERS OR AS PLANS OR CODES REQUIRE. 1 - 230V QUAD BOX 1 CIRCUIT, 40 AMP BREAKER AS PLANS OR CODES REQUIRE. POWER AS NEEDED FOR EXHAUST FAN AND HEATING AS PER PLANS AND CODES. 7. BURN IN ROOM #68 15 - 110V QUAD BOXES MOUNTED 4 FEET OFF THE FLOOR, 15 CIRCUITS, 20 AMP BREAKERS OR AS PLANS OR CODES REQUIRE. 2 - 230V QUAD BOXES MOUNTED 4 FEET OFF THE FLOOR, 2 CIRCUITS, 20 AMP BREAKERS OR AS PLANS OR CODES REQUIRE. POWER AS NEEDED FOR EXHAUST FAN AND HEATING AS PER PLANS AND CODES. 8. ADDITIONAL 230V CIRCUITS WITH LOCATIONS TO BE DETERMINED ON PLANS 1 - 15 AMP IN SHIPPING AREA #72 2 - 20 AMP IN AREA #73 FOR HIPOT TEST AND TEST RACKS 1 - 15 AMP IN SUB-ASSEMBLY AREA #74 1 - 15 AMP IN RMA AREA #75 11. LIGHTING: A. SUPPLY AND INSTALL LIGHT FIXTURES (UP TO MAXIMUM OF 435) ON THE UPPER AND LOWER LEVELS, REUSING EXISTING LIGHT FIXTURES WHERE POSSIBLE, PER PLANS, CODES AND TITLE 24 REQUIREMENTS. B. PROVIDE DUAL SWITCHING (A,B) WHERE REQUIRED BY CODE. C. EMERGENCY LIGHTING AS PER PLANS, CODES AND TITLE 24 REQUIREMENTS. D. NIGHT LIGHTING AS PER PLANS AND CODES. E. EGG CRATE STYLE LENS FOR LOBBY ENTRY AREA, UPPER LEVEL HALLS AND UPPER LEVEL WINDOW OFFICES AS PER PLANS AND CODES. F. LOWER LEVEL FIXTURES TO BE ARRANGED TO PROVIDE ABOVE AVERAGE LIGHTING WITHIN TITLE 24. 12. INSIDE FENCING: A. RECEIVING AREA #75 AND STOCK AREA #76 FULL HEIGHT AS POSSIBLE PER PLANS. B. FENCING IN AREAS #73 AND #74 10 FOOT HEIGHT UNDER CEILING GRID AS PER PLANS. C. REUSE TENANT'S EXISTING FENCING AS POSSIBLE. 13. WALL COVERINGS: A. PAINT WALLS WITH 2 COATS FRAZEE FLAT (COLOR TO BE DETERMINED). B. EXISTING AND NEW RESTROOMS, CAFETERIA #39 AND BREAK ROOM #109 PAINTED WITH 2 COATS OF FRAZEE SEMI-GLOSS (COLOR TO BE DETERMINED). C. WALLPAPER - 50 ROLLS AT $40.00 PER ROLL (LOCATIONS TO BE DETERMINED). 14. DOORS AND FRAMES: A. REUSE EXISTING DOORS AND FRAMES, HARDWARE AND HANDLES ON LOWER LEVEL AS POSSIBLE PER PLANS AND FIRE CODE REQUIREMENTS. B. NEW DOORS AND FRAMES ON UPPER LEVEL TO MATCH STYLE OF LOWER LEVEL AS PER PLANS AND FIRE CODE REQUIREMENTS. C. NEW SCHLAGE LEVER "D" DOOR HANDLES TO MATCH EXISTING PER PLANS AND ADA REQUIREMENTS. D. 2-FIRE HOLD OPEN DOORS WITH 6'0" X 8'0" FRAMES OR AS PLANS OR FIRE CODES REQUIRE TO BE USED AS PASSAGE THROUGH FIRE CORRIDOR BETWEEN AREAS #73 AND #74. E. RELOCATE THE ONE DOUBLE ENTRY DOORS TO STAIRCASE ENTRY AS PER PLANS AND CODES. 15. FLOOR COVERINGS: A. FURNISH AND INSTALL ATLAS BROOKSTONE OR EQUIVALENT GLUE DOWN, APPROXIMATELY 1,800 SQUARE YARDS AT APPROXIMATELY $18.00 PER YARD. B. FURNISH AND INSTALL ARMSTRONG VCT TILES IN CAFETERIA #39, BREAK ROOM #109, AREAS #72, #73 AND #74, APPROXIMATELY 10,000 SQUARE FEET AT $1.00 PER SQUARE FOOT. C. FURNISH AND INSTALL 4 INCH VINYL BASE, APPROXIMATELY 4500 LINEAR FEET. D. FURNISH AND INSTALL CERAMIC TILE UPGRADE TO UPPER LEVEL RESTROOM WITH APPROXIMATELY 342 SQUARE FEET OF FLOORING AND APPROXIMATELY 420 SQUARE FEET OF WAINSCOT WALLS AT APPROXIMATELY $18.00 PER SQUARE FOOT. E. PREPARE, CLEAN AND CLEAR SEAL AREAS #75 AND #76 NOT TO EXCEED $0.55 PER SQUARE FOOT. F. CARPET THE NETWORK ROOM #21, QA LAB #36 AND ENGINEERING LAB #40 WITH AN ESD MATERIAL AS PER PLANS NOT TO EXCEED $4.00 PER SQUARE FOOT INSTALLED. 16. AIR COMPRESSOR: A. DISCONNECT AND HOOK UP TENANT'S AIR COMPRESSOR AS PER PLANS AND CODE. B. HANG APPROXIMATELY 450 LINEAR FEET OF 3/4 INCH GALVANIZED PIPE ABOVE THE CEILING GRID. C. 20 - CAPPED TEE LOCATIONS TO BE DETERMINED BY TENANT FOR 1/2 INCH OR LESS DROPS AND FUTURE USE. D. 10 - DROPS WIRE 1/2 INCH OR LESS LINES WITH A SHUT OFF VALVE AND 1 QUICK DISCONNECT FITTING AT EACH LOCATION. E. 2 - DIRECT HOOK UPS TO ESS CHAMBER ROOM #70 AND AT&T ASSEMBLY LINE IN AREA #73 AS PER PLANS AND CODES. 17. MISCELLANEOUS ITEMS: A. FURNISH AND INSTALL 1 10' X 10' ROLLING STEEL OVERHEAD DOOR, CHAIN OPERATED, TO MATCH EXISTING AT AREA #72 LOADING DOCK LOCATION (REMOVAL OF GLASS AND FRAMING). B. FURNISH AND INSTALL 32 BLINDS FOR THE WINDOWS ON THE UPPER LEVEL WITH AN ALLOWANCE OF $3,000.00. C. MODIFY EXISTING ENTRY COUNTER FOR NEW ENTRY AREA LOBBY #66. D. SUPPLY AND INSTALL 2X4 METAL FRAMED WALL WITH 1/2 INCH PLYWOOD ON THE OUTSIDE AND DRYWALL ON THE INSIDE TO BE INSTALLED IN FRONT OF AND INSIDE OF ALL WINDOWS IN THE RECEIVING AREA #75 AND STOCK AREA #76. E. MODIFY EXISTING STAIRCASE BY REMOVING TWO LOWER STAIRS IN FRONT OF THE ENTRY DOORS TO MAKE A LARGER ENTRY HALL. BUILD MATCHING HALF WALL IN REMOVED STAIR LOCATION. F. SUPPLY AIR QUALITY TEST UPON COMPLETION OF CONSTRUCTION. H. FRAMING SUPPORT ON TOP OF THE ROOF FOR ESS CHAMBER CONDENSER UNIT (CONSISTING OF 2 - 6X8 BEAMS. IF CODE REQUIRES ADDITIONAL SUPPORT, TENANT TO PAY FOR ADDITIONAL COST. I. ONE MIRROR (MINIMUM) TO BE INSTALLED IN EACH UPPER LEVEL RESTROOM WITH MINIMUM FOUR (4) FOOT WIDTH. J. SUPPLY AND INSTALL 1 - 4' X 8' 1/2" PLYWOOD BACKBOARD IN ROOM #21 FOR PHONE EQUIPMENT. 22 EXHIBIT A PAGE 4 K. UPON COMPLETION OF CONSTRUCTION, CLEAN UP AND WAX WITH A STANDARD COMMERCIAL JANITORIAL FLOORWAX ROOMS #39 & #109 AND AREAS #72, #73 & #74. L. PROVIDE ALL SIGNS, RAMPS AND STRIPING FOR DISABLED PARKING AND BUILDING ACCESS. M. OWNER TO PROVIDE ANY SCRAP CARPETING MATERIAL AND 80 TO 100 SQUARE FEET OF VCT TILE FOR FUTURE MAINTENANCE. 18. OPTIONS (SUPPLIED UPON SIGNED CHANGE ORDER FOR ADDITIONAL COSTS AND TIME): A. STEELCASE FURNITURE FOR OPEN SPACE. B. ANY OVERTIME PAY FOR COMPLETION EARLIER THAN STATED WITHIN THE LEASE. ANY OVERTIME PAY TO COMPLETE ADDITIONAL WORK NOT INCLUDED HEREIN. C. CONCRETE FILLED REMOVABLE POSTS. D. MEN'S AND WOMEN'S SHOWERS. E. PLANTERS. F. ANY UPGRADES OTHER THAN THOSE STATED HEREIN. G. SECURITY SYSTEM FOR TENANT'S USE. H. ANY SEPARATE FIRE SYSTEM IN ADDITION TO EXISTING. I. SIGNAGE. J. TELEPHONES AND SYSTEMS. K. NETWORK AND SYSTEMS. L. MOVING OF TENANT'S EQUIPMENT OR FURNITURE. M. MOVING OF TENANT'S ESS CHAMBER OR CONDENSER. N. INSTALL AN ELEVATED PLATFORM ON THE ROOF TO SUPPORT THE ESS CHAMBER CONDENSER UNIT TO MATCH EXISTING AIR CONDITIONING UNITS. O. PROVIDE ELECTRICAL OUTLET OR SERVICE FOR I-BUS SIGN ABOVE ROOM #28. 23 EXHIBIT "B" [FLOORPLAN] GROUND FLOOR 24 EXHIBIT "B" [FLOORPLAN] MEZZANINE AREA 25 EXHIBIT "C" [FLOORPLAN] EXPANSION AREA - MEZZANINE 26 EXHIBIT "D" SKY PARK CENTRE [LOT PLAN OF BUILDINGS & PARKING AREA] Note: As of 1/1/97, the parking area is not as depicted above. 27 EXHIBIT "E" BUILDING RULES AND REGULATIONS SKY PARK CENTRE 1. Tenant shall not suffer or permit the obstruction of any Common Areas, including driveways, walkways and stairways. 2. Landlord reserves the right to refuse access to any persons Landlord in good faith judges to be a threat to the safety, reputation or property of the Project and its occupants. 3. Subject to Section 1.06 of the lease (the use clause), Tenant shall not make or permit any unreasonable noise or odors that annoy or interfere with other tenants or persons having business within the Project. 4. Tenant shall not keep animals or birds within the Project, and shall not bring bicycles, motorcycles or other vehicles into areas not designated as authorized for same. 5. Tenant shall not make, suffer or permit litter except in appropriate receptacles for the purpose. 6. Tenant shall be responsible for the inappropriate use of any toilet rooms, plumbing or other utilities. No foreign substances of any kind are to be inserted therein. 7. Tenant shall not deface the walls, partitions or other surfaces of the premises or Project. 8. Tenant shall not suffer or permit anything in or around the Premises or Building that causes excessive vibration or floor loading in any part of the Project. 9. Tenant shall not employ any service or contractor for construction services or work to be performed to the Premises, except as approved by Landlord. 10. Tenant shall return all keys at the termination of its tenancy and shall be responsible for the cost of replacing any keys that are lost. 11. Tenant shall be responsible for securely locking any doors that it may have opened for entry. 12. No exterior window coverings, shades or awnings shall be installed by Tenant. 13. No Tenant, employee or invitee shall go upon the roof of the Premises. 14. Tenant shall not suffer or permit smoking or carrying of lighted cigars or cigarettes in areas reasonably designated by Landlord or by applicable governmental agencies as non-smoking areas. 15. Tenant shall not use any method of heating or air conditioning other than as provided by Landlord. 16. The Premises shall not be used for lodging. 17. Tenant shall comply with all safety, fire protection and evacuation regulations established by Landlord or any applicable governmental agency. 18. Landlord reserves the right to waive any one of these rules and regulations and/or as to any particular tenant, and any such waiver shall not constitute a waiver of any other rule or regulation or any subsequent application thereof to such tenant. 19. Tenant assumes all risks from theft or vandalism and agrees to keep its Premises locked as may be required. 20. Landlord reserves the right to make such other reasonable rules and regulations as it may from time to time deem necessary for the appropriate operation and safety of the Project and its occupants. Tenant agrees to abide by those and such rules and regulations. PARKING RULES 1. Tenant shall not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant's employees, suppliers, shippers, customers or invitees to be loaded, unloaded or parked in areas other than those designated by Landlord for such activities. 2. Users of the parking area will obey all posted signs and park only in the areas designated for vehicle parking. 1 28 3. Unless otherwise instructed, every person using the parking area is required to park and lock their own vehicle. Landlord will not be responsible for any damage to vehicles, injury to persons or loss of property, all of which risks are assumed by the party using the parking area. 4. The maintenance, washing, waxing or cleaning of vehicles in the parking area is prohibited. 5. Tenant shall be responsible for seeing that all of its employees, agents and invitees comply with the applicable parking rules, regulations, laws and agreements. 6. Landlord reserves the right to modify these rules and/or adopt such other reasonable and non-discriminatory rules and regulations as it may deem necessary for the proper operation of the parking area. 7. Such parking use as is herein provided is intended merely as a license only and no bailment is intended or shall be created hereby. 2 29 EXHIBIT F WORK LETTER AGREEMENT Landlord and Tenant are executing, simultaneously with this Work Letter Agreement, an Industrial Real Estate Lease ("Lease") covering certain premises in a building located at 9174 Sky Park Court, San Diego, CA ("Premises"). This Work Letter Agreement is a part of the lease and shall be subject to all of its terms and conditions, including all definitions contained in the Lease and shall apply to all expansion space becoming a part of the Premises by Tenant's exercise of expansion options under the Lease. 1. REPRESENTATIVES: Landlord appoints Landlord's Representative to act for Landlord and Tenant appoints Tenant's Representative to act for Tenant in all matters covered by this Work Letter Agreement. All inquiries, requests, instructions, authorizations and other communications with respect to the matters covered by this Work Letter Agreement will be made to Landlord's Representative or Tenant's Representative, as the case may be. Either party may change its respective Representative under this Work Letter Agreement at any time with prior written notice to the other party. Tenant's Representative: John Selby, Maxwell Labs Tenant Contact: Dick Dysktra, Maxwell Labs Landlord's Representative: David Kirchner, Cody Three Landlord's Contact: Jay Sheppard, Pomona Management Group Landlord's Architect: Robert Laird, Architecture One 2. TENANT IMPROVEMENTS 2.1 Plans & Specifications: The Tenant Improvements shall be constructed pursuant to plans and specifications prepared in accordance with Paragraph 3.1 of this Work Letter Agreement by Landlord's Architect ("Architect"). The scope of the work to be included in the plans and specifications will be consistent with the space plans that are attached to the Lease as Exhibits "B" and "C" and the specifications that are attached to the Lease as Exhibit "A". Landlord shall furnish, through the Architect, at its sole cost and expense, complete plans and specifications required for the construction and installation of the Tenant Improvements. Such plans shall include, but not be limited to, partition layout, reflective ceiling plans, electrical outlets, switches and telephone outlets and locations. Architect will furnish plans to the Landlord's mechanical, electrical and plumbing engineers ("Engineers"), if applicable, to enable the Engineers to complete design build drawings which will, when incorporated with the other plans provided by Architect (in total, "the Construction Documents"), enable the selected general contractor to secure the permits necessary for the construction of the Tenant Improvements. All fees incurred by the Landlord in the preparation of working and permit drawings of the agreed plans and specifications contained in Exhibits "A", "B" and "C" shall be the sole expense of Landlord. All costs of any subsequent plan changes initiated by Tenant ("Additional Work") shall be the sole expense of Tenant. Upon delivery of plans and specifications, Tenant may provide a list of potential contractors and subcontractors to be included in the bidding process. Landlord shall not be bound to use any contractor or subcontractor so described. 2.2 Cost of Tenant Improvement Work: Landlord shall pay all costs associated with the design, construction and installation of the Tenant Improvements, including, but not limited to, costs of preparation of Construction Documents, all costs of construction labor and materials under the construction contract with the selected general contractor, fees for permits and licenses paid by the general contractor to governmental agencies in connection with the Tenant Improvements, costs of any necessary structural engineering 30 EXHIBIT F Page-2- 2.3 Tenant Improvement Construction: Landlord shall cause the Tenant Improvements to be constructed by a qualified general contractor selected by Landlord at Landlord's sole expense. The selected general contractor shall provide a one (1) year warranty for all materials and workmanship on the Premises. Construction shall commence as soon as possible following the selection of the general contractor and the obtaining of the required building permits. Landlord shall be responsible for overseeing the contractor and assuring that the Tenant Improvements are constructed in accordance with the permitted Construction Documents. All Tenant Improvements and the equipment and materials incorporated into the Tenant Improvements shall materially comply with the Construction Documents and shall be constructed in a good and workmanlike manner, free from all material defect in design, materials and workmanship, in compliance with all governmental and quaisi-governmental rules, regulations, laws and building codes. 3. SCHEDULE OF TENANT IMPROVEMENT ACTIVITIES 3.1 Construction Document Preparation: As soon as practicable following lease execution, Architect together with the Engineers will prepare and deliver to Landlord and Tenant one reproducible copy of the Construction Documents for the Premises apiece. 3.2 Tenant Comments: Upon receipt of the Construction Documents, Tenant shall review for errors and omissions from the plans and specifications as detailed in Exhibits "A", "B" and/or "C" of the Lease and forward all comments to Landlord within five (5) business days of receipt. Failure to notify Landlord of any comments within the proscribed period shall be deemed approval of such plans. Landlord and Architect will then have five (5) business days to address and/or correct any deficiencies and deliver one corrected reproducible copy of the Construction Documents to Tenant. 3.3 As-Built Documentation: Landlord shall furnish to Tenant, at Landlord's expense, one set of reproducible "as built" plans for all completed Tenant Improvements and Additional Work within thirty (30) days after Lease Commencement. 3.4 Completion and Punch List: Landlord shall be responsible for the construction of the Tenant Improvements in accordance with Construction Documents. Upon Substantial Completion, as defined in Section 6 below, of the Tenant Improvements, Landlord shall, upon not less than three (3) days' prior notice, provide Tenant an opportunity to inspect the Premises and the Tenant Improvements and Additional Work. Tenant will, within three (3) days following such inspection, develop a "punch list" identifying all corrective work discovered during such inspection. Such corrective work shall be limited to those items specified in the Construction Documents or duly authorized Change Orders. Within ten (10) days after receipt of said punch list, Landlord shall undertake to correct all punch list items to the reasonable satisfaction of Tenant. If Landlord fails to take corrective action within such ten (10) day period, Tenant shall have the right to complete such work and deduct the cost from the first rent to become due under the Lease. Within thirty (30) days after Lease Commencement, Tenant can provide to Landlord a list of latent defects in the Tenant Improvements and Additional Work not reasonably discoverable during the punch list inspection. 4. TENANT WORK: All finish work and other work desired by Tenant and not included within the scope of the Tenant Improvements as set forth in the Construction Documents or in the Additional Work authorized by a duly executed Change Order, including, but not limited to, computer systems, telephone systems, telecommunications systems and other items (the "Tenant Work") shall be furnished installed and paid for by Tenant. A delay in the installation of any Tenant Work will not result in any extension of the Lease Commencement Date. Commencement of any Tenant Work by Tenant shall not constitute acceptance by Tenant of any work by Landlord or Contractor or a waiver of any rights Tenant may have against Landlord, Contractor or others with respect to the Tenant Improvements or Additional Work. 31 EXHIBIT F Page -3- 4.1 Access and Entry: At a time designated by Landlord and Contractor, Landlord agrees to provide reasonable access to the Premises to Tenant and its agents for the purpose of installing and completing Tenant's cabling related to Tenant's telephone and telecommunications systems, so long as such access does not interfere with the conduct of Landlord's construction or affect Landlord's ability to bring the Premises to Substantial Completion. All other Tenant Work shall occur during the thirty (30) day period provided to Tenant for fixturization. With respect to the Tenant Work, Tenant shall adopt a schedule in conformance with the schedule of Landlord's Contractor and conduct its work in such a manner as to maintain harmonious labor relations so as not to interfere with or delay the work of Landlord's Contractor. Landlord will endeavor to provide Tenant, at no cost, space in or about the Premises, if available, for the storage and staging of Tenant's materials, provided that such storage and staging does not interfere with or delay the work of Landlord's Contractor. Tenant shall be responsible for providing all insurance and for providing any necessary security and shall use said space at its sole risk. Tenant agrees to hold Landlord harmless and indemnify Landlord from and against any and all loss, liability or cost arising out of or in connection with the use of this storage space by Tenant. Tenant shall be obligated to remove any of the stored materials from the storage space prior to the Lease Commencement Date and shall be responsible to repair any damage or clean up any debris resulting from Tenant's use of the space. 4.2 Risk of Loss: All materials, work, installations and decorations of any nature brought upon or installed in the Premises before Lease Commencement Date shall be at the risk of the party who brought such materials or items onto the Premises. Notwithstanding the foregoing, any damage to the Tenant Improvements and/or the Additional Work caused by Tenant or any party acting on Tenant's behalf during the thirty (30) day fixturization period shall be at the risk of Tenant. Neither Landlord nor any party acting on Landlord's behalf shall be responsible for any damage or loss or destruction of such items brought to or installed in the Premises by Tenant prior to Lease Commencement Date, except in the event of gross negligence or willful misconduct of Landlord, Contractor, or any employee, agent, subcontractor or other party acting on behalf of Landlord or Contractor. 5. CHANGE ORDERS Tenant may authorize Additional Work during construction only by written instructions from Tenant's Representative to Landlord's Representative on a form to be designated by Landlord ("Request for Information Form"). Within a reasonable period after receipt of a Request for Information, Landlord will direct Contractor to prepare and deliver, for Tenant's approval, a not-to exceed cost estimate setting forth the total cost of such proposed change and the revised estimated completion date (if such Additional Work will alter the estimated date for Substantial Completion of Tenant Improvements). Such requests shall be reasonable in number and nature so as not to interfere with or delay the work of Landlord's Contractor. Tenant shall assume responsibility for any Architect's or Engineers' fees related to such a Request for Information, if their services are needed. If Tenant's Representative approves such Additional Work in writing, Landlord will provide a Final Change Order to Tenant for the Additional Work covered by the Request for Information, provided such work is consistent with the overall Tenant Improvements and is in compliance with all governmental or quasi-governmental rules, regulations, laws or building codes. Tenant's Representative shall sign and date the Final Change Order before Landlord will commence such Additional Work. If Tenant's Representative fails to approve such Additional Work in writing within a reasonable time after delivery of the cost estimate, Tenant will be deemed to have withdrawn the proposed Request for Information and Landlord will not proceed to perform the Additional Work. Tenant will pay to Landlord, within thirty (30) days of the Lease Commencement Date, the total cost of work associated with such Tenant approved Additional Work. 32 EXHIBIT F Page-4- 6. SUBSTANTIAL COMPLETION AND LEASE COMMENCEMENT DATE Substantial Completion or substantially complete shall mean that the Premises have been approved for occupancy by the City of San Diego Building Inspection Department and completion of construction of the Tenant Improvements in accordance with the Construction Documents, with the exception of minor details of construction, installation, decoration or mechanical adjustments commonly found on an architectural punch list, none of which materially interfere with Tenant's use or occupancy of the Premises. Substantial Completion of the Tenant Improvements shall be deemed to have occurred notwithstanding the requirement to complete the punch list items or similar corrective work. Landlord agrees that Tenant's obligation for the payment of rent under the Lease and the Lease Commencement Date shall not occur until Landlord has substantially completed the Tenant Improvements and the Premises are suitable for occupancy and delivery in accordance with Article 17 as described in the First Lease Rider. Notwithstanding the foregoing, Tenant agrees that if Landlord shall be delayed in causing such work to be substantially completed as a result of any of the events below as a "Tenant Delay", such delay shall be the responsibility of Tenant and will result in the Lease Commencement Date being the earlier of either (i) thirty (30) days after the date of Substantial Completion, or (ii) thirty (30) days after the date when Substantial Completion would have occurred if there had been no Tenant Delay. The aforementioned thirty (30) days provided to Tenant for fixturization. For the purposes of this Work Letter Agreement, a Tenant Delay is defined as follows: (a) Tenant's failure to furnish any documents or approve any item or cost estimates as required herein; or (b) Tenant's request for material, finishes or installations which are not available on a commercially practicable basis, but only if Landlord has notified Tenant of such unavailability and Tenant has not approved substitute material within a reasonable time period; or (c) Tenant's changes to the Construction Documents; or (d) Tenant's interference with Landlord's Contractor in such a manner as to delay the work of Landlord's Contractor; or (e) Tenant's failure to perform any act or obligation imposed on Tenant by the Lease or this Work Letter Agreement as and when required, provided, however, that any of the matters described in subparagraphs (a) through (e), inclusive, actually cause a delay in completion of construction and Landlord provided notice to Tenant of such fact and the resulting delay at the time such matters occurred. 7. MISCELLANEOUS In the event of any conflict between the terms of this Work Letter Agreement and the Lease, the terms of this Work Letter Agreement shall control. Landlord shall indemnify, defend and hold Tenant harmless from and against any loss or damage which Tenant may incur as the result of any mechanics' liens, resulting from the Tenant Improvements or Additional Work, attaching to or encumbering Tenant's leasehold estate under this Lease. Tenant shall indemnify, defend and hold Landlord harmless from and against any loss or damage which Landlord may incur as the result of any mechanics' liens, resulting from the Tenant Work, attaching to or encumbering Landlord's title in the Premises under this Lease. 33 EXHIBIT F-1 Estimated Schedule of Construction The following timetable is an estimate of the time necessary to complete construction of the Tenant Improvements as defined in Exhibits A and B. These estimates are subject to change due to the provisions of Exhibit F as well as circumstances beyond the control of Tenant and Landlord (including but not limited to strikes, acts of God, national emergencies, collectively known as force majeur). The estimated schedule is as follows from date of lease execution by both parties: Electrical Engineering Mechanical Engineering, & Final Architectural: 4 weeks Contractor Bidding & Plan Check: 2 weeks Plan Check Revision: 2 weeks Construction: 10 weeks Punch List Corrections: 1 week Contingency: 1 week Substantial Completion: Total of Above Occupancy: Upon Substantial Completion 34 EXHIBIT "G" Tenant's Use of Hazardous Materials HAZARDOUS MATERIALS ON PREMISES Alcohol based solvent Fluxoff, MFG. Chemtronics USAGE: 2 gallons per year Water based oil residue, caused by draining air compressor. USAGE: 15 gallons per year. EX-10.21 9 EXHIBIT 10.21 1 EXHIBIT 10.21 SECOND AMENDMENT TO EMPLOYMENT CONTRACT This Second Amendment to Employment Contract ("Amendment") is made as of this 23rd day of June, 1997, by and between Maxwell Technologies, Inc., (formerly Maxwell Laboratories, Inc.) a Delaware corporation ("Company") and Mr. Kenneth Potashner, an individual ("Executive"). WHEREAS, the Company and Executive are parties to that certain Chief Executive Officer Employment Contract, dated March 25, 1996, as amended by that certain Amendment to Employment Contract, dated March 28, 1996, ("Employment Contract"), pertaining to certain terms and conditions of Executive's employment by the Company as Chief Executive Officer; and WHEREAS, the parties desire to set forth herein amendments which have been agreed to with respect to various aspects of the Employment Contract; NOW, THEREFORE, the parties agree as follows: 1. AMENDMENT TO SECTION 1. Section 1 of the Employment Contract is hereby amended as follows: (a) The date "July 31, 1998" is deleted from the first sentence and replaced with the date "July 31, 2000". (b) Just before the last sentence of Section 1 the following new sentence is added: "The Board shall terminate the relevant terms of Section 3 Compensation of Executive applicable to each of the years ending July 31, 1999, and July 31, 2000, prior to the beginning of each such year, which relevant terms shall be no less favorable to Executive than such terms as are applicable for the year ending July 31, 1998." 2. AMENDMENT TO SECTION 3(a). Section 3(a) is hereby amended by adding after the first sentence thereof the following sentence: "Effective August 1, 1997, Executive shall be paid 2 a base salary at the annual rate of $450,000, payable in installments consistent with the Company's payroll practices." 3. AMENDMENT TO SECTION 3(b)(3). Section 3(b)(3) is hereby amended to change the figure "$400,000" the first time it appears in such section to the figure "$900,000" and to change the figure "$400,000" the second time it appears in the section to the figure "$450,000". 4. AMENDMENT TO SECTION 3(c). A new Section 3(c)(3) is added as follows: "(3) Additional Options. On the date of this Amendment Executive shall receive options under the Company's 1995 Stock Option Plan for 50,000 shares, which options shall be incentive stock options to the maximum extent permitted by applicable law. Such options shall be for a ten-year term and be on the same terms and conditions as the options described in clause (2) above in this Section 3(c), including the vesting schedule with vesting measured from the date of this Amendment. Promptly following the closing of an underwritten public offering of shares of common stock by the Company, the Board will consider the grant of additional options to Executive." 5. AMENDMENT TO ADD SECTION 3(g). A new Section 3(g) is added as follows: "(g) Commencing August 1, 1997, Executive shall be entitled to a car allowance consistent with such allowances being paid to other executives of the Company." 6. EFFECT OF AMENDMENT. This Second Amendment to Employment Contract is effective as of the date set forth above and as amended herein, the Employment contract remains in full force and effect. 3 SIGNATURES. The parties hereto have executed this Amendment as of the date first above mentioned. MAXWELL TECHNOLOGIES, INC. By [SIG] ------------------------------------- /s/ KENNETH POTASHNER ------------------------------------- Kenneth Potashner EX-10.23 10 EXHIBIT 10.23 1 EXHIBIT 10.23 MAXWELL TECHNOLOGIES, INC. AMENDMENT NUMBER ONE TO RESTRICTED STOCK AGREEMENT THIS AMENDMENT NUMBER ONE TO RESTRICTED STOCK AGREEMENT (the "Amendment") is made and entered into as of June 24, 1997 between MAXWELL TECHNOLOGIES, INC., a Delaware corporation, (the "Company") and KENNETH POTASHNER (the "Executive"). RECITALS WHEREAS, the Company and Executive are parties to that certain Maxwell Laboratories, Inc. Restricted Stock Agreement, dated July 25, 1996 ("Agreement") under which Executive was granted shares of the Company's Common Stock subject to certain restrictions; and WHEREAS, the parties desire to amend the Agreement to reflect the grant of additional restricted shares of Common Stock to Executive; NOW, THEREFORE, the parties hereby amend the Agreement as follows: 1. Award of Additional Stock. Paragraph 1 of the Agreement is amended to award to Executive 10,000 shares of Company common stock, $.10 par value, (the "Additional Stock"), in addition to the 177,960 shares of Restricted stock (after giving effect to a 2 for 1 stock split after the date of the Agreement) granted under the Agreement. The Additional Stock shall be subject to the terms and conditions of the Agreement, as amended by this Amendment. 2. Vesting Schedule. The shares of Additional Stock granted hereunder and not hereafter forfeited shall vest and cease to be subject to forfeiture in accordance with the following schedule: 2,500 shares of Additional Stock shall vest on April 30, 1998 and an additional 209 shares of Additional Stock shall vest on the last day of each month thereafter for the next 12 such months, and 208 shares of Additional Stock shall vest on the last day of each of the 24 months immediately following such 12 month period, at which time all shares of Additional Stock shall be vested (each such date and the date of any event described in Section 5 of the Agreement is referred to hereinafter and in the Agreement as a "Vesting Date"). Upon the vesting of shares of Additional Stock, the "Transfer Restrictions" (within the meaning of Section 3 of the Agreement) thereon shall lapse. 3. Effect of Amendment. All other terms and conditions of the Agreement shall apply to the Additional Stock as though such shares were included therein as originally granted shares of Restricted Stock. Except as specifically provided in paragraphs 1 and 2 above, the parties rights and obligations with respect to the Additional Stock shall be as set forth in the Agreement, and all of the terms and conditions of the Agreement, as supplemented by this Amendment, shall remain in full force and effect. MAXWELL TECHNOLOGIES, INC. By: /s/ Gary J. Davidson --------------------------------- Gary L. Davidson, Vice President- Finance & Administration By: /s/ Kenneth Potashner --------------------------------- Kenneth Potashner EX-10.25 11 EXHIBIT 10.25 1 EXHIBIT 10.25 PONDEROSA PINES BUSINESS PARK LEASE AGREEMENT THIS LEASE is executed at San Diego, California, on November 1, 1996 by and between PONDEROSA PINES PARTNERSHIP, a general partnership (the "Lessor") and, PUREPULSE TECHNOLOGIES, INC. (the "Lessee"). 1. DESCRIPTION OF PREMISES AND IMPROVEMENTS 1.1 Lessor hereby leases to Lessee and Lessee hereby hires from Lessor, pursuant to the terms and conditions set forth herein, those certain premises described and outlined in green on the site plan attached hereto designated Exhibit "A", consisting of a portion of one building, and certain improvements to be constructed therein, located at 4229 Ponderosa Avenue, San Diego, California (the "Premises"), together with areas, including landscaped areas, for use in common with others for parking, access and egress. The Premises contain in the aggregate approximately 22,145 square feet (the "gross floor area") and are situated with other buildings on certain real property described as follows: Portion of Lot 22 City of San Diego Industrial Park No. 4 of Map No. 5714 as such portion is indicated as a legal lot division by division plot No. 323, Parcel No. 369-170-20. The Premises is part of a group of buildings which together form what is commonly known as Ponderosa Pines Business Park. Said group of buildings and all contiguous real property, as outlined in red on Exhibit A, is hereinafter referred to as the "Business Park". The aforementioned areas to be used by Lessee in common with others (except as indicated in Section 4.6) as an incident to Lessee's leasing of the Premises shall consist of the common areas of the Business Park, as defined in Section 12.1. 1.2 The Premises shall be improved by Landlord in accordance with Section 1 of the attached Addendum. 1.3 The cost of any additional Improvements not outlined in the attached Addendum, including design, permits, construction and other reasonable expenses related thereto shall be paid by the Lessee. 2. TERM 2.1 The term of this Lease shall be for sixty (60) months, commencing on the "Commencement Date," which is hereby defined as the date Landlord completes the tenant improvements per Section 1 of the Addendum. The period beginning on the Commencement Date and ending sixty (60) months thereafter is hereby defined as the "Original Term". 2.2 Lessee is hereby granted and shall have two options, exercisable separately, to extend the term of this Lease for an additional period of five (5) years (i.e, a total of ten (10) years), each on the same terms and conditions of this Lease except that the base monthly rental for the first option period shall be adjusted as provided in Section 3.2. The base monthly rent for the first year of the second option period shall be adjusted, upwards only, to market; and such monthly rent adjusted to market shall become the new Base Monthly Rental for purposes of inflation adjustment, provided in Section 3.2, thereafter, the rent shall be adjusted annually as provided in Section 3.2. Each option shall be exercised only by Lessee delivering to Lessor in person or by United States mail within one hundred twenty (120) days before expiration of the Original Term or the extended term, as the case may be, its written notice to extend the term thereof. 1 2 3. RENT 3.1 Lessee shall pay to Lessor at the address set forth at the end of this Lease, or such other address as Lessor may advise Lessee in writing, without deduction, offset, prior notice or demand, as monthly rent for the Premises the amount indicated in the table immediately below: During the first 12 months following the Commencement Date = $9,965.25 per month NNN. During the second 12 months following the Commencement Date = $13,287.00 per month NNN. During the third 12 months following the Commencement Date = second year's monthly rent plus annual CPI increase per Section 3.2.1 below. During the fourth 12 months following the Commencement Date = third year's monthly rent plus annual CPI increase per Section 3.2.1 below. During the fifth 12 months following the Commencement Date = fourth year's monthly rent plus annual CPI increase per Section 3.2.1 below. Annual CPI increases for Years 3, 4 and 5 to be a maximum of five (5%) percent. Such payments shall be made in lawful money of the United States payable in advance on the first day of each month of the term of this Lease. 3.2 During the Original Term there shall be no adjustments of the monthly rent, other than as provided in Section 3.1. For the second 12 month period of the first renewal period, and for each 12 month period thereafter, the monthly rental shall be the monthly rent applicable during the last 12 month period of the Original Term ("Base Monthly Rental"), adjusted for inflation as set forth below: 3.2.1 The adjustments, if any, shall be based upon any increase that may have occurred in the Bureau of Labor Statistics Consumer Price Index, for all Urban Consumers for all items based on the period 1982 - 1984 = 100 (the "Index") as published by the United States Department of Labor. The adjustments shall be computed by multiplying the Base Monthly Rental payable during the twelve-month period to be adjusted by a factor equal to the percentage increase in the Index between the "Base Month" (defined as the first month of the term of any renewal period hereof) and the Index last published preceding the date of adjustment. Lessor shall give written notice to Lessee indicating the amount of the adjustment and manner of computation as soon as the information becomes available to Lessor. Delay in notification of the amount of adjustment shall not affect Lessee's obligation to pay the monthly rent or the amount of any increase immediately upon receipt of notification of same. 3.2.2 In no event shall the monthly rent for a subsequent twelve-month period be reduced below the monthly rent for the twelve-month period immediately preceding the date of adjustment. 3.2.3 In the event that the Index does not exist in the same format described in Paragraph 3.2.1, the parties shall substitute any official index published by the Bureau of Labor Statistics, or successor or similar governmental agency, as may then be in existence and shall be not nearly equivalent thereto. If the parties are unable to agree upon a substitute index, the parties shall refer to the choice of successor index to binding arbitration in accordance with the rules of the American 2 3 Arbitration Association. 3.3 Any amount due to Lessor that is not paid when due shall bear interest at ten percent (10%) per annum from the date due. Payment of interest shall not excuse or cure any default by Lessee under this Lease. In addition, Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder 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 on Lessor by the terms of any mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, Lessee shall pay to Lessor a late charge equal to five percent (5%) of 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 late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. 3.4 Upon execution of this Lease, Lessee shall deposit with Lessor $0.00 as a security deposit for the performance by Lessee of the provisions of this Lease, the receipt of which is acknowledged by Lessor. If Lessee is in default, as defined in Section 16 hereof, Lessor can use the security deposit, or any portion of it, to cure the default or to compensate Lessor for all damages sustained by Lessor resulting from Lessee's default. Lessee shall immediately on demand pay to Lessor a sum equal to the portion of the security deposit expended or applied by Lessor as provided in this paragraph so as to maintain the security deposit in the sum initially deposited with Lessor. At the expiration or termination of this Lease, Lessor shall return the security deposit to Lessee, less any amount necessary to cure any default. Lessor's obligations with respect to the security deposit are those of a debtor and not a trustee. Lessor can maintain the security deposit separate and apart from Lessor's general fund or can commingle the security deposit with Lessor's general and other funds. Lessor shall not be required to pay Lessee interest on the security deposit. 4. USE 4.1 The Premises shall be used and occupied by Lessee for the following purposes and for no other purpose, without first obtaining the written consent of Lessor: general office, research and development, manufacturing and assembly of Lessee's products and related purposes. 4.2 Lessee, at Lessee's expense, shall promptly comply with all laws, ordinances, zoning restriction, rules, regulations, orders and requirements of any duly constituted public authorities now or hereafter affecting the use, safety, cleanliness or occupation of the Premises. 4.3 Lessee shall not allow supplies, materials or other objects to be stored or remain outside the exterior of the Premises. 4.4 Lessee shall not permit any use to be made or act to be done in or about the Premises which would increase the existing rate of insurance upon the Premises or cause the cancellation of any insurance policy covering the Premises. In the event that Lessee's use increases said rate or causes the cancellation of a policy of insurance, Lessee shall be liable for, as additional rent, the additional cost of insurance. 3 4 4.5 Lessee shall comply with all rules and regulations (the "Rules and Regulations") from time to time reasonably adopted by Lessor which are uniformly applied to all lessees of the Business Park. Lessor shall not be liable for the failure of any person to comply with the Rules and Regulations, but agrees to take reasonable steps to enforce such Rules and Regulations on a uniform, nondiscriminatory basis. 4.6 Lessee understands that the Business Park has available for use approximately three and three-tenths (3.3) parking spaces per one thousand (1,000) square feet of building area. Lessee shall not overburden the parking in the Business Park by exceeding its pro rata share of parking in the Business Park. Lessee shall be entitled to designate 8 spaces, directly in front of or behind building 4229, for exclusive use in accordance with regulations adopted by Lessor. 5. ALTERATIONS AND ADDITIONS 5.1 Lessee shall not, without Lessor's prior written consent (which shall not be unreasonably withheld), make any alterations, additions, improvements or utility installations in, on or about the Premises, except for non-structural alterations not exceeding twenty thousand dollars ($20,000.00) in cost in the case of each such alteration. As used in this section, the term "utility installations" shall include ducting, power panels, fluorescent fixtures, space heaters, conduit and wiring. As a condition to giving such consent, Lessor may require that (a) Lessee agree to remove any such alterations, additions, improvements or utility installations at the expiration of the term and to restore the Premises to their prior condition; and/or (b) Lessee provide Lessor at Lessee's sole cost and expense a payment and completion bond in an amount equal to one and one-half (1-1/2) times the estimated cost of such improvements, to insure Lessor against any liability for mechanics' and materialmens' liens and to insure completion of the work. 5.2 Unless Lessor requires the removal pursuant hereto, all alterations, additions, improvements and utility installations on the Premises (whether or not such utility installations constitute trade fixtures of Lessee) shall at the expiration or earlier termination of the Lease become the property of Lessor and remain upon and be surrendered with the Premises. Notwithstanding the foregoing, personal property, business and trade fixtures, cabinetwork, furniture, moveable partitions, machinery and equipment shall remain the property of Lessee and may be removed by Lessee at any time during the term of this Lease when Lessee is not in default, provided that any damage which may be caused by any removals by Lessee which are permitted hereunder shall be promptly repaired by Lessee at Lessee's expense. Lessee shall not be required to restore the Premises to their condition existing prior to the effectuation of the Improvements. 6. LIENS 6.1 Lessee shall keep the Premises and any building of which the Premises are a part free from any liens arising out of work performed, materials furnished, or obligations incurred by Lessee and shall indemnify, hold harmless and defend Lessor from any liens and encumbrances arising out of any work performed or materials furnished by or at the direction of Lessee. In the event that Lessee shall not, within twenty (20) days following the imposition of any such lien, cause such lien to be released of record by payment or posting of a proper bond, Lessor shall have, in addition to all other remedies provided herein and by law, the right, hut not obligation, to cause the same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All such sums paid by Lessor and all expenses incurred by it in connection therewith including 4 5 attorney's fees and costs shall be payable to Lessor by Lessee on demand with interest at the rate of ten percent (10%) per annum. 6.2 Lessor shall have the right at all times to post and keep posted on the Premises any notices permitted or required by law, or which Lessor shall deem proper, for the protection of Lessor and the Premises, and any other party having an interests therein from mechanics' and materialmens' lien, and Lessee shall give to Lessor at least ten (10) business days prior written notice of the expected date of commencement of any work relating to alterations or additions to the Premises. 7. UTILITIES AND SERVICES 7.1 Lessee shall pay for all water, gas, heat, light, power, telephone service, sewage, air conditioning, and any other service or utility provided to the Premises. 7.2 Except as a result of Lessor's negligence, Lessor shall not be liable for any failure or interruption of any utilities or services being furnished to the Premises. 8. INDEMNITY 8.1 Lessee shall indemnify and hold Lessor harmless from and against any and all claims of liability for any injury or damage to any person or property arising from Lessee's use of the Premises, or from the conduct of Lessee's business, or from any activity, work or thing done, permitted or suffered by Lessee in or about the Premises or elsewhere, on or after the Commencement Date excepting any loss or injury resulting from the negligence or willful misconduct of Lessor. Lessee shall further indemnify and hold Lessor harmless from and against any and all claims arising from any breach or default in the performance of any obligation on Lessee's part to be performed under this Lease, or arising from any negligence of Lessee or Lessee's agents, contractors or employees, and from and against all costs, attorney's fees, expenses and liabilities incurred in the defense of any such claim or any action or proceeding is brought against Lessor by reason of any such claim, Lessee upon notice from Lessor shall defend same at Lessee's expense by counsel reasonably satisfactory to Lessor. 8.2 Lessor shall not be liable for injury to Lessee's business or loss of income therefrom or for damage which may be sustained by the person, goods, wares, merchandise or property of Lessee, its employees, invitees, customers, agents or contractors or any other person in, upon or about the premises caused by or resulting from fire, steam, electricity, gas, water or rain, which may leak or flow from or into any part of the Premises, or from the breakage, leakage, obstruction or other defects of the pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures of the same, whether the said damage or injury results from conditions arising upon the Premises or upon other portions of the Business Park of which the Premises are a part of, from other sources or places and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Lessee, excepting any loss or injury resulting from the negligence or willful misconduct of Lessor. Lessor shall not be liable for any damages arising from any act or neglect of any other Lessee of the Business Park in which the Premises are located. 9. INSURANCE 9.1 Lessor shall, at Lessee's expense, procure and maintain, at all times during the term of this Lease, policies of insurance protecting against the following: 9.1.1 Loss or damage to the Premises in the amount of the full replacement value thereof (exclusive of Lessee's trade fixtures, personal property and equipment), providing protections 5 6 against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, sprinkler leakage, and special extended peril (all-risk). Such insurance shall provide for payment of loss thereunder to Lessor and the holder of any first mortgage or deed of trust on the Premises. 9.1.2 Public liability and property damage insurance with respect to common areas in amounts (i) not less than one million dollars ($1,000,000.00) for injury or death to one or more persons in any one accident or occurrence, and (ii) not less than two hundred fifty thousand dollars ($250,000.00) per occurrence for damage to property. Lessor shall cause Lessee to be named as an additional insured under the liability coverage described in this Paragraph 9.1.2. 9.1.3 Lessor shall provide Lessee with written notice of the amount of the premiums for the coverage described in Paragraphs 9. 1. 1 and 9.1.2 at least twenty (20) days before any such premiums are due. If Lessee can obtain policies of insurance providing substantially the same coverage as the set forth in Paragraphs 9.1.1 and 9.1.2 at a cost cheaper than the amount set forth in Lessor's written notice, Lessee shall have the right to procure and maintain such policies of insurance with insurance companies reasonably satisfactory to Lessor in lieu of Lessor obtaining such policies of insurance. 9.1.4 It is understood that the Premises are a part of multi-building complex and Lessor will acquire a master policy complying with the requirements of Section 9 for the Business Park. Lessee shall, unless Lessee has obtained policies of insurance pursuant to Paragraph 9.1.3, pay its pro rata share of the cost thereof in accordance with Paragraphs 12.2 and 12.3. 9.1.5 The foregoing limits may be increased from time to time as required by the holder of any first deed of trust. 9.2 Lessee shall at all times during the term hereof and at its own cost and expense procure and continue in force Workman's Compensation Insurance and Bodily Injury Liability and Property Damage Liability Insurance adequate to protect Lessor and naming Lessor as an additional insured in the liability contract against liability, injury or death of any person in connection with the area, operation or condition of the premises. Such insurance shall be in an amount of not less than five hundred thousand dollars ($500,000.00) combined single limit for bodily injury and property damage. The limits of such insurance shall not limit the liability of Lessee. All insurance required hereunder shall be with companies satisfactory to Lessor. Prior to occupancy, Lessee shall deliver to Lessor certificates of insurance evidencing the existence and amounts of such insurance with loss payable clauses satisfactory to Lessor; provided that in the event Lessee fails to procure and maintain such insurance, Lessor may (but shall not be required to) procure same at Lessee's expense after ten (10) days prior written notice. No such policy shall be cancelable or subject to reduction of coverage or other modification except after thirty (30) days prior written notice to Lessor by the insurer. Lessee shall, within twenty (20) days prior to the expiration of such policies, furnish Lessor with renewals or binders, failing which Lessor may order such insurance and charge the cost to Lessee, which amount shall be payable by Lessee upon demand. All such policies shall be written as primary policies, not contributing with and not in excess of coverage which Lessor may carry. Lessee shall have the right to provide such insurance coverage pursuant to blanket policies obtained by Lessee, provided such blanket policies expressly afford coverage to the Premises and to Lessee as required by this Lease. 9.3 Lessee shall maintain in force a policy or policies of fire and extended coverage insurance with respect to its fixtures and equipment located in the Premises to the extent of at 6 7 least ninety percent (90%) of their insurable value and plate glass coverage with respect to the Premises. 9.4 Lessee at its cost shall maintain business interruption insurance providing for payments thereunder to Lessee for a period of up to twelve (12) months if the Premises are destroyed or rendered inaccessible by a risk insured against by a policy of standard fire and extended coverage insurance, with vandalism and malicious mischief endorsements. 9.5 Lessor and Lessee hereby mutually release each other from liability and waive all right to recover against each other for any loss from perils insured against under their respective fire insurance policies, including any extended coverage and special form endorsements to said policies; provided, however, this paragraph shall be inapplicable if it would have the effect, but only to the extent that it would have the effect, of invalidating any insurance coverage of Lessor or Lessee. 10. MAINTAIN AND REPAIR OF THE PREMISES 1O. 1 Throughout the term of this Lease, Lessee shall keep in good order, condition and repair the Premises and every part thereof, structural and non-structural. Effective on the Commencement Date, Lessor shall assign, and does hereby assign, to Lessee Lessor's rights under any warranties, express or implied, and construction contracts respecting the quality of the Premises, and Lessor agrees to cooperate reasonably with Lessee in the enforcement of any rights under any such warranties and contracts. To the extent such warranties or contracts are not assignable, Lessor shall enforce such warranties and contracts for the benefit of Lessee. Lessor shall incur no expense nor have any obligation of any kind whatsoever in connection with maintenance of the Premises and Lessee expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Premises in good order. Lessee shall do all acts required to comply with all applicable laws, ordinances, regulations and rules of any public authority relating to its maintenance obligations as set forth herein. 10.2 Upon the expiration or earlier termination of this Lease, Lessee shall surrender the Premises in the same condition as received, broom clean, ordinary wear and tear excepted. Lessee at its sole cost and expense agrees to repair any damage to the Premises caused by or in connection with the removal of any articles of personal property, business or trade fixtures, machinery, equipment, cabinetwork, furniture, movable partitions or permanent improvements or additions, including without limitation thereto, repairing the floor and patching and painting the walls where required by Lessor to Lessor's reasonable satisfaction. Lessee shall indemnify the Lessor against any loss or liability resulting from delay by Lessee in so surrendering the Premises, including without limitation thereto, any claims made by any succeeding lessees founded on such delay. 10.3 In the event Lessee fails to perform Lessee's obligations under this section, Lessor shall give Lessee notice to do such acts as are reasonably required to so maintain the Premises. If Lessee fails to do the work and diligently prosecute it to completion, then Lessor shall have the right (but not the obligation) to do such acts and expend such funds at the expense of Lessee as are reasonably required to perform such work. Any amount so expended by Lessor shall be paid by Lessee promptly after demand with interest at ten percent (10%) per annum from the date of such work. Lessor shall have no liability to Lessee for any damage, inconvenience or interference with the use of the Premises by Lessee as a result of performing any such work. 7 8 10.4 Lessee shall, at its sole cost, keep and maintain all utilities, fixtures, mechanical equipment and heating and air conditioning units used by Lessee in the Premises in good order, condition and repair. 10.5 Lessee shall not commit or permit any nuisance, act or other thing which may disturb the quite enjoyment of the other lessees in the Business Park. 11. TAXES 11.1 Lessee shall pay prior to delinquency all taxes, assessments, license fees and other public charges levied, assessed or imposed or which become payable during the term of this Lease upon any trade fixtures, furnishings, equipment and all other personal property of Lessee installed or located in the Premises. Whenever possible, Lessee shall cause said trade fixtures, furnishings, equipment and personal property to be separately assessed. If, however, any or all of said items shall be assessed and taxed with the real property comprising the Premises, Lessor shall send to Lessee an invoice advising Lessee of the taxes applicable to Lessee's property, and Lessee shall pay to Lessor such taxes as are attributable to Lessee's trade fixtures, furnishings, equipment and personal property no less than ten (10) days prior to the time such taxes would become delinquent. 11.2 Lessee shall also pay any and all real property taxes and assessments assessed or imposed, or which become a lien upon or become chargeable against or payable in connection with the Premises, and Lessee's pro rata share of such charges which are attributable to common areas. 11.2.1 Lessee's share of such taxes and assessments with respect to the Premises shall be determined by Lessor from the ratio of the gross floor area of the Premises to the total gross floor area in the Business Park; provided, however, that in lieu thereof Lessee may, at Lessee's option, pay such taxes and assessments with respect to the Premises as shall be determined from the valuation assigned to the premises in the county tax assessor's worksheets. Lessor shall, at Lessee's cost, provide Lessee with a copy of such worksheets. 11.2.2 Lessee's share of such taxes with respect to the common areas shall be determined by Lessor from the ratio of the gross floor area of the Premises to the total gross floor area in the Business Park. 11.2.3 Lessee shall pay its share of the taxes with respect to the Premises and the common areas in the manner set forth in paragraph 12.3. 11.3 In the event any real property taxes and assessments paid by Lessee cover any period of time prior to the Commencement Date or after the expiration of the term of this Lease, Lessee's share of such taxes shall be pro rated to cover only the period of time within the fiscal tax year during which this Lease is in effect. With respect to any assessments which may be levied against or upon the Premises, or which under the laws then in force may be evidenced by improvement or other bonds or may be paid in annual installments, only the amount of such annual installment (with appropriate proration for any partial year) and interest due thereon shall be included within the computation of the annual taxes and assessments levied against the Premises. 11.4 As used in this Lease, the term "real property tax" shall include any form of assessment, levy, penalty or tax (other than estate, gift, inheritance, net income, capital levy, transfer or excess profits or franchise taxes), imposed by any authority having the direct or indirect power to tax, including without 8 9 limitation, any city, county, state or federal government, or any improvement or other district thereof, whether such tax is determined by the area of the Premises or the rent or other sums payable hereunder, including without limitation, any gross income or excise tax levied by any of the foregoing authorities with respect to receipt of such rent or other sums. 12. COMMON AREAS 12.1 Common areas shall include all areas within the Business Park outside the exterior boundaries of the buildings situated hereon, as designed at Exhibit A, including, but not limited to, streets, driveways, parking areas, truckways, delivery passages, sidewalks, landscaped and planted areas, exterior stairways, retaining and decorative walls, planters and other areas provided by Lessor for the common use (except as provided in Sections 4.6) of Lessor and the lessees of the Business Park, their employees and invitees. 12.2 Lessor shall maintain said common areas (including the parking areas assigned to Lessee under Section 4.6) in a neat, clean and orderly condition, properly lighted and landscaped as Lessor, in its sole discretion, shall determine. Lessee shall pay to Lessor, in the manner set forth in Paragraph 12.3, its pro rata share of the expenses in connection with the maintenance of common areas, plus any additional costs caused by extraordinary maintenance requirements created by Lessee's use of the Premise. Lessee's pro rata share of expenses in connection with the maintenance of common areas shall be the ratio of the gross floor area of the Premises to the gross floor area of the Business Park. It is understood and agreed that the phrase "expense in connection with the maintenance of common areas" shall include, but shall not be limited to, all sums (other than capital expenditures) expended in connection with said common areas for all general maintenance, repairs, pest control, trash removal, resurfacing, repainting, restripping, cleaning, sweeping and janitorial services; maintenance and repair of sidewalks, streets, curbs and Business Park signs; sprinkler systems, lighting and other utilities (other than capital costs of initially installing any of same in connection with the construction or completion of the Business Park); directional signs; and other markers and bumpers (other than capital costs of initially installing any of same in connection with the construction or completion of the Business Park); maintenance and repair of any fire protection systems, automatic sprinkler systems, lighting systems, storm drainage systems and any other utility systems; personnel to implement such service and to police the common areas; police and fire protection services; straight-line depreciation and maintenance on machinery and equipment (if owned) and rental paid for such machinery and equipment (if rented); any parking charges, surcharges or any other costs levied or assessed by local, state or federal governmental agencies in connection with the use of parking facilities; maintenance of planting and landscaping; the cost of parking lot sweeping; maintenance of common area improvements; and property management costs. Such costs and expenses shall not include any allowance for depreciation of common area improvements. Lessor may cause any or all of said services to be provided by an independent contractor or contractors; provided, however that the fees charged by such contractor or contractors shall not be in excess of those charged by Coldwell Banker Property Management Company or other comparable property management companies in the San Diego area. 12.3 On a monthly basis, Lessor shall provide Lessee a written statement of Lessee's share of the cost of insurance provided by Lessor as provided for herein, repairs, taxes and expenses in connection with the maintenance of common areas and the Premises paid or incurred by Lessor during the prior month. Lessee shall pay such amount to Lessor as additional rent on the first of the month following the month in which such statement is received. 9 10 Lessor shall keep full, accurate and separate books of account, receipts, bills and other supporting documentation covering Lessor's operating costs, and the statements to Lessee shall accurately reflect the total operating costs and Lessee's share. The books of account shall be retained by Lessor for a period of at least eighteen (18) months after the expiration of each calendar year. Lessee shall have the right at all reasonable times during the term to inspect the books of account, receipts, bills and other supporting documentation. 12.4 Lessee shall have for its use and benefit the nonexclusive right in common with Lessor and future owners, other lessees, and their agents, employees, customers, licensees and sublessees, to use said common areas during the entire term of this Lease, or any extension thereof, for ingress and egress, roadway and automobile parking, except therefrom such reasonable number of parking spaces which may have been designated for a specific lessee. 13. SIGNS AND ADVERTISING 13.1 Lessee shall not conduct or permit any sale by auction of the Premises. 13.2 Lessee shall comply with such reasonable sign regulations as are from time to time adopted by Lessor and applied to all lessees of the Business Park on a non-discriminatory basis. All exterior signs must have the approval of Lessor prior to installation, which approval shall not be unreasonably withheld. Lessor hereby grants approval to Lessee for Lessee's sign affixed to the building exterior on the Commencement Date. If Lessee, after five (5) days written notice, shall fail to properly maintain or repair any exterior sign, Lessor may do so and the cost thereof shall be payable by Lessee to Lessor upon demand as additional rent. 13.3 Lessee shall not display, store or sell any merchandise outside the defined exterior walls and permanent doorways of the Premises, without Lessor's prior written consent. Lessee shall not, without Lessor's consent, install any exterior lighting, amplifiers, or similar devices or use in or about the Premises any advertising media which may be heard or seen outside the Premises. 13.4 Lessee shall not, without Lessor's consent, solicit business nor distribute any handbills or other advertising matter in the common areas of the Business Park. 14. ENTRY BY LESSOR 14.1 Lessee shall permit Lessor and Lessor's agents to enter the Premises at all reasonable times for the purpose of inspecting the same, for the purpose of maintenance, repairs, alterations or additions to any portion of the Business Park, including the erection and maintenance of such scaffolding, canopies, fences and props as may be required, or for the purpose of posting notices of non-responsibility for alterations, additions or repairs, subject to security regulations reasonably adopted by Lessee or otherwise required by governmental agencies. 14.2 Lessor may, during reasonable business hours within one hundred twenty (120) days prior to the expiration of this Lease, enter the Premises for the purpose of allowing prospective lessees to view the Premises and to place any usual or ordinary "For Lease" signs, subject to security regulations as aforesaid. 14.3 Lessor shall be permitted to enter upon the premises for any of the purposes and in the manner stated herein without any liability to Lessee for any loss of occupation or quiet enjoyment of the premises resulting therefrom. 10 11 15. ASSIGNMENT AND SUBLETTING 15. 1 Lessee shall not either voluntarily or by operation of law assign (provided that such limitation shall not apply to any assignment effected by any merger, consolidation, sale of assets or other corporate reorganization in which Lessee is involved), sell, encumber, pledge or otherwise transfer all or any part of Lessee's leasehold estate hereunder, or permit the Premises to be occupied by anyone other than Lessee or Lessee's employees, or employees of Lessee's subsidiaries, or companies under common control with Lessee, or sublet the Premises or any portion thereof, without Lessor's prior written consent in each instance, which consent shall not be unreasonably withheld. Lessor's consent shall be based upon a determination that the same quality of business and financial soundness of ownership shall exist after such assignment or subletting and, provided further, that none of the covenants, conditions and obligations imposed upon Lessee by this Lease or of the rights, remedies or benefits afforded Lessor by this Lease is thereby impaired or diminished. 15.2 If Lessee desires at any time to assign this Lease or to sublet the Premises or any portion thereof, Lessee shall notify Lessor of its desire to do so and shall submit in writing to Lessor (i) the name of the proposed sublessee or assignee; (ii) the nature of the proposed sublessee's or assignee's business to be carried on in the Premises; (iii) the principal terms and provision of the proposed sublease or assignment; and (iv) such reasonable financial information as Lessor may request concerning the proposed sublessee or assignee, such request to be made within five (5) days after Lessee shall submit the information specified in the preceding clauses (i) through (iii). Lessee may also, at Lessee's option, offer to Lessor the option of terminating this Lease as to the portion (including all) of the Premises so proposed to be subleased or assigned with a proportionate (based upon the ratio of the gross floor area of the portion surrendered to the gross floor area of the entire Premises prior to the surrender) abatement in the rent and other charges payable hereunder. 15.3 Within seven (7) days after Lessor's receipt of the information specified in Paragraph 15.2 above, Lessor shall notify Lessee in writing whether Lessor (a) consents to the sublease or assignment proposed by Lessee or, (b) if Lessee has offered Lessor the option of terminating this Lease as to the portion of the Premises (including all) so proposed to be subleased or assigned, elects to terminate this Lease as to the portion (including all) of the Premises so proposed to be subleased or assigned, in which event Lessor's notice to Lessee shall set forth the proportionate abated rental payable thereafter hereunder. If Lessor consents to the sublease or assignment proposed by Lessee, Lessee may thereafter within ninety (90) days after receipt of written notice from Lessor of such consent, enter into a valid sublease or assignment of the Premises or portion thereof, upon the terms and conditions described in the information furnished by Lessee to Lessor pursuant to Paragraph 15.2 above. 15.4 No consent by Lessor to any subletting or assignment by Lessee shall relieve Lessee of any obligation to be performed by Lessee under this Lease, whether occurring before or after such consent, subletting or assignment. The consent by Lessor to any subletting or assignment shall not relieve Lessee from the obligation to obtain Lessor's express written consent to any other subletting or assignment. The acceptance of rent by Lessor from any other person shall not be deemed to be a waiver by Lessor of any provisions of this Lease or to be a consent to any subletting, assignment or other transfer. Consent to one subletting, assignment or other transfer shall not be deemed to constitute consent to any subsequent subletting, assignment or other transfer. 15.5 In the event that Lessee subleases or assigns all or any part of the Premises, the limitation on cost of living 11 12 increases in the Base Monthly Rental contained in Section 3.3.2 shall, as of the date of such assignment or sublease terminate with respect to that fraction of the Base Monthly Rental of which the numerator is gross floor area of the portion assigned or subleased and the denominator is the gross floor area of the entire Premises prior to the assignment or sublease (the "Base Monthly Rental fraction"). The Base Monthly Rental fraction shall be adjusted as of the date of such assignment or sublease in the manner set forth in Section 3.3, provided that the limitation on increases set forth in Section 3.3.2 shall not be applicable. 16. BREACH OF LESSEE 16.1 The occurrence of any of the following shall constitute a material default and breach of this Lease by Lessee: 16.1.1 The failure of Lessee to pay or cause to be paid when due any rent, monies or charges required by this Lease to be paid by Lessee when such failure continues for a period of ten (10) days after written notice thereof from Lessor to Lessee; 16.1.2 The abandonment of vacation of the Premises by Lessee; 16.1.3 A failure by Lessee to observe and perform any other provision of this Lease to be observed or performed by Lessee, where such failure continues for twenty (20) days after written notice thereof by Lessor to Lessee; provided, however, that if the nature of said default is such that it cannot reasonably be cured within such twenty-day period, Lessee shall not be deemed to be in default if Lessee shall within such period commence such cure and thereafter diligently prosecute the same to completion; 16.1.4 The making by Lessee of any general assignment or general arrangement for the benefit of creditors; the filing by or against Lessee of a petition to have Lessee adjudged a bankrupt or of a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Lessee, the same is dismissed within ninety (90) days); 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 sixty (60) days; or 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 forty-five (45) days. 16.2 In the event that Lessor issues notices or comparable documents by reason of Lessee's breach, and Lessee cures such default, Lessee agrees to pay to Lessor, as additional rent, the reasonable cost of preparation and delivery of same. 16.3 The acceptance by Lessor of rent due hereunder after breach by Lessee shall not constitute a waiver of such breach, unless a writing to the effect has been delivered to Lessee. 17. REMEDIES UPON BREACH 17.1 In the event of any default by Lessee, Lessor shall, at its option, in addition to all other rights and remedies it may have hereunder or as provided by law have the following rights and remedies: 17.1.1 Lessor can continue this Lease in full force and effect, and the Lease will continue in effect as long as Lessor does not terminate Lessee's right to possession, and Lessor shall have the right to collect rent when due. During the period Lessee is in default, Lessor can enter the Premises and relet them, or any part of them, to third parties for Lessee's account. Lessee shall 12 13 be liable immediately to Lessor for all costs Lessor incurs in reletting the Premises including, without limitation, brokers' commissions, attorneys' fees, expenses of remodeling the Premises required by the reletting, and like costs. Reletting can be for a period shorter or longer than the remaining term of this Lease. Lessee shall pay to Lessor the rent due under this Lease on the dates the rent is due, less the rent Lessor receives from any reletting. No act by Lessor allowed by this section shall terminate this Lease unless Lessor notifies Lessee that Lessor elects to terminate this Lease. After Lessee's default and for as long as Lessor does not terminate Lessee's right to possession of the Premises, if Lessee obtains Lessor's consent Lessee shall have the right to assign or sublet its interest in this Lease, but Lessee shall not be released from liability. Lessor's consent to a proposed assignment or subletting shall not be unreasonably withheld. 17.1.2 Lessor can terminate Lessee's right to possession of the Premises at any time. No act by Lessor other than giving notice to Lessee shall terminate this Lease. Acts of maintenance or efforts to relet the Premises shall not constitute a termination of Lessee's right to possession. Lessor may re-enter the Premises, remove Lessee's property therefrom and store it for Lessee's account and at Lessee's expense and risk subject to damage or loss caused by the deliberate or negligent act of Lessor, and recover damages from Lessee as hereafter provided. Any such re-entry shall be permitted by Lessee without hindrance. 17.1.3 In the event Lessor elects to terminate this Lease and Lessee's right to possession in accordance with the foregoing Paragraph 17.1.2, or the same are terminated by operation of law, Lessor may recover as damages from Lessee the following: 17.1.3.1 The worth at the time of award by a court competent jurisdiction of the unpaid rent which had been earned at the time of termination of the Lease; 17.1.3.2 The worth at the time of award of the amount by which the unpaid rent which would have been earned after the date of termination of this Lease until the time of award exceeds the amount of such loss of rent that Lessee proves could have been reasonably avoided; 17.1.3.3 The worth at the time of the award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of the loss of such rent that Lessee proves could be reasonably avoided; and, 17.1.3.4 Any other amount, including attorneys' fees and court costs, necessary to compensate Lessor for all detriment proximately caused by Lessee's failure to perform its obligations under the Lease, or which in the ordinary course of things would be likely to result therefrom. 17.2 The "worth at the time of award" of the amounts referred to in Paragraphs 17.1.3.1 and 17.1.3.2 is to be computed by allowing interest at ten percent (10%) per annum. The "worth at the time of award" of the amount referred to in Paragraph 17.1.3.3 above is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). 17.3 Efforts by Lessor to mitigate the damages caused by Lessee's breach of this Lease shall not waive Lessor's right to recover damages under the foregoing provisions. 17.4 Nothing in this Section 17 shall affect the right of Lessor to indemnification against liability arising prior to the termination of this Lease for personal injuries or property damage, or against mechanic's liens or other loss, claims or expenses as 13 14 may be provided elsewhere in this Lease. 17.5 The foregoing remedies of Lessor shall not be exclusive, but shall be cumulative and in addition to all rights and remedies now or thereafter provided or allowed by law. 18. DAMAGE OR DESTRUCTION 18. 1 If, during the term of this Lease, or any extensions thereof, the Premises are totally or partially destroyed from a risk covered by insurance rendering the Premises totally or partially inaccessible or unusable, Lessor shall restore the Premises to substantially the same conditions they were in immediately before destruction. Such destruction shall not terminate this Lease. If then existing law does not permit restoration, either party may terminate this Lease by giving notice to the other party within sixty (60) days of such destruction. If the cost of the restoration (determined by fixed price construction bids reasonably approved by Lessee and Lessor) exceeds the amount of proceeds received from the insurance carrier, Lessor can elect to terminate this Lease by giving notice to Lessee within thirty days after determining that the restoration cost will exceed the insurance proceeds. If Lessor elects to terminate this Lease, Lessee, within thirty (30) days after receiving Lessor's notice to terminate. can elect to pay one-half the difference between the amount of insurance proceeds and the cost of restoration, in which case Lessor shall restore the Premises. Any amounts so payable by Lessee shall be deposited by Lessee in a fund control or bank disbursement account at such times as may be requested by Lessor's construction lender. If there be no construction lender, Lessee shall make monthly installment payments of one-half of the expenses of restoration incurred for the preceding month. Lessor shall give Lessee satisfactory evidence that all sums contributed by Lessee as provided in this section have been expended in paying the cost of restoration. If Lessor elects to terminate this Lease and Lessee does not elect to contribute toward the cost of restoration as provided in this section, this Lease shall terminate. 18.2 If during the term of this Lease the Premises are totally or partially destroyed from a risk not covered by the insurance, rendering the Premises totally or partially inaccessible or unusable, Lessor shall promptly restore the Premises to substantially the same condition as they were in immediately before destruction. Such destruction shall not terminate this Lease. If the existing laws do not permit the restoration, either party can terminate this Lease by giving notice to the other party within sixty (60) days of such destruction. If the cost of restoration (determined by fixed price construction bids reasonably approved by Lessee and Lessor) exceeds ten percent (10%) of the then replacement value of the Premises, (reasonably determined by Lessee and Lessor) Lessor can elect to terminate this Lease by giving notice to Lessee within thirty (30) days after determining the restoration cost and replacement value. If Lessor elects to terminate this Lease, Lessee, within thirty (30) days after receiving Lessor's notice to terminate, can notify Lessor of its election to pay the difference between ten percent (10%) of the replacement value of the Premises and the actual cost of restoration, in which case Lessor shall restore the Premises. Any amounts so payable by Lessee shall be deposited by Lessee in a fund control or bank disbursement account at such times as may be requested by Lessor's construction lender. If there be no construction lender, Lessee shall make monthly installment payments of the expenses of restoration incurred during the previous month. Lessor shall give Lessee satisfactory evidence that all sums contributed by Lessee as provided in this section have been expended, in paying the cost of restoration. If Lessor elects to terminate this Lease and Lessee does not elect to contribute toward the cost of restoration as provided in this section, this Lease shall terminate. In the event the Premises or the real property of 14 15 which the Premises constitute a part is foreclosed upon and sold at a sheriff's sale, or sold pursuant to a trustee's power of sale or conveyed pursuant to a deed in lieu of foreclosure or sale, the foregoing obligation of the Lessor contained in this Section 18.2 to pay up to 10% EG of the replacement value of the Premises shall be ineffective and shall not be binding upon any purchaser or transferee acquiring the Premises as a result of such foreclosure, trustee's sale or deed in lieu thereof. In such event, upon the occurrence of total or partial destruction from a risk not covered by insurance, the purchaser or transferee can elect to terminate this Lease unless Lessee, within thirty (30) days after receiving notice to terminate, gives written notice of its election to pay the entire cost of restoration. 18.3 If Lessor is required or elects to restore the Premises, Lessor shall not be required to restore alterations, made by Lessee, Lessee's improvements (other than the Improvements provided for in Section 1.2) Lessee's trade fixtures, and Lessee's personal property, such excluded items being the sole responsibility of Lessee to restore. 18.4 In case of destruction there shall be an abatement or reduction of rent, between the date of destruction and the date of completion of restoration, based on the extent to which the destruction interferes with Lessee's use of the Premises. 18.5 If destruction to the Premises occurs during the last two years of the term, Lessor can terminate this Lease by giving notice to Lessee not more than thirty (30) days after the destruction; provided that, if the destruction occurs during the last two years of the term and if within thirty (30) days after the destruction Lessee exercises the option to extend the term as provided in Section 2.5 (if the time within which the option can be exercised has not expired), Lessor shall restore the premises as provided in this Section 18. 19. C0NDEMNATION 19.1 If the Premises or any portion thereof are taken under the power of eminent domain, or sold by Lessor under the threat of the exercise of such power, this Lease shall terminate as to the part so taken as of the date that the condemning authority takes possession of the Premises. If more than thirty percent (30%) of the Premises or more than thirty percent (30%) of the parking area of the Business Park are taken or sold under such threat, either Lessor or Lessee may terminate this Lease as of the date that the condemning authority takes possession by delivery of written notice of such election within twenty (20) days after the condemning authority shall have taken possession. 19.2 If this Lease is not terminated by Lessor or Lessee, it shall remain in full force and effect as to the portion of the Premises remaining; provided that, the rent shall be reduced by that portion which the floor area of the Premises taken bears to the total floor area of the Premises prior to the taking. In such event, Lessor shall, at Lessor's expense, restore the Premises to a complete unit of like quality and character, except as to size, as existed prior to the date of which the condemning authority took possession. All awards for the taking of any part of the Premises or proceeds from the sale made under the threat of the exercise of the power of eminent domain shall be the property of Lessor, whether made as compensation for diminution of value of the leasehold estate, for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any award for loss of or damage to Lessee's trade fixtures and removable personal property. 15 16 20. SURRENDER OF LEASE 20.1 The voluntary or other surrender of its interest in this Lease by Lessee or a mutual cancellation of this Lease shall not work a merger, and shall, at the election of Lessor, either terminate all or any existing subleases or sublessees or operate as an assignment to Lessor of any or all of such subleases or sublessees. 21. COST OF SUIT 21.1 If Lessee or Lessor shall bring any action for any relief against the other, declaratory or otherwise, arising out of this Lease, including any suit by Lessor for the recovery of rent or possession of the Premises, the losing party shall pay the successful party a reasonable sum for attorney's fees which shall be deemed to have occurred on the commencement of such action and shall be paid whether or not such action is prosecuted to judgment. Should Lessor, without fault on Lessor's part, be made a party to any litigation instituted by Lessee or by any third party against Lessee, or by or against any person holding under or using the Premises by License of Lessee, or for the foreclosure of any lien for labor or materials furnished to or for Lessee or any such other person or otherwise arising out of or resulting from any act or transaction of Lessee or of any such other person, Lessee covenants to save and hold Lessor harmless from any judgment rendered against Lessor or the Premises or any part thereof, and all costs and expenses, including reasonable attorney's fees, incurred by Lessor in or in connection with such litigation. 22. TRANSFER OF LESSOR'S INTEREST 22.1 In the event of a sale or conveyance by Lessor of Lessor's interest in the Premises other than a transfer for security purposes only, Lessor shall, upon giving notice of such transfer to Lessee, be relieved from and after the date specified in such notice of transfer of all obligations and liabilities accruing thereafter on the part of Lessor, provided that any funds in the hands of Lessor at the time of transfer in which Lessee has an interest, shall be delivered to the successor of Lessor. This Lease shall not be affected by any such sale and Lessee agrees to attorn to the purchaser or assignee provided all Lessor's obligations hereunder are assumed in writing by the transferee. 23. ESTOPPEL CERTIFICATES 23.1 Lessee shall within ten (10) days after receipt of a request therefore from Lessor execute, acknowledge and deliver to Lessor a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to Lessee's knowledge, any uncured defaults on the part of Lessor hereunder, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by a prospective purchaser or encumbrancer of the Premises. Lessee's failure to deliver such statement within such time shall be conclusive upon Lessee (i) that this Lease is in full force and effect without modification except as may be presented by Lessor, (ii) that there are no uncured defaults in Lessor's performance, and (iii) that not more than one month's rent has been paid in advance. If Lessor desires to finance or refinance the Premises or any part thereof, Lessee hereby agrees to deliver to any lender designated by Lessor such audited financial statements as Lessee may have prepared in the ordinary course of its business; provided that all such financial statements shall be received by Lessor in confidence and shall be used by Lessor only for the purposes herein set forth. 16 17 24. SUBORDINATION AND ATTORNMENT 24.1 Except as otherwise provided herein, this Lease is hereby made subordinate to the lien of any mortgages or deeds of trust now or hereafter in force against the real property of which the Premises constitute a part, and to all advances made or hereafter made upon the security thereof. Lessee agrees to subordinate this Lease to the lien of any mortgage or deed of trust hereafter placed against the Premises, and to all advances made or hereafter made upon the security thereof. 24.2 In the event any proceedings are brought for foreclosure, or in the event of the exercise of the power of sale under any mortgage or deed of trust covering the Premises, Lessee shall attorn to the purchaser upon any such foreclosure or sale and recognize such purchaser as Lessor under this Lease. 24.3 Lessee, upon request of any party in interest, shall execute promptly such instruments and certificates to carry out the provisions of Paragraphs 24.1 and 24.2. 24.4 Notwithstanding any subordination or foreclosure, or sale under power of sale, Lessee's right to quiet enjoyment of the Premises shall not be disturbed so long as Lessee is not in default under the terms of this Lease. 25. HOLDING OVER 25.1 If Lessee remains in possession of all or any part of the Premises after the expiration of the term hereof, with or without the express or implied consent of Lessor, such tenancy shall be from month to month only, and not a renewal thereof or an extension for any further term and in such case rent and other monetary sums due hereunder shall be payable in the amount and at the time specified in this Lease and such month to month tenancy shall be subject to every other term, covenant and agreement contained herein. 26. INTERPRETATION 26.1 Whenever the singular number is used in this Lease, the same shall include the plural, and the masculine gender shall include the feminine and neuter genders, and the word "person" shall include corporation, firm, or association, when required by the context. 26.2 The headings or titles to the Sections of this Lease are for convenience only and do not in any way define, limit or construe the contents of such Sections. 26.3 This instrument contains all of the agreements and conditions made between the parties with respect to the hiring of the premises and may not be modified orally or in any other manner other than by a written instrument signed by all the parties to this Lease. 26.4 The laws of the State of California shall govern the validity, performance and enforcement of this Lease. 26.5 If any provision of this Lease is determined to be void by any court of competent jurisdiction, such determination shall not affect any other provision of this Lease and such other provisions shall remain in full force and effect. If any provision of this Lease is capable of two constructions, one which would render the provision void and one which would render the provision valid, the provision shall be interpreted in the manner which would render it valid. 17 18 27. TIME; JOINT AND SEVERAL LIABILITY 27.1 Time is of the essence of this Lease and each and every provision hereof. All the terms, covenants and conditions contained in this Lease to be performed by either party, if such party shall consist of more than one person or organization, shall be deemed to be joint and several, and all rights an remedies of the parties shall be cumulative and non-exclusive of any other remedy at law or in equity. 28. FORCE MAJEURE 28.1 Any prevention, delay or stoppage due to strikes, lockouts, labor disputes, acts of God, inability to obtain labor or materials or reasonable substitutes therefor, governmental restrictions, regulations, or controls, enemy or hostile governmental action, civil commotion, fire or other casualty, and other cause beyond the reasonable control of the party obligated to perform, shall, except as expressly provided in this Lease to the contrary, excuse the performance by such party for a period equal to that resulting from such prevention, delay or stoppage, except those obligations of Lessee to make payment for rental or other charges pursuant to the terms of this Lease. 29. NOTICES 29.1 All notices or demands of any kind required or desired to be given by Lessor or Lessee hereunder shall be in writing and shall be deemed delivered forty-eight (48) hours after depositing the notice or demand in the United States mail, certified or registered, return receipt requested, postage and fees prepaid, addressed to the Lessor or Lessee respectively at the addresses set forth after their signatures at the end of this Lease. 30. MEMORANDUM OF LEASE 30.1. Lessee shall not record this Lease without Lessor's prior written consent. Either party shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. 31. BROKERS 31.1 Lessee warrants that it has had no dealings with any real estate broker or agents in connection with the negotiation of this Lease and it knows of no other real estate broker or agent who is entitled to commission with this Lease. Any commission to be paid in connection with this Lease shall be the sole concern and responsibility of Lessor, and Lessor shall indemnify Lessee against any claims in connection therewith. 32. OPTION TO LEASE EXPANSION SPACE 32.1 At any time that Lessor determines to lease the portion not occupied by Lessee of the Building in which the Premises are located (the "Expansion Space"), Lessor shall notify Lessee of the rent, net of any tenant improvement credit or allowances (except to the extent such allowances and credits are made available to Lessee) for which Lessor is willing on the open market to lease the Expansion Space, or part of the Expansion Space. If Lessee, within thirty (30) days after receipt of Lessor's notice, states in writing its agreement to lease the Expansion Space or part of it, the Expansion Space or part of it shall be include in the Premises and leased to Lessee pursuant to the provisions of this Lease, including, without limitation, the provisions relating the rights and obligations of the parties with respect to alterations. However, the rent payable under this Lease shall be increased by the amount of rent attributable to the 18 19 Expansion Space or part of it that is leased by Lessee. The parties shall immediately execute an amendment to this Lease stating the addition of the Expansion Space or part of it to the Premises. If Lessee does not indicate within thirty (30) days its agreement to lease the Expansion Space or part of it, Lessor thereafter shall have the right to lease or extend the Lease covering the Expansion Space or part of it to a third party. 32.2 The provisions of this Section shall be operative during the term of this Lease, including option periods, each time Lessor determines to lease all or part of the Expansion Space to a third person (including any Expansion Space which Lessee previously elected not to lease under this Section). 33. INTEREST ON PAST-DUE OBLIGATIONS 33.1 Except as expressly herein provided, any amount due to Lessor not paid when due shall bear interest at ten percent (10%) per annum from the date due. Payment of interest shall not excuse or cure any default by Lessee under this Lease. 34. HAZARDOUS MATERIALS Lessee agrees to comply with all applicable federal, state and local laws, rules and regulations relating to the presence of Hazardous Materials on the Premises during the term of this Lease, and in connection with any permit requirements under such laws, to seek written approval of Lessor to the introduction of Hazardous Materials onto the Premise requiring a permit, which approval will not be unreasonably withheld. 34.1 Remediation Action. If the presence, release, or placement on or in the Premises by Lessee during the term of this Lease, or the generation, transportation, storage, treatment, or disposal at the Premises during the Term of this Lease, of any Hazardous Material (a) gives rise to a claim (including, but not limited to, a claim for response action, remedial action, or removal action) under any environmental law or any common law theory based on nuisance or strict liability, or (b) causes or threatens to adversely affect public health or the environment, Lessee shall promptly take any and all remedial response or removal action necessary to clean up the Premises and any contaminated soil, surface water, or groundwater and to mitigate exposure to liability arising from the Hazardous Material, whether or not required by law. 34.2 Testing and Indemnity. At any time prior to the expiration of the Lease Term, Lessor shall have the right to conduct appropriate tests of water and soil and to deliver to Lessee the results of such tests to demonstrate that contamination in excess of permissible level has occurred as a result of Lessee's use of the Premises. Lessee shall further be solely responsible for and shall defend, indemnify and hold the Lessor, its agents and contractors harmless from and against all claims, costs and liabilities, including actual attorney's fees and costs, arising out of or in connection with any removal, clean-up, restoration and materials required hereunder to return the Premises and any other property of whatever nature to their condition existing prior to the appearance of the hazardous Materials as long as Lessee (including Lessee's agents and employees, contractors or invitees) are responsible for the discharge of Hazardous Materials on the premises. 34.3 Underground Tanks. If underground or other storage tanks storing Hazardous Materials are located on the Premises or are hereafter placed on the Premises by any party, Lessee shall monitor the storage tanks, maintain appropriate records, implement reporting procedures, properly close any underground storage tanks, and take or cause to be taken all other steps necessary or required 19 20 under the California Administrative Code, Title 23, Chapter 3, Subchapter 16, "Underground Storage Tank Regulations" and Division 20, Chapter 6.7 of the California Health & Safety Code, "Underground Storage of Hazardous Substances", as they now exist or may hereafter be adopted or amended. 34.4 Lease Termination. Upon termination of this Lease, Lessee shall remove from the Premises all hazardous Materials brought onto the Premises by Lessee which required a permit under applicable environmental law and which are required to be so removed, and in such event Lessee shall obtain a Phase I environment assessment of the Premises and provide a copy to Lessor. 34.5 Lessee's Obligation. Lessee's obligations under this Paragraph 34 shall survive the termination of the Lease. 34.6 Definition of "Hazardous Material". As used herein, the term "hazardous material" means any hazardous or toxic substance, material or waste which is or becomes regulated by any local governmental authority, the State of California or the United States Government. The term "hazardous material" includes, without limitation, any material or substance which is (1) defined as a "hazardous waste" under Sections 25515, 25117 or 25122.7 or listed pursuant to Section 25140 of the California Health & Safety Code, Division 20, Chapter 6.5 (Hazardous Waste Control Law); (ii) defined as a "hazardous substance" under Section 25316 of the California Health & Safety Code, Division 2, chapter 6.8 (Carpenter-Presly-Tanner Hazardous Substance Account Act); (iii) defined as a "hazardous material", "hazardous substance" or "hazardous waste" under Section 25501 of the California Health & Safety Code, Division 20, Chapter 6.95 (Hazardous Substances); (iv) petroleum; (v) asbestos; (vi) listed under Article 9 and defined as hazardous or extremely hazardous pursuant to Article 11 of Title 22 of the California Administrative Code, Division 4, Chapter 20; (vii) designated as a "hazardous substance" pursuant to Section 311 of the Federal Water Pollution Control Act (33 U.S.C. Section 1317); viii) defined as a "hazardous waste" pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq. (42 U.S.C. Section 6903); or (ix) defined as a "hazardous substance" pursuant to Section 101 of the Comprehensive Environmental Response Compensation and Liability Act, 42, U.S.C. Section 9601, et seq. (42 U.S.C. Section 9601). IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease as of the day and year first above written. LESSOR: LESSEE: PONDEROSA PINES PARTNERSHIP PUREPULSE TECHNOLOGIES, INC. By: /s/ Gerald W. Bosstick By: /s/ Joseph C. Stumpf ----------------------- --------------------- Gerald W. Bosstick Joseph C. Stumpf Its: General Partner Its: Vice President ---------------------- --------------------- 5414 Oberlin Drive, #140 8888 Balboa Avenue ------------------------ ------------------------ San Diego, CA 92121 San Diego, CA 92123 ------------------------ ------------------------ (619) 597-6888 (619) 496-4100 ------------------------ ------------------------ 20 21 EXHIBIT "A" [PONDEROSA PINES SITE PLAN MAP] 22 ADDENDUM DATED NOVEMBER 1, 1996 TO THAT CERTAIN LEASE AGREEMENT DATED NOVEMBER 1, 1996 BY AND BETWEEN PONDEROSA PINES PARTNERSHIP, AS LANDLORD, AND PUREPULSE TECHNOLOGIES, INC., AS TENANT. 1. Tenant Improvements. Landlord shall provide the following improvements to building 4229: 1.1 Restrooms: Intensive cleaning, repaint stalls and walls, replace damaged fixtures and toilet seats, replace tiles/linoleum on floor, new base all around; 1.2 Repair all drywall all the way to the ceiling - replace broken pieces, patch small holes, tape, and spackle ready for paint; 1.3 Paint all walls in former office and shop area, including roof pillars, all the way to the ceiling; 1.4 Jackhammer and repair cracks in slab; 1.5 Pay for PurePulse Technologies, Inc. roofer to repair roof - estimate is $3,000.00; 1.6 Paint all ceiling lams and rafters, sprinkler system and remaining HVAC ducting; 1.7 Insulate at ceiling in shop and former office area - use R-16 batts (preferentially a light reflective "down" side); 1.8 Acid scrub, pressure wash and seal shop and former office area floor; 1.9 Repair leaks around windows, and replace and paint deteriorated wallboard under leaks; 1.10 Patch carpet in office areas where wall partitions were removed. Use carpet in back hall by restrooms for patch material; 1.11 Repair non-functioning crash bar on North wall door. 2. Demolition. Landlord shall demolition the following existing improvements in building 4229: 2.1 Office partitions along West (front) glass wall ("former office area"); 2.2 All t-bar and hangers in former office and shop areas; 2.3 Remove and cap sprinkler system t-bar extensions as high as possible; 2.4 Branch electrical circuits in former office and shop area; 2.5 Certain partitions in current office area (marked); 2.6 Communication and data wiring in all areas (NOT comm. wiring from dmark); 2.7 Certain identified HVAC ducting in shop area. 23 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first about written. LANDLORD: PONDEROSA PINES PARTNERSHIP By: /s/ Gerald W. Bosstick --------------------------- Gerald W. Bosstick Title: General Partner --------------------------- Date: --------------------------- TENANT: PUREPULSE TECHNOLOGIES, INC. By: /s/ Joe Stumpf --------------------------- Joe Stumpf Title: Vice President --------------------------- Date: 12/12/96 --------------------------- EX-10.26 12 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 31 day of January, 1997 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 of not more than $10,000,000 (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 and for working capital. 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 "Eurodollar Interest Period"] for Advances in the minimum amount of $100.000. Such interest rate shall be a percentage approximately equivalent to 1.75% 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". 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 with an Interest Period of 90 days or less on the last day of the relevant Eurodollar Interest Period. The Borrower further promises and agrees to pay the Bank interest on any Eurodollar Advance with an 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 Eurodollar Interest Period) and on the last day of the relevant Eurodollar 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. -1- 2 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. Notice of any Eurodollar 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 Eurodollar 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; 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. 2. That interest on a Eurodollar Advance shall continue to accrue at a newly quoted Eurodollar Rate or shall be adjusted to commence 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. If the Bank shall not have received notice (as prescribed herein) of the Borrower's election that interest on any Eurodollar Advance shall continue to accrue at the newly quoted Eurodollar 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 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 interest is accruing on any Advance on the basis of the Eurodollar Rate, no prepayment shall be made on any Advance bearing interest at the Eurodollar Rate except on a day which is the last day of the Interest Period pertaining thereto. If the whole or any part of any Eurodollar 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 Advances 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 COSTS: During any period of time in which interest on any Advance is accruing on the basis of the Eurodollar 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 or relating to funds used by the Bank in quoting and determining the Eurodollar Rate. G. CONVERSION FROM EURODOLLAR RATE TO VARIABLE RATE: In the event that the Bank shall at any time determine that the accrual of interest on the basis of the Eurodollar Rate (i) is infeasible because the Bank is unable to determine the Eurodollar 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 shall be deemed to be a Variable Rate Advance and interest shall thereupon immediately accrue at the Variable Rate. -2- 3 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, 1999 (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 debits 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 and standby letters of credit (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 Letters of Credit outstanding, less any partial draws paid by the Bank, exceed the sum of $10,000,000 and, together with the total principal amount of all Advances and the aggregate settlement price of all Foreign Exchange Contracts outstanding, 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 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 Letter of Credit shall expire on a date which is 365 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 -3- 4 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 SUB-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 $200,000 as determined by Bank at the time of entering into each Foreign Exchange Contract and, together with the total principal amount of all Advances and the total face amount of all Letters of Credit outstanding, less any partial draws paid by the Bank, exceed the Line of Credit. 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 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. 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. -4- 5 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 a 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 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. -5- 6 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 com- plied 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 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; 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 -6- 7 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 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. 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) 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 $2,000,000 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. 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. 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. -7- 8 4.13 FINANCIAL CONDITION. Maintain at all times: A. NET WORTH. A minimum effective tangible net worth of not less than $23,000,000.00. 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. QUICK RATIO. A ratio of the sum of cash, cash equivalents and accounts receivable to outstanding Advances under the Line of Credit of not less than 1.30 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 $5,000,000 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. C. At all times indemnify and hold 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. -8- 9 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 10% of the issued and outstanding capital stock of the Borrower. 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 -9- 10 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 I - Mediation: At the request of any party to the dispute, claim or controversy of the matter shall be 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 II - Unsecured Contracts - Arbitration: Should any dispute, claim or controversy remain unresolved at the conclusion of the Step I 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, out shall not otherwise serve to abate, stay or suspend the arbitration proceedings. c) Step II - 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 I mediation, then 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(l) or any -10- 11 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 the 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 excercise 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, 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. -11- 12 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 referred 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. 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:/s/ Thomas L. Gore By:/s/ Ken Potashner ------------------------- --------------------------------- Thomas L. Gore, AVP Ken Potashner/Pres.& C.E.O. (Name/Title) (Name/Title) Address: 1280 Fourth Avenue By:/s/ Gary Davidson San Diego, CA 92101 --------------------------------- Gary Davidson/V.P. & C.F.O. (Name/Title) Address: 8888 BALBOA AVENUE SAN DIEGO, CALIF. 92123 -12- 13 AMENDMENT TO LINE OF CREDIT AGREEMENT This 5th Amendment to Line of Credit Agreement (the "Amendment") is made and entered into this 31 day of January, 1997, 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 February 4, 1994, 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. COMPLIANCE CERTIFICATE. A new Section 4.05 E. is added to the Agreement as follows: "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". 2. CHANGE IN ADDITIONAL INDEBTEDNESS. Section 4.07 of the Agreement is deleted in its entirety and the following is substituted in lieu thereof: "4.07 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) 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 $2,000,000 in the aggregate". 3. MODIFICATION OF LOANS. Section 4.08 of the Agreement is deleted in its entirety and the following is substituted in lieu thereof: "4.08 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". 4. CHANGE IN ASSET SALES. Section 4.10 of the Agreement is deleted in its entirety and the following is substituted in lieu thereof: "4.10 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". 5. CHANGE IN FINANCIAL CONDITION. Section 4.12 of the Agreement is deleted in its entirety and the following is substituted in lieu thereof: "4.13 FINANCIAL CONDITION. Maintain at all times: A. NET WORTH. A minimum effective tangible net worth of not less than $23,000,000.00. -1- 14 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. QUICK RATIO. A ratio of the sum of cash, cash equivalents and accounts receivable to outstanding Advances under the Line of Credit of not less than 1.30 to 1". 6. REMOVAL OF CONSECUTIVE LOSS AND ADDITION OF CAPITAL EXPENDITURES. Section 4.14 of the Agreement is deleted in its entirety and a new Section 4.14 is added as follows: "4.14 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 $5,000,000 in any one fiscal year". 7. RESTRICTION ON DIVIDENDS. A new Section 4.16 is added as follows: "4.16 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". 8. 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 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 the Agreement, as hereby amended. 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/ Thomas L. Gore By:/s/ Gary Davidson --------------------------- ------------------------------- Thomas L. Gore, AVP Gary Davidson/V.P. & C.F.O. (Name/Title) (Name/Title) By: ------------------------------- ---------------------------------- (Name/Title) -2- EX-10.29 13 EXHIBIT 10.29 1 EXHIBIT 10.29 OFFICE LEASE LANDLORD: AEW/LBA ACQUISITION COMPANY II, LLC, A CALIFORNIA LIMITED LIABILITY COMPANY TENANT: MAXWELL TECHNOLOGIES, INC. A DELAWARE CORPORATION 2 SUMMARY OF BASIC LEASE INFORMATION AND DEFINITIONS This SUMMARY OF BASIC LEASE INFORMATION AND DEFINITIONS ("SUMMARY") is hereby incorporated into and made a part of the attached Office Lease which pertains to the Building described in Section 1.4 below. All references in the Lease to the "Lease" shall include this Summary. All references in the Lease to any term defined in this Summary shall have the meaning set forth in this Summary for such term. Any initially capitalized terms used in this Summary and any initially capitalized terms in the Lease which are not otherwise defined in this Summary shall have the meaning given to such terms in the Lease. 1.1 LANDLORD'S ADDRESS: AEW/LBA Acquisition Company II, LLC c/o Layton-Belling & Associates 5510 Morehouse Drive, Suite 150 San Diego, California 92121 Attn: Mr. David C. Thomas Telephone: (619) 597-8795 Facsimile: (619) 597-0242 With a copy to: AEW/LBA Acquisition Company II, LLC c/o Layton-Belling & Associates 4440 Von Karman Avenue, Suite 150 Newport Beach, California 92660 Attn: Mr. Phil A. Belling Telephone: (714) 833-0400 Facsimile: (714) 553-1211 1.2 TENANT'S ADDRESS: Prior to Commencement Date: Maxwell Technologies, Inc. 8888 Balboa Avenue San Diego, California 92123 Attn: Chief Financial Officer Telephone: (619) 279-5100 Facsimile: (619) 277-6754 After Commencement Date: Maxwell Technologies, Inc. 9275 Skypark Court, Suite 400 San Diego, California 92123 Attn: Chief Financial Officer Telephone: (619) 279-5100 Facsimile: (619) 277-6754 1.3 SITE; PROJECT: The Site consists of the parcel(s) of real property located in the City of San Diego , County of San Diego, State of California, as shown on the site plan attached hereto as Exhibit "A". The Project includes the Site and all buildings, improvements and facilities, now or subsequently located on the Site from time to time, including, without limitation, the Building currently located on the Site, as depicted on the site plan attached hereto as Exhibit "A". The aggregate rentable square feet of the office buildings (including the Building) located within the Project contain 202,530 rentable square feet. 1.4 BUILDING: A four (4) story office building located on the Site containing 131,847 rentable square feet, the address of which is 9275 Skypark Court, San Diego, California 92123. 1.5 PREMISES: Those certain premises known as Suite 400 as generally shown on the floor plan attached hereto as Exhibit "B", consisting of a portion of the fourth (4th) floor of the Building, and containing 24,942 rentable square feet (23,905 usable square feet). 1.6 TERM: Sixty-six (66) months, subject to extension as provided in Section 2.2 of the Lease. 1.7 COMMENCEMENT DATE: The earlier of (i) August 1, 1997, or (ii) the date that Tenant commences business operations from the Premises. 1.8 MONTHLY BASIC RENT: Upon the commencement of the Term of this Lease, and on the first day of each month thereafter during the Term of this Lease, Tenant shall pay to Landlord, in advance and without offset, as Monthly Basic Rent for the Premises the following monthly payments: -i- 3
MONTHLY BASIC RENT MONTHS PER RENTABLE SQUARE FEET ------ ------------------------ Prorated for any partial month $1.35 and the first full month 2-7 Free (subject to Section 3.1 hereof) 8-12 $1.35 13-24 $1.404 25-36 $1.46 37-48 $1.518 49-60 $1.578 61-66 $1.641
1.9 TENANT'S PERCENTAGE: 18.92%. Accordingly, as more particularly set forth in Sections 4.3 and 4.4 hereof, Tenant shall pay to Landlord 18.92% of the "Operating Expenses" (as defined in Section 4.4) in excess of "Landlord's Contribution to Operating Expenses" as defined in Section 1.10 of the Summary below. 1.10 LANDLORD'S CONTRIBUTION TO OPERATING EXPENSES: Tenant's Percentage of Operating Expenses incurred by Landlord during calendar year 1997 (the "BASE YEAR"), adjusted to reflect an assumption that the Building is fully assessed for real property tax purposes as a completed Building ready for occupancy and that the Building is one hundred percent (100%) occupied during such year. 1.11 SECURITY DEPOSIT: None. 1.12 PERMITTED USE: General office uses. 1.13 BROKERS: Landlord is not represented by a broker. CB Commercial Real Estate Group, Inc. is representing Tenant. 1.14 INTEREST RATE: The lesser of: (a) the rate announced from time to time by Wells Fargo Bank or, if Wells Fargo Bank ceases to exist or ceases to publish such rate, then the rate announced from time to time by the largest (as measured by deposits) chartered bank operating in California, as its "prime rate" or "reference rate", plus five percent (5%); (b) the maximum rate permitted by law; or (c) the actual rate paid by Landlord. 1.15 TENANT IMPROVEMENTS: The initial tenant improvements installed or to be installed in the Premises as described in Section 12.5 of this Lease. 1.16 PARKING PASS RATIO: Three and seven tenths (3.7) parking spaces per one thousand (1,000) usable square feet in the Premises, consisting of (i) seventy-eight (78) unreserved parking spaces and (ii) ten (10) reserved covered parking spaces. 1.17 BUSINESS HOURS FOR THE BUILDING. 7:00 a.m. to 6:00 p.m., Mondays through Fridays (except Building Holidays) and 9:00 a.m. to 1:00 p.m. on Saturdays (except Building Holidays). "BUILDING HOLIDAYS" shall mean New Year's Day, Labor Day, Presidents' Day, Thanksgiving Day, Memorial Day, Independence Day and Christmas Day and such other national holidays as are adopted by Landlord, in Landlord's reasonable discretion, as holidays for the Building so long as such other national holidays are adopted by other landlords of comparable buildings in the vicinity of the Building. 1.18 GUARANTORS: None. -ii- 4 STANDARD FORM OFFICE LEASE TABLE OF CONTENTS SECTION TITLE PAGE - ------- ----- ---- 1. Premises ........................................................ 1 2. Term ............................................................ 2 3. Rent ............................................................ 4 4. Common Areas; Operating Expenses ................................ 4 5. [Intentionally Deleted] ......................................... 8 6. Use ............................................................. 8 7. Payments and Notices ............................................ 9 8. Brokers ......................................................... 10 9. Surrender; Holding Over ......................................... 10 10. Taxes on Tenant's Property ...................................... 10 11. Condition of Premises; Repairs .................................. 11 12. Alterations ..................................................... 11 13. Liens ........................................................... 13 14. Assignment and Subletting ....................................... 13 15. Entry by Landlord ............................................... 15 16. Utilities and Services .......................................... 15 17. Indemnification and Exculpation ................................. 17 18. Damage or Destruction ........................................... 17 19. Eminent Domain .................................................. 18 20. Tenant's Insurance .............................................. 19 21. Landlord's Insurance ............................................ 20 22. Waiver of Claims; Waiver of Subrogation ......................... 20 23. Tenant's Default and Landlord's Remedies ........................ 20 24. Landlord's Default .............................................. 22 25. Subordination ................................................... 22 26. Estoppel Certificate ............................................ 23 27. Intentionally Deleted ........................................... 23 28. Modification and Cure Rights of Landlord's Mortgagees and Lessors 23 29. Quiet Enjoyment ................................................. 23 30. Transfer of Landlord's Interest ................................. 23 31. Limitation on Landlord's Liability .............................. 23 32. Miscellaneous ................................................... 24 33. Lease Execution ................................................. 25 34. Arbitration ..................................................... 27 EXHIBITS EXHIBIT "A" Site Plan EXHIBIT "B" Floor Plan EXHIBIT "C" [INTENTIONALLY DELETED] EXHIBIT "D" Sample Form of Notice of Lease Term Dates EXHIBIT "E" Rules and Regulations EXHIBIT "F" Sample Form of Tenant Estoppel Certificate -iii- 5 INDEX OF MAJOR DEFINED TERMS LOCATION OF DEFINED TERMS DEFINITION IN OFFICE LEASE Abandonment ........................................................... 20 Actual Statement ...................................................... 7 ADA ................................................................... 8 Affiliate ............................................................. 14 Audit Notice .......................................................... 7 Base Year ............................................................. ii Brokers ............................................................... ii Building .............................................................. i Building Common Areas ................................................. 4 Building Holidays ..................................................... ii Building Top Signs .................................................... 8 Build-to-Suit Transaction ............................................. 26 claims ................................................................ 26 Commencement Date ..................................................... i Communications Equipment .............................................. 25 days .................................................................. 24 Directory Signage ..................................................... 9 Economic Terms ........................................................ 2 Election Date ......................................................... 2 Election Notice ....................................................... 18 Eligibility Period .................................................... 16 Entry Door and Premises Lobby Signage ................................. 9 Estimate Statement .................................................... 7 Excess Expenses ....................................................... 5 First Refusal Notice .................................................. 2 First Refusal Space ................................................... 1 Force Majeure Delays .................................................. 25 Hazardous Materials ................................................... 9 HVAC .................................................................. 11 Improvement Allowance ................................................. 12 Improvement Allowance Items ........................................... 13 Improvement Drawings .................................................. 13 Indemnified Claims .................................................... 17 Invoice ............................................................... 22 Landlord .............................................................. 1 Landlord Indemnified Parties .......................................... 9 Landlord's Contribution to Operating Expenses ......................... ii Lease ................................................................. 1 Monthly Basic Rent .................................................... i Must Take Effective Date .............................................. 1 Must Take Space ....................................................... 1 New Lease Transactions ................................................ 26 Operating Expenses .................................................... 5 Option Notice ......................................................... 3 Option Rent ........................................................... 3 Option Term ........................................................... 3 Original Tenant ....................................................... 1 Outside Agreement Date ................................................ 3 PCBs .................................................................. 9 Permitted Transfer .................................................... 14 Permitted Use ......................................................... ii Pre-Approved Change ................................................... 11 Premises .............................................................. i Project ............................................................... i Project Common Areas .................................................. 4 Real Property Taxes and Assessments ................................... 6 Relocation Transaction ................................................ 26 Renewal Rental Rate ................................................... 3 rent .................................................................. 4 Security Deposit ...................................................... ii Site .................................................................. i Summary ............................................................... 1 Superior Lease ........................................................ 1 Superior Rights ....................................................... 1 Tenant ................................................................ 1 Tenant Changes ........................................................ 11 tenant concessions .................................................... 3 Tenant Improvements ................................................... 13 Tenant Indemnified Parties ............................................ 17 Tenant Parties ........................................................ 17 -iv- 6 Tenant's Agents ....................................................... 13 Tenant's Election Notice .............................................. 2 Tenant's Parties ...................................................... 9 Tenant's Percentage ................................................... ii Tenant's Review Period ................................................ 3 Tenant's Signage ...................................................... 9 Term .................................................................. i Termination Date ...................................................... 26 Termination Notice .................................................... 26 Termination Option .................................................... 26 Transfer .............................................................. 13 Transfer Notice ....................................................... 14 Transferee ............................................................ 14 worth at the time of award ............................................ 21 -v- 7 OFFICE LEASE This LEASE, which includes the preceding Summary of Basic Lease Information and Definitions ("SUMMARY") attached hereto and incorporated herein by this reference ("LEASE"), is made as of the _ day of June, 1997, by and between AEW/LBA ACQUISITION COMPANY II, LLC, a California limited liability company ("LANDLORD"), and MAXWELL TECHNOLOGIES, INC., a Delaware corporation ("TENANT"). 1. PREMISES. 1.1 PREMISES. Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the Premises described in Section 1.5 of the Summary above, improved or to be improved with the Tenant Improvements. Such lease is upon, and subject to, the terms, covenants and conditions herein set forth and each party covenants, as a material part of the consideration for this Lease, to keep and perform their respective obligations under this Lease. 1.2 LANDLORD'S RESERVATION OF RIGHTS. Provided Tenant's use of and access to the Premises is not interfered with in an unreasonable manner, and subject to the terms of this Lease, Landlord reserves for itself the right from time to time to install, use, maintain, repair, replace and relocate pipes, ducts, conduits, wires and appurtenant meters and equipment above the ceiling surfaces, below the floor surfaces and within the walls of the Building and the Premises. 1.3 RENTABLE AND USABLE SQUARE FEET OF PREMISES. Landlord and Tenant agree that the number of rentable and usable square feet contained in the Premises and the Building, as well as Tenant's Percentage are (and are stipulated to be) as set forth in the Summary. 1.4 MUST TAKE SPACE. Tenant hereby agrees to add to the Premises the balance of the fourth (4th) floor of the Building stipulated by the parties hereto to contain 9,606 rentable (9207 usable) square feet of space ("MUST TAKE SPACE"). The effective date of Tenant's lease of the Must Take Space shall be the first day of the thirteenth (13th) month of the Lease Term ("MUST TAKE EFFECTIVE DATE") and Tenant shall not be obligated to pay any Basic Rent or Operating Expenses for the Must Take Space until the Must Take Effective Date. Notwithstanding anything above to the contrary, and upon at least twenty (20) days prior written notice to Landlord, Tenant may enter the Must Take Space three (3) months prior to the Must Take Effective Date in order to commence construction of the Tenant Improvements in the Must Take Space in accordance with Section 12.5; provided, however, that such early entry shall be subject to all of the terms and provisions of this Lease (except for the obligation to pay rent, unless Tenant commences business operations from the Must Take Space, in which event Tenant's obligation to pay rent shall commence on such date), and such reasonable rules and procedures promulgated by Landlord; provided further, that without limiting the generality of the foregoing, Landlord shall not be responsible for and Tenant is required to obtain insurance covering, any loss, including theft, damage or destruction to any work or material installed or stored by Tenant or Landlord, or any contractor or individual involved in the completion of the Tenant Improvements into the Must Take Space, or for any injury to Tenant or Tenant's employees, invitees, licensees or Tenant's Agents (as such term is defined in Section 12.5 hereof) and provided further that Landlord shall have the right to post the appropriate notices of non-responsibility and to require Tenant to provide Landlord with evidence that Tenant has fulfilled its obligation to provide insurance pursuant to Section 20 of this Lease. Tenant's lease of the Must Take Space shall be on the same terms and conditions as affect the original Premises throughout the Lease Term, including, without limitation, the same Base Year (1997), and, on a per rentable square foot basis, the same Monthly Basic Rent, which Monthly Basic Rent shall increase, on each annual anniversary of the Commencement Date, by the same per rentable square foot increase as the Monthly Basic Rent for the initial Premises (four percent (4%)). On the Must Take Effective Date, Tenant's Percentage shall be increased to take into account the addition of the number of rentable square feet of the Must Take Space to the Premises. Tenant acknowledges and agrees that the Must Take Space shall be leased to Tenant in its "as is" condition (as of the date hereof). The Lease Term for the Must Take Space shall expire coterminously with the Lease Term for the initial Premises. Notwithstanding anything above to the contrary, Landlord shall not be liable to Tenant or otherwise be in default hereunder in the event that Landlord is unable to deliver the Must Take Space to Tenant on the projected delivery date thereof due to the failure of any other tenant to timely vacate and surrender to Landlord such Must Take Space, or any portion thereof; provided, however, Landlord agrees to use its commercially reasonable efforts to enforce its right to possession of such Must Take Space against such other tenant. Promptly after Landlord's delivery of the Must Take Space to Tenant, Landlord and Tenant shall execute an amendment to this Lease adding the Must Take Space to the Premises upon the terms and conditions set forth in this Section 1.4. The construction of any improvements by Tenant in the Must Take Space shall be in accordance with Section 12.5 of this Lease and Landlord shall, in accordance with Section 12.5 hereof, provide Tenant with an improvement allowance in an amount up to Six Dollars ($6.00) per usable square foot of the Must Take Space for the costs relating to the design and construction of the initial improvements in the Must Take Space, the disbursement of which improvement allowance shall be in strict accordance with Section 12.5 hereof. 1.5 RIGHT OF FIRST REFUSAL. Landlord hereby grants to the Tenant named in the Summary ("ORIGINAL TENANT") a continuing right of first refusal with respect to available space located on the first (1st) floor of the Building (the "FIRST REFUSAL SPACE"). Notwithstanding the foregoing (i) for First Refusal Space which is subject to a lease as of the date of this Lease, such first refusal right of Tenant shall commence only following the expiration or earlier termination of such existing lease (such existing lease may be referred to herein as the "SUPERIOR LEASE"), including any renewal of such Superior Lease, whether or not such renewal is pursuant to an express written provision in such lease, and regardless of whether any such renewal is consummated pursuant to a lease amendment or a new lease, and (ii) such first refusal right shall be subordinate and secondary to all rights of expansion, first refusal, first offer or similar rights granted to the tenant(s) of the Superior Lease (the rights described in items (i) and (ii), above to be known collectively as "SUPERIOR RIGHTS"). Tenant's right of first refusal shall be on the terms and conditions set forth in this Section 1.5; provided, however, that in addition to the Permitted Use set forth in Section 1.12 of the Summary, Tenant shall be permitted to use 8 the First Refusal Space (but not the initial Premises or the Must Take Space) for light manufacturing, laboratories and product distribution so long as any such uses are otherwise in compliance with all of the terms and provisions of this Lease including, but not limited to, Section 6.1. Notwithstanding anything in this Section 1.5 to the contrary, the rights contained in this Section 1.5 may also be exercised by any Affiliate (as defined Section 14.2 hereof) of the Original Tenant. (a) Procedure. Landlord shall notify Tenant (the "FIRST REFUSAL NOTICE") when Landlord receives a proposal or request for proposal that Landlord would seriously consider for all or any portion of the First Refusal Space, where no holder of a Superior Right desires to lease such space. The First Refusal Notice shall describe the space which is the subject of the proposal or request for proposal and shall set forth Landlord's proposed economic terms and conditions applicable to Tenant's lease of such space (collectively, the "ECONOMIC TERMS"). Notwithstanding the foregoing, Landlord's obligation to deliver the First Refusal Notice shall not apply during the last twelve (12) months of the initial Lease Term unless Tenant has delivered an Interest Notice to Landlord pursuant to Section 2.2(c) below nor shall Landlord be obligated to deliver the First Refusal Notice during the last nine (9) months of the initial Lease Term unless Tenant has delivered the Option Notice to Landlord pursuant to Section 2.2(c) below. (b) Procedure for Acceptance. If Tenant wishes to exercise Tenant's right of first refusal with respect to the space described in the First Refusal Notice, then within five (5) business days after delivery of the First Refusal Notice to Tenant (the "ELECTION DATE"), Tenant shall deliver written notice to Landlord ("TENANT'S ELECTION NOTICE") pursuant to which Tenant shall elect either to (i) lease the entire First Refusal Space described in the First Refusal Notice upon the Economic Terms set forth in the First Refusal Notice and the same non-economic Terms as set forth in this Lease; (ii) refuse to lease such First Refusal Space identified in the First Refusal Notice, specifying that such refusal is not based upon the Economic Terms set forth by Landlord in the First Refusal Notice, but upon Tenant's lack of need for such First Refusal Space, in which event Landlord may lease such First Refusal Space to any entity on any terms Landlord desires and Tenant's right of first refusal set forth herein shall thereupon terminate and be of no further force or effect; or (iii) refuse to lease the First Refusal Space, specifying that such refusal is based upon the Economic Terms set forth in the First Refusal Notice, in which event Tenant shall also specify in Tenant's Election Notice revised Economic Terms upon which Tenant would be willing to lease such First Refusal Space from Landlord. If Tenant does not so respond in writing to Landlord's First Refusal Notice by the Election Date, Tenant shall be deemed to have elected the option described in clause (ii) above. If Tenant timely delivers to Landlord Tenant's Election Notice pursuant to clause (iii) above, Landlord may elect either to: (A) lease such First Refusal Space to Tenant upon the revised Economic Terms specified by Tenant in Tenant's Election Notice, and the same non-Economic Terms as set forth in this Lease; or (B) lease the First Refusal Space to any person or entity upon any terms Landlord desires; provided, however, if (1) the Economic Terms of Landlord's proposed lease to said third party are more favorable to the third party than those Economic Terms proposed by Tenant in Tenant's Election Notice, or (2) the size of the First Refusal Space to be leased to such third party is less than the size of the First Refusal Space offered to Tenant, before entering into such third party lease, Landlord shall notify Tenant of such more favorable Economic Terms (or such reduced size) and Tenant shall have the right to lease the First Refusal Space upon such more favorable Economic Terms (or as to such reduced size) by delivering written notice thereof to Landlord within two (2) business days after Tenant's receipt of Landlord's notice. If Tenant does not elect to lease such space from Landlord within said two (2) business day period, Tenant shall be deemed to have elected the option described in clause (ii) above and Tenant's right of first refusal set forth herein shall thereupon terminate and be of no further force or effect. (c) Construction of First Refusal Space. Tenant shall take the applicable First Refusal Space in its then "as-is" condition, and Tenant shall be entitled to construct improvements in the First Refusal Space in accordance with the provisions of Section 12 (but excluding Section 12.5) of this Lease. (d) Lease of First Refusal Space. If Tenant timely exercises Tenant's right to lease the First Refusal Space as set forth herein, Landlord and Tenant shall execute an amendment adding such First Refusal Space to this Lease upon the same non-economic terms and conditions as applicable to the initial Premises, and the Economic Terms and conditions as provided in this Section 1.5. All terms and provisions of the Lease, including Tenant's unreserved parking privileges and Tenant's Percentage, shall be adjusted to take into account the addition of the First Refusal Space to the Premises. Tenant shall commence payment of rent for the First Refusal Space and the Lease Term of the First Refusal Space shall commence upon the date Landlord makes possession of the First Refusal Space available to Tenant. The lease term for the First Refusal Space shall be for a term coterminous with Tenant's lease of the initial Premises. (e) Termination of Right of First Refusal. The rights set forth in this Section 1.5, and Landlord's obligations with respect thereto, shall be personal to the Original Tenant. The right of first refusal granted herein shall terminate with respect to such First Refusal Space upon the failure by Tenant to exercise its right of first refusal with respect to such First Refusal Space as offered by Landlord. Tenant shall not have the right to lease the First Refusal Space if, as of the date of the attempted exercise of any right of first refusal by Tenant, or, at Landlord's option, as of the scheduled date of delivery of such First Refusal Space to Tenant, Tenant is in default under this Lease after any applicable notice and cure periods. 2. TERM. 2.1 TERM; NOTICE OF LEASE DATES. The Term of this Lease shall be for the period designated in Section 1.6 of the Summary commencing on the Commencement Date, and ending on the expiration of such period, unless the Term is sooner terminated as provided in this Lease. Notwithstanding the foregoing, if the Commencement Date falls on any day other than the first day of a calendar month then the term of this Lease will be measured from the first day of the month following the month in which the Commencement Date occurs. Within ten (10) days after Landlord's written request, Tenant shall execute a written confirmation of the Commencement Date and expiration date of the Term in the form of -2- 9 the Notice of Lease Term Dates attached hereto as Exhibit "D". The Notice of Lease Term Dates shall be binding upon Tenant unless Tenant objects thereto in writing within such ten (10) day period. 2.2 OPTION TERM. (a) Option Right. Landlord hereby grants the Original Tenant and any Affiliate of the Original Tenant one (1) option to extend the Lease Term (for the entire Premises only (including the Must Take Space)) for a period of three (3) years (the "OPTION TERM"), which option shall be exercisable only by written notice delivered by Tenant to Landlord as provided below, provided that, as of the date of delivery of such notice, Tenant is not in default under this Lease and, at Landlord's option, Tenant is not in default under this Lease as of the end of the initial Lease Term (with any applicable notice and cure periods having expired). The rights contained in this Section 2.2 shall be personal to the Original Tenant and to any Affiliate of the Original Tenant and may only be exercised by the Original Tenant and by any Affiliate of the Original Tenant (and not any other assignee, sublessee or other transferee of Tenant's interest in this Lease) if the Original Tenant and/or any Affiliate of the Original Tenant occupies at least fifty percent (50%) of the Premises as of the date it exercises its option in accordance with the terms of this Section 2.2. (b) Option Rent. The Rent payable by Tenant during the Option Term (the "OPTION RENT") shall be equal to the Renewal Rental Rate (as hereinafter defined). The term "RENEWAL RENTAL RATE" shall mean the rate being charged to tenants for comparable space by Landlord in the Building (or, if not enough comparable transactions exist in the Building, then the rate being charged to tenants for comparable space in, as reasonably determined by Landlord, comparable buildings in the vicinity of the Building), with similar amenities, taking into consideration the size, location, floor level, the proposed term of the Option Term, the extent of the services to be provided and any other relevant terms and conditions in each instance including "tenant concessions," if any, then being offered to prospective tenants in the Building or comparable buildings. The term "TENANT CONCESSIONS" shall include, without limitation, so-called free rent, tenant improvement allowances, and other tenant inducements, taking into account the value of the existing improvements in the Premises, based on the age, quality and layout of the improvements. The Renewal Rental Rate will be an effective rate, not specifically including, but accounting for, the appropriate tenant concessions described above. (c) Exercise of Option. The option contained in this Section 2.2 shall be exercised by Tenant, if at all, by delivering written notice ("OPTION NOTICE") to Landlord not less than nine (9) months prior to the expiration of the initial Lease Term, stating that Tenant is exercising its option. Failure of Tenant to deliver the Option Notice to Landlord on or before the date specified above shall be deemed to constitute Tenant's failure to exercise its option to extend. If Tenant timely exercises its option to extend, the Lease Term shall be extended for the Option Term upon all of the terms and conditions set forth in this Lease, except that the rent shall be determined as provided below. (d) If a determination of the Renewal Rental Rate is required under the Lease, then Landlord will provide written notice of Landlord's determination of the Renewal Rental Rate not later than thirty (30) days after the date upon which Tenant timely exercises the right giving rise to the necessity for such Renewal Rental Rate determination. Tenant will have thirty (30) days ("TENANT'S REVIEW PERIOD") after receipt of Landlord's notice of the Renewal Rental Rate within which to accept such Renewal Rental Rate or to reasonably object thereto in writing. Tenant's failure to object to the Renewal Rental Rate submitted by Landlord in writing within Tenant's Review Period will conclusively be deemed Tenant's approval and acceptance thereof. If Tenant reasonably objects to the Renewal Rental Rate submitted by Landlord within Tenant's Review Period, Landlord and Tenant will attempt in good faith to agree upon such Renewal Rental Rate using their best good faith efforts. If Landlord and Tenant fail to reach agreement on such Renewal Rental Rate within fifteen (15) days following the expiration of Tenant's Review Period (the "OUTSIDE AGREEMENT DATE"), then each party's determination will be submitted to appraisal in accordance with the provisions below. (e) (i) Landlord and Tenant will each appoint one (1) independent appraiser who by profession must be a real estate broker who has been active over the five (5) year period ending on the date of such appointment in the leasing of commercial properties comparable to the Building located in the vicinity of the Building. The determination of the appraisers will be limited solely to the issue of whether Landlord's or Tenant's submitted Renewal Rental Rate for the leased area at issue is the closest to the actual Renewal Rental Rate for such area as determined by the appraisers, taking into account the requirements specified in Section 2.2(b) above. Each such appraiser will be appointed within fifteen (15) days after the Outside Agreement Date. (ii) The two (2) appraisers so appointed will within fifteen (15) days of the date of the appointment of the last appointed appraiser agree upon and appoint a third appraiser who shall be qualified under the same criteria set forth hereinabove for qualification of the initial two (2) appraisers. (iii) The three (3) appraisers will within thirty (30) days of the appointment of the third appraiser reach a decision as to whether the parties will use Landlord's or Tenant's submitted Renewal Rental Rate, and will notify Landlord and Tenant thereof. (iv) The decision of the majority of the three (3) appraisers will be binding upon Landlord and Tenant. If either Landlord or Tenant fails to appoint an appraiser within the time period specified in Subsection (e)(i) hereinabove, the appraiser appointed by one of them will, within thirty (30) days following the date on which the party failing to appoint an appraiser could have last appointed such appraiser, reach a decision based upon the procedures set forth above (i.e., by selecting either Landlord's or Tenant's submitted Renewal Rental Rate) and notify Landlord and Tenant thereof, and such appraiser's decision will be binding upon Landlord and Tenant. -3- 10 (v) If the two (2) appraisers fail to agree upon and timely appoint a third appraiser, both appraisers will be dismissed and the matter to be decided will be forthwith submitted to arbitration under the provisions of the American Arbitration Association based upon the procedures set forth above (i.e., by selecting either Landlord's or Tenant's submitted Renewal Rental Rate). (vi) The cost of appraisal (and, if necessary, arbitration) will be shared by Landlord and Tenant equally. (vii) If the process described in this Section 2.2 has not resulted in a selection of Landlord's or Tenant's Renewal Rental Rate by the commencement of the applicable period, then the existing rent will be used until the appraiser(s) reach a decision, with an appropriate rental credit and other adjustments for any overpayments of Monthly Basic Rent or other amounts if the appraisers select Tenant's estimate of the Renewal Rental Rate. 2.3 EARLY OCCUPANCY. If Tenant occupies the Premises prior to the Commencement Date for the purpose of performing Tenant's Work, such early occupancy shall be subject to all of the terms and conditions of this Lease, including, without limitation, the provisions of Sections 20, 21 and 23, except that provided Tenant does not commence the operation of business from the Premises, Tenant will not be obligated to pay Monthly Basic Rent or any additional rent during the period of such early occupancy. Tenant agrees to provide Landlord with prior notice of any such intended early occupancy. 3. RENT. 3.1 BASIC RENT. Tenant agrees to pay Landlord, as basic rent for the Premises, the Monthly Basic Rent in the amounts designated in Section 1.8 of the Summary. The Monthly Basic Rent shall be paid by Tenant in monthly installments in the amounts designated in Section 1.8 of the Summary in advance on the first day of each and every calendar month during the Term, without demand, notice, deduction or offset except that the first full month's Monthly Basic Rent shall be paid upon the execution of this Lease. Monthly Basic Rent for any partial month shall be prorated in the proportion that the number of days this Lease is in effect during such month bears to the actual number of days in such month. Notwithstanding anything to the contrary in Section 1.8 of the Summary, (i) Tenant agrees to pay to Landlord during Tenant's free rent period (i.e., months two (2) through seven (7) of the Lease Term), an amount equal to $.20 per rentable square foot in the Premises for each such month in Tenant's free rent period in order to partially reimburse Landlord for Tenant's occupancy of the Premises during such free rent period and (ii) such free rent period shall be null and void if Tenant is in default under the Lease (with all applicable notice and cure periods having expired) at any time prior to or during such free rent period. 3.2 ADDITIONAL RENT. All amounts and charges payable by Tenant to Landlord under this Lease in addition to the Monthly Basic Rent described in Section 3.1 above (including, without limitation, Tenant's Percentage of Operating Expenses in excess of Landlord's Contribution to Operating Expenses as provided in Section 6) shall be considered additional rent for the purposes of this Lease, and the word "RENT" in this Lease shall include such additional rent unless the context specifically or clearly implies that only the Monthly Basic Rent is referenced. The Monthly Basic Rent and additional rent shall be paid to Landlord as provided in Section 7, without any prior demand therefor and without any deduction or offset whatever, in lawful money of the United States of America. 4. COMMON AREAS; OPERATING EXPENSES. 4.1 DEFINITIONS; TENANT'S RIGHTS. During the Term of this Lease, Tenant shall have the non-exclusive right to use, in common with other tenants in the Project, and subject to the Rules and Regulations referred to in Section 6.1 below, those portions of the Project (the "PROJECT COMMON AREAS") not leased or designated for lease to tenants that are provided for use in common by Landlord, Tenant and any other tenants of the Project (or by the sublessees (agents, employees, customers invitees, guests or licensees of any such party), whether or not those areas are open to the general public. The Project Common Areas shall include, without limitation, any fixtures, systems, decor, facilities and landscaping contained, maintained or used in connection with those areas, and shall be deemed to include any city sidewalks adjacent to the Project, any pedestrian walkway system, park or other facilities located on the Site and open to the general public. The common areas appurtenant to the Building shall be referred to herein as the "BUILDING COMMON AREAS" and shall include, without limitation, the following areas: (a) the common entrances, lobbies, restrooms on multi-tenant floors, elevators, stairways and accessways, loading docks, ramps, drives and platforms and any passageways and serviceways thereto to the extent not exclusively serving another tenant or contained within another tenant's premises, and the common pipes, conduits, wires and appurtenant equipment serving the Premises; and (b) the parking structure and parking areas (subject to Section 6.2 below), loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways and landscaped areas appurtenant to the Building. The Building Common Areas and the Project Common Areas shall be referred to herein collectively as the "Common Areas". 4.2 LANDLORD'S RESERVED RIGHTS. Landlord reserves the right from time to time to use any of the Common Areas and to do any of the following, as long as such acts do not unreasonably interfere with Tenant's use of or access to the Premises, Tenant's Signage or Tenant's parking privileges: (a) expand the Building and construct or alter other buildings or improvements on the Site; (b) make any changes, additions, improvements, repairs or replacements in or to the Project, the Site, the Common Areas and/or the Building (including the Premises if required to do so by any law or regulation) and the fixtures -4- 11 and equipment thereof, including, without limitation: (i) maintenance, replacement and relocation of pipes, ducts, conduits, wires and meters; and (ii) changes in the location, size, shape and number of driveways, entrances, stairways, elevators, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas and walkways and, subject to Section 6.2, parking spaces and parking areas; (c) close temporarily any of the Common Areas while engaged in making repairs, improvements or alterations to the Project, Site and/or Building; and (d) perform such other acts and make such other changes with respect to the Project, Site, Common Areas and Building, as Landlord may, in the exercise of good faith business judgment, deem to be appropriate. Notwithstanding the foregoing, in taking any action pursuant to this Section 4.2, Landlord shall use commercially reasonable efforts so as to not materially and adversely affect (A) Tenant's sign rights set forth in this Lease; or (B) the number and/or location of Tenant's parking spaces; or (C) Tenant's ingress and egress to the Building and/or parking structure. 4.3 EXCESS EXPENSES. In addition to the Monthly Basic Rent required to be paid by Tenant pursuant to Section 3.1 above, during each month during the Term of this Lease (after the Base Year noted in Section 1.10 of the Summary), Tenant shall pay to Landlord the amount by which Tenant's Percentage of Operating Expenses for such calendar year exceeds Landlord's Contribution to Operating Expenses (such amount shall be referred to in this Section 4 as the "EXCESS EXPENSES"), in the manner and at the times set forth in the following provisions of this Section 4. Notwithstanding anything contained in this Section 4 of this Lease to the contrary, the aggregate Operating Expenses shall not, in any calendar year after the Base Year, increase more than seven percent (7%) over the Operating Expenses for the immediately preceding calendar year. 4.4 DEFINITION OF OPERATING EXPENSES. As used in this Lease, the term "OPERATING EXPENSES" shall consist of all costs and expenses of operation and maintenance of the Building, the Common Areas and the Site, as determined by standard accounting practices, calculated assuming (i) the Building is one hundred percent (100%) occupied, (ii) the Building is fully assessed (reflecting the acquisition of the Building by Landlord) and fully completed as of the Commencement Date, and (iii) all tenants are paying full rent, disregarding free rent or any reduced rent. Operating Expenses shall include the following costs by way of illustration but not limitation: (a) Real Property Taxes and Assessments (as defined in Section 4.5 below) and any taxes or assessments imposed in lieu thereof; (b) any and all assessments imposed with respect to the Building, Common Areas, and/or Site pursuant to any covenants, conditions and restrictions affecting the Site, Common Areas or Building; (c) water and sewer charges and the costs of electricity, heating, ventilating, air conditioning and other utilities; (d) utilities surcharges and any other costs, levies or assessments resulting from statutes or regulations promulgated by any government authority in connection with the use or occupancy of the Building or the Premises or the parking facilities serving the Building or the Premises; (e) costs of insurance obtained by Landlord pursuant to Section 21 of this Lease; (f) waste disposal and janitorial services; (g) security; (h) costs incurred in the management of the Site, Building and Common Areas, including, without limitation: (1) supplies, (2) wages and salaries (and payroll taxes and similar governmental charges related thereto) of employees used in the operation and maintenance of the Site, Building and Common Areas, and (3) a management/administrative fee not to exceed five percent (5%) of the annual gross receipts of the Project; (i) supplies, materials, equipment and tools; (j) repair and maintenance of the elevators and the structural portions of the Building, including the plumbing, heating, ventilating, air-conditioning and electrical systems installed or furnished by Landlord; (k) maintenance, costs and upkeep of all parking and Common Areas: (l) amortization on a straight-line basis over the useful life together with interest at the Interest Rate (as defined in Section 1.14 of the Summary of this Lease) on the unamortized balance of all costs of a capital nature (including, without limitation, capital improvements, capital replacements, capital repairs, capital equipment and capital tools): (1) reasonably intended to produce a reduction in operating charges or energy consumption; or (2) required after the date of this Lease under any governmental law or regulation that was not applicable to the Building as of the date hereof; (m) costs and expenses of gardening and landscaping; (n) maintenance of signs (other than signs of tenants of the Building); (o) personal property taxes levied on or attributable to personal property used in connection with the Building, the Common Areas and/or the Site; and (p) costs and expenses of repairs, resurfacing, repairing, maintenance, painting, lighting, cleaning, refuse removal, security and similar items, including appropriate reserves. For purposes of determining Landlord's Contribution to Operating Expenses, Operating Expenses shall not include one-time special assessments, charges, costs or fees or extraordinary charges or costs incurred in the Base Year only, including those attributable to boycotts, embargoes, strikes or other shortages of services or supplies. Notwithstanding anything to the contrary contained in this Lease, "Operating Expenses" shall not include any of the following: (1) Any ground lease rental or master lease rental; (2) Costs reimbursed by insurers, governmental authorities or any other entity; (3) Costs, including permit, license and inspection costs, incurred with respect to the installation of other tenants' or occupants' improvements made for other tenants or occupants in the Building or the Project or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant space for other tenants or occupants of the Building or the Project; (4) Marketing costs including any sale/transfer/leasing commissions, attorneys' fees in connection with the negotiation and preparation of letters, deal memos, letters of intent, agreements, leases, subleases and/or assignments, space planning costs, and other costs and expenses incurred in connection with sale/transfer/lease, sublease and/or assignment negotiations and transactions with present or prospective purchasers, tenants or other occupants of the Building or the Project; -5- 12 (5) Costs incurred by Landlord, including attorneys' fees and costs, judgment and awards, due to the violation by Landlord or other tenants or occupants of the Project of (A) the terms and conditions of any lease or other occupancy of space in the Building or the Project, (B) this Lease, (C) any master lease, or (D) any other agreements, covenants, conditions and restrictions encumbering the Building or the Project; (6) Interest, principal, points and fees on debts or amortization on any mortgage or mortgages or any other debt instrument encumbering the Building or the Project; (7) Penalties, fines and interest incurred as a result of Landlord's negligence, inability or unwillingness to make any payments when due or to file any real property tax, income tax or informational returns when due; (8) Costs arising from Landlord's charitable or political contributions; (9) Costs for acquisition of sculpture, paintings or other objects of art (but not excluding customary janitorial and maintenance associated with any such items); (10) Advertising and promotional expenditures, and the cost of signs in or on the Project identifying the owner of the Building or other tenants of the Building or the Project; (11) Costs associated with the operation of the business of the partnership or entity which constitutes Landlord as the same are distinguished from the costs of operation of the Building, including partnership accounting and legal matters, costs of defending any lawsuits with any mortgagee (except actions where the default of Tenant may be in issue), costs of selling, syndicating, financing, mortgaging or hypothecating any of Landlord's interest in the Building and/or the Project, costs of any disputes between Landlord and its employees (if any) not engaged in the operation of the Building, disputes of Landlord with Building or parking management, or outside fees paid in connection with disputes with other tenants: (12) Attorneys' fees and costs in connection with any litigation between Landlord and Tenant; (13) Costs associated with the installation, maintenance and removal of any signage associated with the tenants of the Building (except for any directory signage, directional signage and any signs required by Law); (14) Any rental and associated costs, either actual or not, for the leasing office of Landlord, but not excluding any commercially reasonable on-site property management office rental and associated costs for an office not to exceed 3,000 rentable square feet in area; (15) Any compensation paid to clerks, attendants or other persons in commercial concessions operated by Landlord; (16) Any entertainment, dining or travel expenses of Landlord for any purpose; (17) Any flowers, gifts, balloons, etc. provided to any entity whatsoever, including, but not limited to, Tenant, or other tenants, employees, vendors, contractors, prospective tenants and agents; and (18) Except for costs relating to any of Tenant's actions or any failure to act where Tenant is responsible under this Lease to so act, any costs, expenses, fees or penalties incurred by Landlord to comply with any Hazardous Materials laws, rules, ordinances or regulations enacted prior to the Commencement Date. 4.5 DEFINITION OF REAL PROPERTY TAXES AND ASSESSMENTS. All Real Property Taxes and Assessments shall be adjusted to reflect an assumption that the Building is fully assessed for real property tax purposes as a completed building(s) ready for occupancy. As used in this Lease, the term "REAL PROPERTY TAXES AND ASSESSMENTS" shall mean: any form of assessment, license fee, license tax, business license fee, commercial rental tax, levy, charge, improvement bond, tax or similar imposition imposed by any authority having the direct power to tax, including any city, county, state or federal government, or any school, agricultural, lighting, drainage or other improvement or special assessment district thereof, as against any legal or equitable interest of Landlord in the Premises, Building. Common Areas or Site, including the following by way of illustration but not limitation: (a) any tax on Landlord's "right" to rent or "right" to other income from the Premises or as against Landlord's business of leasing the Premises; (b) any assessment, tax, fee, levy or charge in substitution, partially or totally, of any assessment, tax, fee, levy or charge previously included within the definition of real property tax, it being acknowledged by Tenant and Landlord that Proposition 13 was adopted by the voters of the State of California in the June, 1978 election and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such services as fire protection, street, sidewalk and road maintenance, refuse removal and for other governmental services formerly provided without charge to property owners or occupants. It is the intention of Tenant and Landlord that all such new and increased assessments, taxes, fees, levies and charges be included within the definition of "real property taxes" for the purposes of this Lease; (c) any assessment, tax, fee, levy or charge allocable to or measured by the area of the Premises or other premises in the Building or the rent payable by Tenant hereunder or other tenants of the Building, including, without limitation, any gross receipts tax or excise tax levied by state, city or federal government, or any political subdivision thereof, with respect to the receipt of such rent, or upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises, or any portion thereof but not on Landlord's other operations; -6- 13 (d) any assessment, tax, fee, levy or charge upon this transaction or any document to which Tenant is a party, creating or transferring an interest or an estate in the Premises; and/or (e) any assessment, tax, fee, levy or charge by any governmental agency related to any transportation plan, fund or system (including assessment districts) instituted within the geographic area of which the Building is a part. Notwithstanding the foregoing, if after the Commencement Date Real Property Taxes and Assessments are reduced, then for purposes of all subsequent Lease Years including the Lease Year in which the reduction occurs, Landlord's Contribution to Operating Expenses shall be proportionately reduced. Notwithstanding the foregoing provisions of this Section 4.5 above to the contrary, "Real Property Taxes and Assessments" shall not include Landlord's federal or state income, franchise, inheritance or estate taxes. 4.6 ESTIMATE STATEMENT. By the first day of April of each calendar year during the Term of this Lease (after the Base Year noted in Section 1.10 of the Summary), Landlord shall endeavor to deliver to Tenant a line item statement ("ESTIMATE STATEMENT") estimating the Operating Expenses for the current calendar year and the estimated amount of Excess Expenses payable by Tenant. Landlord shall have the right no more than three (3) times in any calendar year to deliver a revised Estimate Statement showing the Excess Expenses for such calendar year if Landlord determines that the Excess Expenses are greater than those set forth in the original Estimate Statement (or previously delivered revised Estimate Statement) for such calendar year. The Excess Expenses shown on the Estimate Statement (or revised Estimate Statement, as applicable) shall be divided into twelve (12) equal monthly installments, and Tenant shall pay to Landlord, concurrently with the regular monthly rent payment next due following the receipt of the Estimate Statement (or revised Estimate Statement, as applicable), an amount equal to one (1) monthly installment of such Excess Expenses multiplied by the number of months from January in the calendar year in which such statement is submitted to the month of such payment, both months inclusive (less any amounts previously paid by Tenant with respect to any previously delivered Estimate Statement or revised Estimate Statement for such calendar year). Subsequent installments shall be paid concurrently with the regular monthly rent payments for the balance of the calendar year and shall continue until the next calendar year's Estimate Statement (or current calendar year's revised Estimate Statement) is received. 4.7 ACTUAL STATEMENT. By the first day of April of each succeeding calendar year during the Term of this Lease, Landlord shall endeavor to deliver to Tenant a statement ("ACTUAL STATEMENT") of the actual Operating Expenses and Excess Expenses for the immediately preceding calendar year. If the Actual Statement reveals that Excess Expenses were over-stated or under-stated in any Estimate Statement (or revised Estimate Statement) previously delivered by Landlord pursuant to Section 4.6 above, then within thirty (30) days after delivery of the Actual Statement, Tenant shall pay to Landlord the amount of any such under-payment, or, Landlord shall pay to Tenant (or credit against the next monthly rent falling due), the amount of such over-payment, as the case may be. Such obligation will be a continuing one which will survive the expiration or earlier termination of this Lease. Prior to the expiration or sooner termination of the Lease Term and Landlord's acceptance of Tenant's surrender of the Premises, Landlord will have the right to estimate the actual Operating Expenses for the then current Lease Year and to collect from Tenant prior to Tenant's surrender of the Premises, Tenant's Percentage of any excess of such actual Operating Expenses over the estimated Operating Expenses paid by Tenant in such Lease Year. 4.8 NO RELEASE. Any delay or failure by Landlord in delivering any Estimate or Actual Statement pursuant to this Section 4 shall not constitute a waiver of its right to receive Tenant's payment of Excess Expenses, nor shall it relieve Tenant of its obligations to pay Excess Expenses pursuant to this Section 4, except that Tenant shall not be obligated to make any payments based on such Estimate or Actual Statement until ten (10) business days after receipt of such statement. 4.9 BOOKS AND RECORDS. Landlord shall maintain books and records in accordance with sound accounting and management practices, reflecting the Operating Expenses. If Tenant wishes to review or audit the amount of Tenant's Percentage of Operating Expenses or any component thereof as to the Base Year or as to the first Lease Year immediately following the Base Year, Tenant must deliver to Landlord a written notice of Tenant's desire to review or audit Landlord's books and records ("AUDIT NOTICE") within six (6) months following Tenant's receipt of Landlord's first annual reconciliation. Thereafter, if Tenant wishes to review or audit Tenant's Percentage of Operating Expenses as to any subsequent Lease Year, Tenant and its duly authorized representatives (which representatives (including Tenant's auditors, if any) shall be subject to Landlord's reasonable approval) shall have the right to do so with respect to any calendar year within one (1) year following receipt of the applicable Actual Statement for such calendar year, upon thirty (30) days' prior delivery of an Audit Notice. Such audit will be conducted (i) during normal business hours at Landlord's business offices or at the management office of the Building; (ii) on consecutive business days until completed; and (iii) in an expeditious manner so as to minimize interference with Landlord's operations. Landlord agrees that Tenant or its auditors shall have the right to photocopy Landlord's books and records at Tenant's sole cost and expense. Tenant shall pay in a timely manner as required by this Lease any amounts stated as due on the Actual Statement, provided that such payment shall not waive any right to audit and/or dispute by Tenant as set forth herein. In no event will Landlord or its property manager be required to (i) photocopy any accounting records or other items or contracts, (ii) create any ledgers or schedules not already in existence, (iii) incur any costs or expenses relative to such inspection, or (iv) perform any other tasks other than making available such accounting records as are described in this paragraph. Tenant agrees to deliver to Landlord the results of any such audit within ninety (90) days of completion of the audit. If Tenant does not deliver an Audit Notice as to any annual reconciliation within the time frames set forth hereinabove, then Tenant acknowledges and agrees that such annual reconciliation will be conclusively binding on Tenant. If Tenant's audit or review reveals that Landlord has overcharged Tenant and Landlord agrees with the results of such audit or the results of such audit are confirmed in an arbitration between the parties pursuant to Section 34, then within thirty (30) days after the results of such audit are made available to Landlord, Landlord agrees to reimburse Tenant the amount of such overcharge plus interest at the Interest Rate stated in Section 1.14 of the Summary. If the audit reveals that Tenant was undercharged, then within thirty (30) days after the results of the audit are made available to Tenant, -7- 14 Tenant agrees to reimburse Landlord the amount of such undercharge plus interest thereon at the Interest Rate stated in Section 1.14 of the Summary within thirty (30) days of demand by Landlord. Tenant agrees to pay the cost of such audit, provided that if the audit reveals that Landlord's determination of Tenant's Percentage of Operating Expenses as set forth in a certified statement sent to Tenant was in error in Landlord's favor by more than eight percent (8%) of the amount paid by Tenant prior to delivering the Audit Notice and Landlord agrees with the results of such audit or the results of such audit are confirmed in an arbitration between the parties pursuant to Section 34, then Landlord agrees to pay the reasonable, third-party cost of such audit incurred by Tenant within thirty (30) days of demand by Tenant. To the extent Landlord must pay the cost of such audit, such cost shall not exceed a reasonable hourly charge for a reasonable amount of hours spent by such third-party in connection with the audit. Landlord shall not be liable for any contingency fee payments to any auditors or consultants of Tenant. Tenant agrees to keep the results of the audit (and any settlement, if any, resulting therefrom) confidential and will cause its agents, employees and contractors to keep such results (and any settlement, if any, resulting therefrom) confidential. If Landlord disputes the results of Tenant's audit of Operating Expenses, Landlord shall have the right to initiate an arbitration of the dispute as provided in Section 34. 5. [INTENTIONALLY DELETED]. 6. USE. 6.1 GENERAL. Tenant shall use the Premises solely for the Permitted Use specified in Section 1.12 of the Summary, and shall not use or permit the Premises to be used for any other use or purpose whatsoever. Tenant shall observe and comply with the "Rules and Regulations" attached hereto as Exhibit "E", and all reasonable non-discriminatory modifications thereof and additions thereto from time to time put into effect and furnished to Tenant by Landlord. Landlord shall endeavor to enforce the Rules and Regulations, but shall have no liability to Tenant for the violation or non-performance by any other tenant or occupant of the Project or the Building of any such Rules and Regulations. Tenant shall, at its sole cost and expense, observe and comply with all requirements of any board of fire underwriters or similar body relating to the Premises, and all laws, statutes, codes, rules and regulations now or hereafter in force relating to or affecting the use, occupancy, alteration or improvement of the Premises, including, without limitation, the provisions of Title III of the Americans with Disabilities Act of 1990 ("ADA") as it pertains to Tenant's use, occupancy, improvement and alteration of the Premises; provided, however, that Landlord shall be responsible for any costs (if any) of causing the restrooms of the floor on which the Premises are located (which restrooms constitute part of the Premises) to comply, as of the date hereof, with the ADA in effect as of the date hereof. Tenant shall not use or allow the Premises to be used (a) in violation of any recorded covenants, conditions and restrictions affecting the Site or of any law or governmental rule or regulation, or of any certificate of occupancy issued for the Premises or Building, or (b) for any improper, immoral, unlawful or reasonably objectionable purpose. Tenant shall not do or permit to be done anything which will obstruct or interfere with the rights of other tenants or occupants of the Project or the Building, or injure or annoy them. Tenant shall not cause, maintain or permit any nuisance in, on or about the Premises, the Building, the Project or the Site, nor commit or suffer to be committed any waste in, on or about the Premises. 6.2 PARKING. (a) Tenant's Parking Privileges. During the Term of this Lease, Landlord shall lease to Tenant, and Tenant shall lease from Landlord, the number of parking spaces specified in Section 1.16 of the Summary hereof based on the parking pass ratio set forth therein for use by Tenant's employees in the common parking areas for the Building within the Project, as designated by Landlord from time to time. In addition to the parking spaces specified in Section 1.16 of the Summary, Tenant shall be entitled, on a non-exclusive basis and in common with other tenants of the Project, to twelve (12) visitor parking spaces within the Project, the exact location of which is set forth on Exhibit "A." Landlord shall at all times have the right to establish and modify the nature and extent of the parking areas for the Building and Project (including whether such areas shall be surface, underground and/or other structures) as long as Tenant is provided the number of parking spaces designated in Section 1.16 of the Summary. In addition, Landlord may, in its sole discretion, assign any unreserved and unassigned parking spaces, and/or make all or a portion of such spaces reserved so long as Tenant is provided the number of parking spaces in Section 1.16 of the Summary. (b) Parking Charges; Loss of Parking Spaces. Each of Tenant's parking spaces set forth in Section 1.16 of the Summary hereof shall not be subject to any additional charge to Tenant. In addition to such parking spaces for use by Tenant's employees, Landlord shall permit access to the parking areas for Tenant's visitors, subject to availability of spaces. (c) Parking Rules. The use of the parking areas shall be subject to the Parking Rules and Regulations contained in Exhibit "E" attached hereto and any other reasonable, non-discriminatory rules and regulations adopted by Landlord and/or Landlord's parking operators from time to time, including any system for controlled ingress and egress and charging visitors and invitees. Tenant shall not use more parking spaces than its allotment and shall not use any parking spaces specifically assigned by Landlord to other tenants of the Building or Project or for such other uses as visitor parking. Tenant's parking spaces shall be used only for parking by vehicles no larger than normally sized passenger automobiles or pick-up trucks. Tenant shall not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant's employees, suppliers, shippers, customers or invitees to be loaded, unloaded, or parked in areas other than those designated by Landlord for such activities. If Tenant permits or allows any of the prohibited activities described herein, then Landlord shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost thereof to Tenant, which cost shall be immediately payable by Tenant upon demand by Landlord. 6.3 SIGNS AND AUCTIONS. Subject to compliance with all governmental rules and requirements and the provisions of this Lease, Tenant shall have (i) the exclusive right to install a building top sign identifying Tenant's name on the north and east facing sides of the Building (the "BUILDING TOP SIGNS"), (ii) the right to have Landlord install, at Tenant's sole -8- 15 cost and expense and in Landlord's standard manner, directory strips on the Building directory in the lobby of the Building to display Tenant's name, the names of Tenant's principal employees and Tenant's location in the Building (the "DIRECTORY SIGNAGE"), and (iii) the right to install signs identifying Tenant's name in the lobby entrance to its Premises and on the entry doors of the Premises (the "ENTRY DOOR AND PREMISES LOBBY SIGNAGE"). The Building Top Signs, the Directory Signage and the Entry Door and Premises Lobby Signage are collectively referred to as "TENANT'S SIGNAGE." The exact location, dimensions, color, illumination and other features of Tenant's Signage shall be subject to Landlord's prior approval in accordance with the Project's signage program. The Building Top Signs right is personal to the Original Tenant and to any Affiliate of the Original Tenant only so long as the Original Tenant or any Affiliate of the Original Tenant is occupying one hundred percent (100%) of the total rentable square feet comprising the initial Premises (not including the Must Take Space). Tenant's Signage shall be installed (except for the installation of the Directory Signage (which shall be installed by Landlord)) and maintained by Tenant at Tenant's sole cost and expense pursuant to an installation and maintenance program approved and supervised by Landlord. If Tenant fails to maintain Tenant's Signage in a manner reasonably satisfactory to Landlord, then Landlord may maintain Tenant's Signage and charge the costs thereof to Tenant as additional rent. At the expiration or earlier termination of this Lease, Tenant shall, at Tenant's sole cost and expense, remove Tenant's Signage and repair any damage or discoloration to the Building caused by the installation or removal thereof. Except for Tenant's Signage, Tenant shall have no right to place any sign upon the Premises, the Building, Site or Project or which can be seen from outside the Premises. Tenant shall have no right to conduct any auction in, on or about the Premises, the Building or Site. 6.4 HAZARDOUS MATERIALS. Except for materials used in connection with Tenant's business conducted from the Premises, including ordinary and general office supplies, such as copier toner, liquid paper, glue, ink and common household cleaning materials (some or all of which may constitute "HAZARDOUS MATERIALS" as defined in this Lease), Tenant agrees not to cause or permit any Hazardous Materials to be brought upon, stored, used, handled, generated, released or disposed of on, in, under or about the Premises, the Building, the Common Areas or any other portion of the Project by Tenant, its agents, employees, subtenants, assignees, licensees, contractors or invitees (collectively, "TENANT'S PARTIES"), without the prior written consent of Landlord, which consent Landlord may withhold in its sole and absolute discretion. Upon the expiration or earlier termination of this Lease, Tenant agrees to promptly remove from the Premises, the Building and the Project, at its sole cost and expense, any and all Hazardous Materials, including any equipment or systems containing Hazardous Materials which are installed, brought upon, stored, used, generated or released upon, in, under or about the Premises, the Building and/or the Project or any portion thereof by Tenant or any of Tenant's Parties. To the fullest extent permitted by law, Tenant agrees to promptly indemnify, protect, defend and hold harmless Landlord and Landlord's partners, officers, directors, employees, agents, successors and assigns (collectively, "LANDLORD INDEMNIFIED PARTIES") from and against any and all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs (including, without limitation, clean-up, removal, remediation and restoration costs, sums paid in settlement of claims, attorneys' fees, consultant fees and expert fees and court costs, but specifically excluding special, indirect or consequential damages including but not limited to claims for loss of use, anticipated profit or business opportunity, market-based stigma damages or business interruption, or mental or emotional distress or fear of injury or disease) which arise or result from the presence of Hazardous Materials on, in, under or about the Premises, the Building or any other portion of the Project and which are caused or permitted by Tenant or any of Tenant's Parties. Tenant agrees to promptly notify Landlord of any release of Hazardous Materials in the Premises, the Building or any other portion of the Project which Tenant becomes aware of during the Term of this Lease, whether caused by Tenant or any other persons or entities. In the event of any release of Hazardous Materials caused or permitted by Tenant or any of Tenant's Parties, Landlord shall have the right, but not the obligation, to cause Tenant to immediately take all steps Landlord deems necessary or appropriate to remediate such release and prevent any similar future release to the satisfaction of Landlord and Landlord's mortgagee(s). At all times during the Term of this Lease, Landlord will have the right, but not the obligation, to enter upon the Premises to inspect, investigate, sample and/or monitor the Premises to determine if Tenant is in compliance with the terms of this Lease regarding Hazardous Materials. As used in this Lease, the term "HAZARDOUS MATERIALS" shall mean and include any hazardous or toxic materials, substances or wastes as now or hereafter designated under any law, statute, ordinance, rule, regulation, order or ruling of any agency of the State, the United States Government or any local governmental authority, including, without limitation, asbestos, petroleum, petroleum hydrocarbons and petroleum based products, urea formaldehyde foam insulation, polychlorinated biphenyls ("PCBs"), and freon and other chlorofluorocarbons. The provisions of this Section 6.4 will survive the expiration or earlier termination of this Lease. Landlord represents to Tenant that, to Landlord's actual knowledge as of the date of Landlord's delivery of the Premises to Tenant, the Building does not, except as may be disclosed in the April 28, 1996 Phase I Environmental Assessment Report No. 889-6E060 prepared by Professional Services Industries, Inc., contain Hazardous Materials in levels in excess of those permitted by Hazardous Materials laws existing as of the date of Landlord's delivery of the Premises to Tenant. Landlord shall indemnify, defend and hold harmless Tenant from and against any and all claims, judgments, damages, penalties, fines, costs, liabilities and losses (including, without limitation, sums paid in settlement of claims and for reasonable attorneys' fees, consultant fees and expert fees, (but specifically excluding special, indirect or consequential damages including but not limited to claims for loss of use, anticipated profit or business opportunity, market-based stigma damages or business interruption, or mental or emotional distress or fear of injury or disease) to the extent arising as a result of any Hazardous Materials (1) located in, on, under or about the Building and/or Project as of the commencement of Tenant's occupancy of the Premises, or (2) hereafter caused to be located in, on, under or about the Building and/or Project by Landlord and/or any of Landlord's employees, agents or representatives or other tenants of the Project. This indemnification of Tenant by Landlord includes, without limitation, costs incurred in connection with any investigation of site conditions or any clean-up, remedial, removal or restoration work. The covenants of Landlord under this Section 6.5 shall survive the expiration of the Term or earlier termination of this Lease. Notwithstanding anything above to the contrary, the foregoing indemnity shall not extend to Hazardous Materials caused to be located in the Building and/or the Project by Tenant or any of Tenant's Parties. 7. PAYMENTS AND NOTICES. All rent and other sums payable by Tenant to Landlord hereunder shall be paid to Landlord at the first address designated in Section 1.1 of the Summary, or to such other persons and/or at such other places as Landlord may hereafter designate in writing. Any notice required or permitted to be given hereunder must be -9- 16 in writing and may be given by personal delivery (including delivery by nationally recognized overnight courier or express mailing service), facsimile transmission, or by registered or certified mail, postage prepaid, return receipt requested, addressed to Tenant at the address(es) designated in Section 1.2 of the Summary, or to Landlord at the address(es) designated in Section 1.1 of the Summary. Either party may, by written notice to the other, specify a different address for notice purposes. 8. BROKERS. The parties recognize that the broker(s) who negotiated this Lease are stated in Section 1.13 of the Summary, and agree that Landlord shall be solely responsible for the payment of brokerage commissions to said broker(s), and that Tenant shall have no responsibility therefor unless written provision to the contrary has been made. Each party represents and warrants to the other, that, to its knowledge, no other broker, agent or finder (a) negotiated or was instrumental in negotiating or consummating this Lease on its behalf, and (b) is or might be entitled to a commission or compensation in connection with this Lease. Any broker, agent or finder of Tenant whom Tenant has failed to disclose herein shall be paid by Tenant. Tenant shall indemnify, defend (by counsel reasonably approved in writing by Landlord) and hold Landlord harmless from and against any and all claims, judgments, suits, causes of action, damages, losses, liabilities and expenses (including attorneys' fees and court costs) resulting from any breach by Tenant of the foregoing representation, including, without limitation, any claims that may be asserted against Landlord by any broker, agent or finder undisclosed by Tenant herein. Landlord shall indemnify, defend (by counsel reasonably approved in writing by Tenant) and hold Tenant harmless from and against any and all claims, judgments, suits, causes of action, damages, losses, liabilities and expenses (including attorneys' fees and court costs) resulting from any breach by Landlord of the foregoing representation, including, without limitation, any claims that may be asserted against Tenant by any broker, agent or finder undisclosed by Landlord herein. The foregoing indemnities shall survive the expiration or earlier termination of this Lease. 9. SURRENDER; HOLDING OVER. 9.1 SURRENDER OF PREMISES. Upon the expiration or sooner termination of this Lease, Tenant shall surrender all keys for the Premises to Landlord, and exclusive possession of the Premises to Landlord broom clean and in substantially the same condition and repair as received by Tenant, reasonable wear and tear excepted (and casualty damage excepted if this Lease is terminated as a result thereof pursuant to Section 18), with all of Tenant's personal property (and those items, if any, of Tenant Improvements and Tenant Changes identified by Landlord pursuant to Section 12.2 below) removed therefrom and all damage caused by such removal repaired, as required pursuant to Sections 12.2 and 12.3 below. If, for any reason, Tenant fails to surrender the Premises on the expiration or earlier termination of this Lease (including upon the expiration of any subsequent month-to-month tenancy consented to by Landlord pursuant to Section 9.2 below), with such removal and repair obligations completed, then, in addition to the provisions of Section 9.3 below and Landlord's rights and remedies under Section 12.4 and the other provisions of this Lease, Tenant shall indemnify, protect, defend (by counsel approved in writing by Landlord) and hold Landlord harmless from and against any and all claims, judgments, suits, causes of action, damages, losses, liabilities and expenses (including attorneys' fees and court costs) resulting from such failure to surrender, including, without limitation, any claim made by any succeeding tenant based thereon. The foregoing indemnity shall survive the expiration or earlier termination of this Lease. 9.2 HOLD OVER WITH LANDLORD'S CONSENT. If, with Landlord's express written consent, Tenant remains in possession of the Premises after the expiration or earlier termination of the Lease Term, Tenant shall become a tenant from month-to-month upon the terms and conditions set forth in this Lease (including Tenant's obligation to pay all Excess Expenses and any other additional rent under this Lease), but at a Monthly Basic Rent equal to the greater of: (a) one hundred fifty percent (150%) of the Monthly Basic Rent applicable to the Premises immediately prior to the date of such expiration or earlier termination; or (b) one hundred twenty-five percent (125%) of the prevailing market rate excluding any rental or other concessions (as reasonably determined by Landlord) for the Premises in effect on the date of such expiration or earlier termination. Tenant shall pay an entire month's Monthly Basic Rent calculated in accordance with this Section 9.2 for any portion of a month it holds over and remains in possession of the Premises pursuant to this Section 9.2. This Section 9.2 shall not be construed to create any expressed or implied right to holdover beyond the expiration of the Lease Term or any extension thereof. 9.3 HOLD OVER WITHOUT LANDLORD'S CONSENT. If Tenant holds over after the expiration or earlier termination of the Lease Term without the express written consent of Landlord, then, in addition to all other remedies available to Landlord, Tenant shall become a tenant at sufferance only, upon the terms and conditions set forth in this Lease so far as applicable (including Tenant's obligation to pay all Excess Expenses and any other additional rent under this Lease), but at a Monthly Basic Rent equal to the greater of: (a) one hundred fifty percent (150%) of the Monthly Basic Rent applicable to the Premises immediately prior to the date of such expiration or earlier termination; or (b) one hundred twenty-five percent (125%) of the prevailing market rate excluding any rental or other concessions (as reasonably determined by Landlord) for the Premises in effect on the date of such expiration or earlier termination. Acceptance by Landlord of rent after such expiration or earlier termination shall not constitute a consent to a hold over hereunder or result in an extension of this Lease. Tenant shall pay an entire month's Monthly Basic Rent calculated in accordance with this Section 9.3 for any portion of a month it holds over and remains in possession of the Premises pursuant to this Section 9.3. 9.4 NO EFFECT ON LANDLORD'S RIGHTS. The foregoing provisions of this Section 9 are in addition to, and do not affect, Landlord's right of re-entry or any other rights of Landlord hereunder or otherwise provided by law or equity. 10. TAXES ON TENANT'S PROPERTY. Tenant shall be liable for, and shall pay before delinquency, all taxes and assessments (real and personal) levied against (a) any personal property or trade fixtures placed by Tenant in or about the Premises (including any increase in the assessed value of the Premises based upon the value of any such personal property or trade fixtures); and (b) any Tenant Improvements, Tenant Changes or other alterations in the Premises (whether installed and/or paid for by Landlord or Tenant) to the extent such items are assessed at a valuation higher than the valuation at which tenant improvements conforming to the Building's standard tenant improvements are assessed. If any such taxes or assessments are levied against Landlord or Landlord's property, Landlord may, after written notice to -l0- 17 Tenant (and under proper protest if requested by Tenant) pay such taxes and assessments, and Tenant shall reimburse Landlord therefor within ten (10) business days after demand by Landlord; provided, however, Tenant, at its sole cost and expense, shall have the right, with Landlord's cooperation, to bring suit in any court of competent jurisdiction to recover the amount of any such taxes and assessments so paid under protest. 11. CONDITION OF PREMISES; REPAIRS. 11.1 CONDITION OF PREMISES. Tenant acknowledges that, except as otherwise expressly set forth in this Lease, neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the Premises, the Building, the Site or the Project or their condition, or with respect to the suitability thereof for the conduct of Tenant's business. Subject to Landlord's repair obligations set forth below, the taking of possession of the Premises by Tenant shall conclusively establish that the Project, the Site, the Premises, the Tenant Improvements therein, the Building and the Common Areas were at such time complete and in good, sanitary and satisfactory condition and repair and without any obligation on Landlord's part to make any alterations, upgrades or improvements thereto; provided, however, that notwithstanding anything herein to the contrary, Landlord shall, prior to the Commencement Date and at its sole cost and expense, (i) replace any missing window blinds to the extent any such blinds were previously located in the Premises and were not removed by Tenant, Tenant's employees, invitees or Tenant's Agents, and (ii) repair holes in the walls of the Premises to the extent not caused by Tenant, Tenant's employees, invitees or Tenant's Agents. 11.2 LANDLORD'S REPAIR OBLIGATIONS. Subject to Section 18.1 and 18.2 of this Lease, Landlord shall, as part of the Operating Expenses, repair and maintain (a) the Building shell and other structural portions of the Building (including the roof and foundations), (b) the basic heating, ventilating, air conditioning ("HVAC"), sprinkler and electrical systems within the Building core and standard conduits, connections and distribution systems thereof within the Premises (but not any above standard improvements installed in the Premises such as, for example, but by way of limitation, custom lighting, special or supplementary HVAC or plumbing systems or distribution extensions, special or supplemental electrical panels or distribution systems, or kitchen or restroom facilities and appliances to the extent such facilities and appliances are intended for the exclusive use of Tenant), and (c) the Common Areas; provided, however, to the extent such maintenance or repairs are required as a result of any act, neglect, fault or omission of Tenant or any of Tenant's agents, employees contractors, licensees or invitees, Tenant shall pay to Landlord, as additional rent, the costs of such maintenance and repairs. Landlord shall not be liable to Tenant for failure to perform any such repairs or maintenance, unless Landlord shall fail to make such repairs and such failure shall continue for an unreasonable time following written notice from Tenant to Landlord of the need for such repairs. Without limiting the foregoing, Tenant waives the right to make repairs at Landlord's expense under any law, statute or ordinance now or hereafter in effect (including the provisions of California Civil Code Section 1942 and any successive sections or statutes of a similar nature). 11.3 TENANT'S REPAIR OBLIGATIONS. Except for Landlord's obligations specifically set forth in Sections 11.1, 11.2, 16.1, 18.1 and 19.2 hereof, Tenant shall at all times and at Tenant's sole cost and expense, keep, maintain, clean, repair and preserve the Premises and all parts thereof including, without limitation, all Tenant Improvements, Tenant Changes, utility meters, all special or supplemental HVAC systems, electrical systems, pipes and conduits, located within the Premises, all fixtures, furniture and equipment, Tenant's storefront, Tenant's signs, locks, closing devices, security devices, widows, window sashes, casements and frames, floors and floor coverings, shelving, kitchen and/or restroom facilities and appliances located within the Premises to the extent such facilities and appliances are intended for the exclusive use of Tenant, if any, custom lighting, and any alterations, additions and other property located within the Premises in good condition and repair, reasonable wear and tear excepted. Tenant shall replace, at its expense, any and all plate and other glass in and about the Premises to the extent the same is damaged or broken by Tenant, its agents, employees invitees, contractors or licensees. Such maintenance and repairs shall be performed with due diligence, lien-free and in a first-class and workmanlike manner, by licensed contractor(s) which are selected by Tenant and approved by Landlord, which approval Landlord shall not unreasonably withhold or delay. Except as otherwise expressly provided in this Lease, Landlord shall have no obligation to alter, remodel, improve, repair, renovate, redecorate or paint all or any part of the Premises. 12. ALTERATIONS. 12.1 TENANT CHANGES; CONDITIONS. Tenant may, at its sole cost and expense, make alterations, additions, improvements and decorations to the Premises (collectively, "TENANT CHANGES") subject to and upon the following terms and conditions: (a) Notwithstanding any provision in this Section 12 (including, but not limited to, Section 12.1(b)) to the contrary, Tenant is absolutely prohibited from making any alterations, additions, improvements or decorations which: (i) affect any area outside the Premises; (ii) affect the Building's structure, equipment, services or systems, or the proper functioning thereof, or Landlord's access thereto; (iii) affect the outside appearance, character or use of the Project, the Building or the Common Areas; (iv) weaken or impair the structural strength of the Building; (v) in the reasonable opinion of Landlord, lessen the value of the Project or Building; or (vi) will violate or require a change in any occupancy certificate applicable to the Premises. (b) Before proceeding with any Tenant Change which is not otherwise prohibited in Section 12.1(a) above, Tenant must first obtain Landlord's written approval thereof (including approval of all plans, specifications and working drawings for such Tenant Change), which approval shall not be unreasonably withheld or delayed. However, Landlord's prior approval shall not be required for any Tenant Change which is cosmetic in nature (e.g. interior painting and wallpapering), or which satisfies each of the following conditions (hereinafter a "PRE-APPROVED CHANGE"): (i) the costs of such Tenant Change does not exceed Three Thousand Dollars ($3,000.00) individually. (ii) the costs of such Tenant Change when aggregated with the costs of all other Tenant Changes made by Tenant during the Term of this Lease do not exceed Fifteen Thousand Dollars ($15,000.00); (iii) Tenant delivers to Landlord final plans, specifications and working drawings for such Change at least ten (10) days prior -11- 18 to commencement of the work thereof; and (iv) Tenant and such Tenant Change otherwise satisfy all other conditions set forth in this Section 12.1. (c) After Landlord has approved the Tenant Changes and the plans, specifications and working drawings therefor (or is deemed to have approved the Pre-Approved Changes as set forth in Section 12.1(b) above), Tenant shall: (i) enter into an agreement for the performance of such Tenant Changes with such contractors and subcontractors selected by Tenant and approved by Landlord, which approval shall not be unreasonably withheld or delayed; (ii) before proceeding with any Tenant Change (including any Pre-Approved Change), provide Landlord with ten (10) days' prior written notice thereof; and (iii) pay to Landlord, within ten (10) days after written demand, the costs of any increased insurance premiums incurred by Landlord to include such Tenant Changes in the fire and extended coverage insurance obtained by Landlord pursuant to Section 21 below. However, Landlord shall be required to include the Tenant Changes under such insurance only to the extent such insurance is actually obtained by Landlord and such Tenant Changes are insurable under such insurance; if such Tenant Changes are not or cannot be included in Landlord's insurance, Tenant shall insure the Tenant Changes under its casualty insurance pursuant to Section 21.1(a) below. In addition, before proceeding with any Tenant Change, Tenant's contractors shall obtain, on behalf of Tenant and at Tenant's sole cost and expense: (A) all necessary governmental permits and approvals for the commencement and completion of such Tenant Change; and (B) a completion and lien indemnity bond, or other surety, satisfactory to Landlord for such Tenant Change; provided, however, that Tenant shall not be required to obtain any such bond with respect to Tenant's construction of the Tenant Improvements or any Tenant Change costing less than One Hundred Thousand Dollars ($100,000.00). Landlord's approval of any contractor(s) and subcontractor(s) of Tenant shall not release Tenant or any such contractor(s) and/or subcontractor(s) from any liability for any conduct or acts of such contractor(s) and/or subcontractor(s). (d) Tenant shall pay to Landlord, as additional rent, the reasonable costs of Landlord's engineers and other consultants (but not Landlord's on-site management personnel) for review of all plans, specifications and working drawings for the Tenant Changes, within ten (10) business days after Tenant's receipt of invoices either from Landlord or such consultants. In addition to such costs, Tenant shall pay to Landlord, within ten (10) business days after completion of any Tenant Change, the actual, reasonable costs incurred by Landlord for services rendered by Landlord's management personnel and engineers to coordinate and/or supervise any of the Tenant Changes to the extent such services are provided in excess of or after the normal on-site hours of such engineers and management personnel. (e) All Tenant Changes shall be performed: (i) in accordance with the approved plans, specifications and working drawings; (ii) lien-free and in a first-class workmanlike manner; (iii) in compliance with all laws, rules, regulations of all governmental agencies and authorities including, without limitation, the provisions of Title III of the Americans with Disabilities Act of 1990; (iv) in such a manner so as not to unreasonably interfere with the occupancy of any other tenant in the Project or Building, nor impose any additional expense upon nor delay Landlord in the maintenance and operation of the Project or Building; and (v) at such times, in such manner and subject to such rules and regulations as Landlord may from time to time reasonably designate. (f) Throughout the performance of the Tenant Changes, Tenant shall obtain, or cause its contractors to obtain, workers compensation insurance and general liability insurance in compliance with the provisions of Section 20 of this Lease. 12.2 REMOVAL OF TENANT CHANGES AND TENANT IMPROVEMENTS. Except for the Tenant Improvements constructed by Tenant which shall remain in the Premises, all Tenant Changes required by Landlord to be removed by Tenant at the time Landlord provided Tenant with Landlord's consent to a Tenant Change (or, in the event of a Pre-Approved Change (not requiring Landlord's consent), at the time Landlord approves Tenant's plans and specifications regarding such Pre-Approved Change), shall be removed by Tenant upon the expiration or earlier termination of this Lease. If Tenant is required to remove any such items as described above, Tenant shall, at its sole cost, remove the identified items on or before the expiration or sooner termination of this Lease and repair any damage to the Premises caused by such removal (or, at Landlord's option, shall pay to Landlord all of Landlord's costs of such removal and repair). 12.3 REMOVAL OF PERSONAL PROPERTY. All articles of personal property owned by Tenant or installed by Tenant at its expense in the Premises (including business and trade fixtures, furniture and moveable partitions) shall be, and remain, the property of Tenant, and shall be removed by Tenant from the Premises, at Tenant's sole cost and expense, on or before the expiration or sooner termination of this Lease. Tenant shall promptly repair any damage caused by such removal. 12.4 TENANT'S FAILURE TO REMOVE. If Tenant fails to remove by the expiration or sooner termination of this Lease all of its personal property, or any items of Tenant Improvements or Tenant Changes identified by Landlord for removal pursuant to Section 12.2 above, or if Tenant fails to comply with its obligations under Section 12.3, Landlord may, at its option, treat such failure as a hold over pursuant to Section 9.3 above, and/or may (without liability to Tenant for loss thereof, at Tenant's sole cost and in addition to Landlord's other rights and remedies under this Lease, at law or in equity: (a) remove and store such items in accordance with applicable law; and/or (b) upon ten (10) days' prior notice to Tenant, sell all or any such items at private or public sale for such price as Landlord may obtain as permitted under applicable law. Landlord shall apply the proceeds of any such sale to any amounts due to Landlord under this Lease from Tenant (including Landlord's attorneys' fees and other costs incurred in the removal, storage and/or sale of such items), with any remainder to be paid to Tenant. 12.5 INITIAL IMPROVEMENTS IN THE PREMISES. Tenant shall be entitled to perform initial improvements in the Premises (including the Must Take Space) in accordance with this Section 12.5 and otherwise in accordance with Section 12. In connection therewith, Tenant shall be entitled to a one-time improvement allowance (the "IMPROVEMENT ALLOWANCE") in an amount up to Six Dollars ($6.00) per usable square foot of the Premises (including the Must Take Space) for the costs -12- 19 relating to the design and construction of Tenant's initial improvements in the Premises and which are to be permanently affixed to the Premises (the "TENANT IMPROVEMENTS") and the Improvement Allowance Items, which Improvement Allowance will only be disbursed by Landlord, if at all, in accordance with all of the terms and provisions of this Section 12.5. In no event shall Landlord be obligated to make disbursements under this Section 12.5 in a total amount which exceeds the Improvement Allowance. Any such Tenant Improvements made by Tenant shall be in accordance with, and subject to, Section 12 including, but not limited to, the terms and conditions of Section 12.1. (a) Improvement Allowance Items. The Improvement Allowance shall be disbursed by Landlord only for the following items and costs (collectively, the "IMPROVEMENT ALLOWANCE ITEMS"): (i) Payment of the fees of the architect and engineer(s) retained by Tenant, and Landlord and Landlord's consultants in connection with the review of the plans and specifications prepared for the Tenant Improvements ("IMPROVEMENT DRAWINGS"); (ii) The payment of plan check, permit and license fees relating to construction of the Tenant Improvements; (iii) The cost of construction of the Tenant Improvements, including, without limitation, testing and inspection costs, trash removal costs, and contractors' fees and general conditions; (iv) The cost of any changes in the existing Building when such changes are required by the Improvement Drawings, such cost to include all direct architectural and/or engineering fees and expenses incurred in connection therewith; (v) The cost of any changes to the Improvement Drawings or Tenant Improvements required by applicable building codes; (vi) Sales and use taxes and Title 24 fees; (vii) Tenant's relocation expenses pertaining to Tenant's move into the Premises; (viii) Cabling and wiring to be installed in the Premises; and (ix) Furniture, fixtures and equipment utilized by Tenant for the conduct of Tenant's business from the Premises. (b) Disbursement of Improvement Allowance. Upon the execution and delivery of this Lease by Landlord and Tenant, Landlord shall disburse to Tenant the first one-half (1/2) of the Improvement Allowance to Tenant. On July 15, 1997, Landlord shall disburse to Tenant the second one-half (1/2) of the Improvement Allowance. Within thirty (30) days after the Commencement Date, Tenant shall provide to Landlord executed unconditional mechanics' lien releases from all of Tenant's Agents (as such term is defined below) which shall comply with the appropriate provisions, as reasonably determined by Landlord, of California Civil Code Section 3262(d) and either Section 3262(d)(3) or Section 3262(d)(4). (c) Other Terms. All Improvement Allowance Items for which the Improvement Allowance has been made available shall, except for Tenant's furniture, trade fixtures and equipment, be deemed Landlord's property. All drafts of the Improvement Drawings shall be subject to Landlord's prior written approval, which approval shall not be unreasonably withheld or delayed. In addition, all of Tenant's contractors, subcontractors, laborers, materialmen and suppliers (collectively, "TENANT'S AGENTS") shall be subject to Landlord's prior written approval (which approval shall not be unreasonably withheld or delayed), except that subcontractors of Landlord's selection shall be retained by the Contractor to perform all mechanical, electrical, plumbing, structural and heating, ventilation and air conditioning work. 13. LIENS. Tenant shall not permit any mechanic's, materialmen's or other liens to be filed against all or any part of the Project, the Site, the Building or the Premises, nor against Tenant's leasehold interest in the Premises, by reason of or in connection with any repairs, alterations, improvements or other work contracted for or undertaken by Tenant or any other act or omission of Tenant or Tenant's agents, employees, contractors, licensees or invitees. Tenant shall, at Landlord's request, provide Landlord with enforceable, unconditional and final lien releases (and other evidence reasonably requested by Landlord to demonstrate protection from liens) from all persons furnishing labor and/or materials with respect to the Premises. Landlord shall have the right at all reasonable times to post on the Premises and record any notices of non-responsibility which it deems necessary for protection from such liens. If any such liens are filed, Tenant shall, at its sole cost, immediately cause such lien to be released of record or bonded to Landlord's reasonable satisfaction so that it no longer affects title to the Project, the Site, the Building or the Premises. If Tenant fails to cause such lien to be so released or bonded within twenty (20) days after filing thereof, Landlord may, without waiving its rights and remedies based on such breach, and without releasing Tenant from any of its obligations, cause such lien to be released by any means it shall deem proper, including payment in satisfaction of the claim giving rise to such lien. Tenant shall pay to Landlord within five (5) days after receipt of invoice from Landlord, any sum paid by Landlord to remove such liens, together with interest at the Interest Rate from the date of such payment by Landlord. 14. ASSIGNMENT AND SUBLETTING. 14.1 RESTRICTION ON TRANSFER. Except as otherwise expressly provided in this Section 14, Tenant shall not, without the prior written consent of Landlord, which consent Landlord will not unreasonably withhold, assign or encumber this Lease or any interest herein or sublet the Premises or any part thereof, or permit the use or occupancy of the Premises by any party other than Tenant (any such assignment, encumbrance, sublease, license or the like shall sometimes be referred to as a "TRANSFER"). Any Transfer without Landlord's consent (except for a Permitted Transfer pursuant to -13- 20 Section 14.2 below) shall constitute a default by Tenant under this Lease, and in addition to all of Landlord's other remedies at law, in equity or under this Lease, such Transfer shall be voidable at Landlord's election. In addition, this Lease shall not, nor shall any interest of Tenant herein, be assignable by operation of law without the written consent of Landlord. For purposes of this Section 14, other than with respect to a Permitted Transfer under Section 14.2 and transfers of stock of Tenant if Tenant is a publicly-held corporation and such stock is transferred publicly over a recognized security exchange or over-the-counter market, if Tenant is a corporation, partnership or other entity, any transfer, assignment, encumbrance or hypothecation of twenty-five percent (25%) or more (individually or in the aggregate) of any stock or other ownership interest in such entity, and/or any transfer, assignment, hypothecation or encumbrance of any controlling ownership or voting interest in such entity, shall be deemed an assignment of this Lease and shall be subject to all of the restrictions and provisions contained in this Section 14. 14.2 PERMITTED CONTROLLED TRANSFERS. Notwithstanding the provisions of Sections 14.1 above to the contrary, Tenant may assign this Lease or sublet the Premises or any portion thereof (herein, a "PERMITTED TRANSFER"), without Landlord's consent and without extending any sublease or termination option to Landlord, to any corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from a merger or consolidation with Tenant, or to any person or entity which acquires all the assets of Tenant's business as a going concern ("AFFILIATE"), provided that: (a) at least twenty (20) days prior to such assignment or sublease, Tenant delivers to Landlord the financial statements and other financial and background information of the assignee or sublessee described in Section 14.3 below; (b) if an assignment, the assignee assumes, in full, the obligations of Tenant under this Lease (or if a sublease, the sublessee of a portion of the Premises or Term assumes, in full, the obligations of Tenant with respect to such portion); (c) Tenant remains fully liable under this Lease; (d) the use of the Premises is permitted under Article 6 and, to the extent applicable, Section 1.5 of this Lease; and (e) such transaction is not entered into as a subterfuge to avoid the restrictions and provisions of this Section 14. 14.3 LANDLORD'S OPTIONS. If at any time or from time to time during the Term Tenant desires to effect a Transfer, Tenant shall deliver to Landlord written notice ("TRANSFER NOTICE") setting forth the terms and provisions of the proposed Transfer and the identity of the proposed assignee, sublessee or other transferee (sometimes referred to hereinafter as a "TRANSFEREE"). Tenant shall also deliver to Landlord with the Transfer Notice, a current financial statement and financial statements for the preceding two (2) years of the Transferee which have been certified or audited by a reputable independent accounting firm acceptable to Landlord, and such other information concerning the business background and financial condition of the proposed Transferee as Landlord may reasonably request. Except with respect to a Permitted Transfer (pursuant to the terms and provisions of Section 14.2 hereof), Landlord shall have the option, exercisable by written notice delivered to Tenant within twenty (20) days after Landlord's receipt of the Transfer Notice, such financial statements and other information, to: approve or disapprove such Transfer, which approval shall not be unreasonably withheld. 14.4 ADDITIONAL CONDITIONS; EXCESS RENT. If for a Transfer other than a Permitted Transfer, Landlord approves of the proposed Transfer pursuant to Section 14.3 above, Tenant may enter into the proposed Transfer with such proposed Transferee subject to the following further conditions: (a) the Transfer shall be on the same terms set forth in the Transfer Notice delivered to Landlord (if the terms have changed, Tenant must submit a revised Transfer Notice to Landlord and Landlord shall have another twenty (20) days after receipt thereof to make the election in Section 14.3 above); (b) no Transfer shall be valid and no Transferee shall take possession of the Premises until an executed counterpart of the assignment, sublease or other instrument affecting the Transfer has been delivered to Landlord pursuant to which the Transferee shall expressly assume all of Tenant's obligations under this Lease (or with respect to a sublease of a portion of the Premises or for a portion of the Term, all of Tenant's obligations applicable to such portion); (c) no Transferee shall have a further right to assign, encumber or sublet, except on the terms herein contained; and (d) one-half (1/2) of any rent or other economic consideration received by Tenant as a result of such Transfer which exceeds, in the aggregate, (i) the total rent which Tenant is obligated to pay Landlord under this Lease (prorated to reflect obligations allocable to any portion of the Premises subleased), plus (ii) the total rent paid to Landlord by Tenant for all days the portion of the Premises in question was vacated commencing on and after the Downtime Start Date (as defined below), plus (iii) any reasonable brokerage commissions, attorneys' fees, moving costs and other economic concessions actually paid by Tenant in connection with such Transfer, shall be paid to Landlord within ten (10) days after receipt thereof as additional rental under this Lease, without affecting or reducing any other obligations of Tenant hereunder. The Downtime Start Date shall mean the later of (A) the date which Tenant vacates and does not reoccupy the portion of the Premises in question and delivers written notice of the same to Landlord, and (B) the date Tenant enters into a listing agreement for the portion of the Premises in question with a reputable broker, and provides Landlord with written notice thereof. 14.5 REASONABLE DISAPPROVAL. Landlord and Tenant hereby acknowledge that Landlord's disapproval of any proposed Transfer (other than a Permitted Transfer) pursuant to Section 14.3 shall be deemed reasonably withheld if based upon any reasonable factor, including, without limitation, any or all of the following factors: (a) the proposed Transfer would result in more than two (2) subleases of portions of the Premises being in effect at any one time during the Term; (b) the proposed Transferee is an existing tenant of the Project and Landlord is unable to accommodate such existing tenant's space needs; (c) the proposed Transferee is a governmental entity which (i) is capable of exercising the power of eminent domain or condemnation or (ii) is of a character or reputation, is engaged in a business, or is of, or is associated with, a political orientation or faction which is not consistent with the quality of the Building, or which would reasonably offend a landlord of a building comparable to the Building, (iii) would significantly increase the human traffic in the Premises or the Building beyond the traffic which generally results from general office use of space in a first-class office building or (iv) is engaged in the business of law enforcement; (d) the portion of the Premises to be sublet or -14- 21 assigned is irregular in shape with legally inadequate means of ingress and egress; (e) the use of the Premises by the Transferee (i) is not permitted by the use provisions in Section 6 hereof, or (ii) violates any exclusive use granted by Landlord to another tenant in the Building; (f) the Transferee does not have the financial capability to fulfill the obligations imposed by the Transfer; or (g) the Transferee is not, in Landlord's reasonable opinion, of reputable or good character. 14.6 NO RELEASE. No Transfer shall release Tenant of Tenant's obligations under this Lease or alter the primary liability of Tenant to pay the rent and to perform all other obligations to be performed by Tenant hereunder. Landlord may require that any Transferee except for an Affiliate remit directly to Landlord on a monthly basis, all monies due Tenant by said Transferee. However, the acceptance of rent by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof. Consent by Landlord to one Transfer shall not be deemed consent to any subsequent Transfer. In the event of default by any Transferee of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such Transferee or successor. Landlord may consent to subsequent assignments of the Lease or sublettings or amendments or modifications to the Lease with assignees of Tenant, without notifying Tenant, or any successor of Tenant, and without obtaining its or their consent thereto and any such actions shall not relieve Tenant of liability under this Lease. 14.7 ADMINISTRATIVE AND ATTORNEYS' FEES. If Tenant effects a Transfer or requests the consent of Landlord to any Transfer, then Tenant shall, upon demand, pay Landlord a non-refundable administrative fee of Five Hundred Dollars ($500.00), plus any reasonable attorneys' and paralegal fees and costs incurred by Landlord in connection with such Transfer or request for consent (whether attributable to Landlord's in-house attorneys or paralegals or otherwise). Acceptance of the $500.00 administrative fee and/or reimbursement of Landlord's attorneys' and paralegal fees shall in no event obligate Landlord to consent to any proposed Transfer. 14.8 MATERIAL INDUCEMENT. Tenant understands, acknowledges and agrees that (a) Landlord's option to sublease from Tenant any space which Tenant proposes to sublease or terminate this Lease upon any proposed assignment or encumbrance of this Lease by Tenant as provided in Section 14.3(b) above rather than approve the proposed sublease, assignment or encumbrance, and (b) Landlord's right to receive any excess consideration paid by a Transferee in connection with an approved Transfer as provided in Section 14.4(d) above, are a material inducement for Landlord's agreement to lease the Premises to Tenant upon the terms and conditions herein set forth. 15. ENTRY BY LANDLORD. Landlord and its employees and agents shall at all reasonable times following prior notice to Tenant (which, except in the case of emergencies and except with respect to ordinary services to be provided by Landlord within the Premises, shall be no less than twenty-four (24) hours prior notice) have the right to enter the Premises to inspect the same, to supply janitorial service and any other service required to be provided by Landlord to Tenant under this Lease, to exhibit the Premises to prospective lenders or purchasers (or during the last year of the Term, to prospective tenants), to post notices of non-responsibility, and/or to alter, improve or repair the Premises or any other portion of the Building or Project, all without being deemed guilty of or liable for any breach of Landlord's covenant of quiet enjoyment or any eviction of Tenant, and without abatement of rent. In exercising such entry rights, Landlord shall endeavor to minimize, as reasonably practicable, the interference with Tenant's business. For each of the foregoing purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in, upon and about the Premises, excluding Tenant's vaults and safes, and Landlord shall have the means which Landlord may deem proper to open said doors in an emergency in order to obtain entry to the Premises; provided, however, that Tenant reserves the right to not provide Landlord with a key to certain offices designed by Tenant in writing to Landlord; provided further, however, that Tenant hereby agrees to release Landlord from any liability, claim, loss or damage arising from Landlord's inability to access such offices. Any entry to the Premises obtained by Landlord by any of said means or otherwise shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant from the Premises or any portion thereof, or grounds for any abatement or reduction of rent and Landlord shall not have any liability to Tenant for any damages or losses on account of any such entry by Landlord except, subject to the provisions of Section 22.1, to the extent of Landlord's gross negligence or willful misconduct. 16. UTILITIES AND SERVICES. 16.1 STANDARD UTILITIES AND SERVICES. As long as Tenant has not committed an uncured default under any of the provisions of this Lease, and subject to the terms and conditions of this Lease, and the obligations of Tenant as set forth hereinbelow, Landlord shall furnish or cause to be furnished to the Premises the following utilities and services, the costs of which shall be included in Operating Expenses, unless otherwise specified below (Landlord reserves the right to adopt non-discriminatory modifications and additions to the following provisions from time to time): (a) Landlord shall make the elevator of the Building available for Tenant's non-exclusive use, twenty-four (24) hours per day. (b) Landlord shall furnish during the Business Hours for the Building specified in Section 1.17 of the Summary, heating, ventilation and air conditioning ("HVAC") for the Premises as required for the comfortable and normal occupancy of the Premises. The cost of maintenance and service calls to adjust and regulate the HVAC system shall be charged to Tenant if the need for maintenance work results from either Tenant's adjustment of room thermostats or Tenant's failure to comply with its obligations under this Section 16, including keeping window coverings closed as needed. Such work shall be charged at hourly rates equal to then-current journeyman's wages for HVAC mechanics. If Tenant desires HVAC at any time other than during the Business Hours for the Building, Landlord shall provide such "after-hours" usage after advance reasonable request by Tenant, and Tenant shall pay to Landlord, as additional rent (and not as part of the Operating Expenses) the actual cost, as fairly determined by Landlord from time to time throughout the term of this Lease, of such after-hours usage (as well as the actual cost of any HVAC used by Tenant in excess of what Landlord considers reasonable or normal), including any minimum hour charges for after-hours requests and any special start-up costs for after-hours -15- 22 services which requires a special start-up (such as late evenings, weekends and holidays). As of the date of this Lease, the charge (including start up costs) for after-hours HVAC is Twenty-Five Dollars ($25.00) per hour for each HVAC zone contained in the Premises for which after-hours HVAC is requested (which after-hours charges are, from time to time throughout the Lease Term, subject to increases or decreases in Landlord's actual costs to provide such after-hours HVAC). Landlord shall furnish to the Premises twenty-four (24) hours per day, reasonable quantities of electric current as required in Landlord's judgment for normal lighting and fractional horsepower office business machines. In no event shall Tenant's use of electric current ever exceed the capacity of the feeders to the Building or the risers or wiring installation of the Building. Landlord shall also furnish water to the Premises twenty-four (24) hours per day for drinking and lavatory purposes, in such quantities as required in Landlord's judgment for the comfortable and normal use of the Premises. If Tenant requires or consumes water or electrical power in excess of what is considered reasonable or normal by Landlord, Landlord may require Tenant to pay to Landlord, as additional rent the cost as fairly determined by Landlord incurred for such excess usage. (d) Landlord shall furnish janitorial services to the Premises five (5) days per week pursuant to janitorial and cleaning specifications as may be adopted by Landlord from time to time. No person(s) other than those persons approved by Landlord shall be permitted to enter the Premises for such purposes. Janitor service shall include ordinary dusting and cleaning (and shall include coffee and eating area cleaning) by the janitor assigned to do such work and shall not include cleaning of carpets or rugs, except normal vacuuming, or moving of furniture, interior window cleaning except on a periodic basis, and other special services. Such additional services may be rendered by Landlord pursuant to written agreement with Tenant as to the extent of such services and the payment of the cost thereof. Janitor service will not be furnished on nights when rooms are occupied after 7:30 p.m. or to rooms which are locked unless a key is furnished to the Landlord for use by the janitorial contractor. Window cleaning shall be done only by Landlord, at such time and frequency as determined by Landlord at Landlord's sole discretion. Tenant shall pay to Landlord the cost of removal of any of Tenant's refuse and rubbish to the extent that the same exceeds the refuse and rubbish usually attendant upon the use of the Premises as offices. (e) Landlord shall provide security service for the Building, in a manner deemed reasonable by Landlord at Landlord's sole discretion, from the Commencement Date throughout the Term. Landlord shall also provide a card reader access system for the Premises and the elevators serving the Premises restricting access to Tenant's floor in the Building and shall provide access cards for all of Tenant's employees, at Landlord's sole cost and expense; provided, however, that all replacement cards shall be at Tenant's sole cost and expense. Notwithstanding anything above to the contrary, Tenant acknowledges and agrees that it shall be Tenant's responsibility to take appropriate measures to ensure the protection of Tenant, Tenant's employees and visitors and its and their respective property from the acts of third parties. Landlord does not represent or assume responsibility that Tenant will be secure from the acts of third parties. (f) At landlord's option, Landlord may install water, electricity and/or HVAC meters in the Premises to measure Tenant's consumption of such utilities, including any after-hours and extraordinary usage described above. Tenant shall pay to Landlord, within ten (10) days after demand, the cost of the installation, maintenance and repair of such meter(s). 16.2 TENANT'S OBLIGATIONS. Tenant shall cooperate fully at all times with Landlord, and abide by all reasonable regulations arid requirements which Landlord may prescribe for the proper functioning and protection of the Building's services and systems. Tenant shall not use any apparatus or device in, upon or about the Premises which may in any way increase the amount of services or utilities usually furnished or supplied to the Premises or other premises in the Building. In addition, Tenant shall not connect any conduit, pipe, apparatus or other device to the Building's water, waste or, other supply lines or systems for any purpose. Neither Tenant nor its employees, agents, contractors, licensees or invitees shall at any time enter, adjust, tamper with, touch or otherwise in any manner affect the mechanical installations or facilities of the Building. 16.3 FAILURE TO PROVIDE UTILITIES. Landlord's failure to furnish any of the utilities and services described in Section 16.1 above when such failure is caused by all or any of the following shall not result in any liability of Landlord: (a) accident, breakage or repairs; (b) strikes, lockouts or other labor disturbances or labor disputes of any such character; (c) governmental regulation, moratorium or other governmental action; (d) inability, despite the exercise of reasonable diligence, to obtain electricity, water or fuel; or (e) any other cause beyond Landlord's reasonable control. In addition, in the event of the failure of any said utilities or services, Tenant shall not be entitled to any abatement or reduction of rent (except as expressly provided in Sections 18.3 and 19.2 if such failure is a result of a damage or taking described therein), no eviction of Tenant shall result, and Tenant shall not be relieved from the performance of any covenant or agreement in this Lease. In the event of any stoppage or interruption of services or utilities, Landlord shall diligently attempt to resume such services or utilities as promptly as practicable. Notwithstanding anything to the contrary contained in this Section 16.3, if for reasons not caused by Tenant, any Affiliate of Tenant, or any of their respective employees, contractors, invitees or agents, for more than five (5) consecutive business days following written notice to Landlord (the "ELIGIBILITY PERIOD"), there is an interruption of essential utilities such that Tenant is prevented from using, and does not use, the Premises or any portion thereof, then Tenant's rent shall be abated or reduced, as the case may be, after expiration of the Eligibility Period for such time that Tenant continues to be so prevented from using, and does not use, the Premises or a portion thereof, in the proportion that the rentable area of the portion of the Premises that Tenant is prevented from using, and does not use, bears to the total rentable area of the Premises; provided, however, that if Landlord is diligently pursuing the repair of such utilities or services and Landlord provides substitute services reasonably suitable for Tenant's purposes as reasonably determined by Tenant, as for example, bringing in portable air-conditioning equipment, then there shall not be any abatement of rent. However, in the event that Tenant is prevented from conducting and does not conduct, its business in any portion of the Premises for a period of time in excess of the Eligibility Period, and the remaining portion of the Premises is not sufficient to allow Tenant to effectively conduct its business therein, and if Tenant does not conduct its business from such remaining portion, then for such time after -16- 23 expiration of the Eligibility Period during which Tenant is so prevented from effectively conducting its business therein, the rent for the entire Premises shall be abated; provided, however, if Tenant reoccupies and conducts its business from any portion of the Premises during such period, the rent allocable to such reoccupied portion, based on the proportion that the rentable area of such reoccupied portion of the Premises bears to the total rentable area of the Premises, shall be payable by Tenant from the date such business operations commence. This Section 16.3 shall not apply in case of damage to, or destruction of, the Premises or the Building, or any eminent domain proceedings which shall be governed by separate provisions of this Lease. 17. INDEMNIFICATION AND EXCULPATION. 17.1 TENANT'S ASSUMPTION OF RISK AND WAIVER. Except to the extent such matter is not covered by the insurance required to be maintained by Tenant under this Lease and such matter is attributable to the gross negligence or willful misconduct of Landlord, Landlord shall not be liable to Tenant, Tenant's employees, agents or invitees for: (i) any damage to property of Tenant, or of others, located in, on or about the Premises, nor for (ii) the loss of or damage to any property of Tenant or of others by theft or otherwise, (iii) any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water, rain or leaks from any part of the Premises or from the pipes, appliance of plumbing works or from the roof, street or subsurface or from any other places or by dampness or by any other cause of whatsoever nature, or (iv) any such damage caused by other tenants or persons in the Premises, occupants of adjacent property of the Project, or the public, or caused by operations in construction of any private, public or quasi-public work. Landlord shall in no event be liable to Tenant for any consequential damages or for loss of revenue or income and Tenant waives any and all claims for any such damages. Notwithstanding anything to the contrary contained in this Section 17.1, all property of Tenant, its agents, employees and invitees kept or stored on the Premises, whether leased or owned by any such parties, shall be so kept or stored at the sole risk of Tenant and Tenant shall hold Landlord harmless from any claims arising out of damage to the same, including subrogation claims by Tenant's insurance carriers, unless such damage shall be caused by the gross negligence or willful misconduct of Landlord. Landlord or its agents shall not be liable for interference with the light or other intangible rights. 17.2 TENANT'S INDEMNIFICATION OF LANDLORD. Tenant shall be liable for, and shall indemnify, defend, protect and hold Landlord and the Landlord Indemnified Parties harmless from and against, any and all claims, damages, judgments, suits, causes of action, losses, liabilities and expenses, including attorneys' fees and court costs (but not for injury to, or interference with, Landlord's or any Landlord Indemnified Parties' business or for consequential damages) (collectively, "INDEMNIFIED CLAIMS"), arising or resulting from (a) any act or omission of Tenant or any of Tenant's agents, employees, contractors, subtenants, assignees, licensees or with respect to acts or omissions within the Premises only, Tenant's invitees (collectively, "TENANT PARTIES"); (b) the use of the Premises and Common Areas and conduct of Tenant's business by Tenant or any Tenant Parties, or any other activity, work or thing done, permitted or suffered by Tenant or any Tenant Parties, in or about the Premises, the Building or elsewhere in the Project; and/or (c) any default by Tenant of any obligations on Tenant's part to be performed under the terms of this Lease. In case any action or proceeding is brought against Landlord or any Landlord Indemnified Parties by reason of any such Indemnified Claims, Tenant, upon notice from Landlord, shall defend the same at Tenant's expense by counsel approved in writing by Landlord, which approval shall not be unreasonably withheld. 17.3 LANDLORD'S INDEMNIFICATION OF TENANT. Notwithstanding anything to the contrary contained in Section 17.2 above, subject to the limitation on Landlord's liability contained in Section 31 below and the mutual waivers contained in Section 22 below, Landlord will be liable for, and agrees to indemnify, protect, defend and hold harmless Tenant and Tenant's agents, successors and assigns (collectively, "TENANT INDEMNIFIED PARTIES"), from and against, any Indemnified Claims (as defined in Section 17.2 above) (but not for injury to, or interference with, Tenant's or any Tenant Indemnified Parties' business or for consequential damages), to the extent any such Indemnified Claim arises or results from (a) any negligent or willful act or omission of Landlord or any Landlord Parties; (b) any default by Landlord of any obligations on Landlord's part to be performed under the terms of this Lease; and (c) to the extent covered by the insurance required to be maintained by Landlord under this Lease (or which would have been covered if Landlord had carried such required insurance), any acts or omissions of any third parties occurring in the Common Areas other than the gross negligence or willful misconduct of Tenant or any Tenant Parties; provided, however, that Landlord's indemnity shall not apply or extend to any such damage or injury which occurs within the Premises which is covered by any insurance maintained by Tenant or any Tenant Indemnified Parties (or which would have been covered had Tenant obtained the insurance required under this Lease). In case any action or proceeding is brought against Tenant or any Tenant Indemnified Parties by reason of any such injury or damage indemnified by Landlord as set forth hereinabove, Landlord, upon notice from Tenant, agrees to defend the same at Landlord's expense by counsel approved in writing by Tenant, which approval Tenant will not unreasonably withhold. 17.4 SURVIVAL; NO RELEASE OF INSURERS. Tenant's indemnification obligations under Section 17.2 shall survive the expiration or earlier termination of this Lease. Tenant's covenants, agreements and indemnification in Sections 17.1 and 17.2 above are not intended to and shall not relieve any insurance carrier of its obligations under policies required to be carried by Tenant pursuant to the provisions of this Lease. 18. DAMAGE OR DESTRUCTION. 18.1 LANDLORD'S RIGHTS AND OBLIGATIONS. In the event the Premises or any part of the Building is damaged by fire or other casualty to an extent not exceeding twenty-five percent (25%) of the full replacement cost thereof, and Landlord's contractor estimates in a writing delivered to the parties that the damage thereto is such that the Building and/or Premises may be repaired, reconstructed or restored to substantially its condition immediately prior to such damage within one hundred twenty (120) days from the date of such casualty, and Landlord will receive insurance proceeds sufficient to cover the costs of such repairs, reconstruction and restoration (or Landlord would have received such insurance proceeds if Landlord carried the insurance required to be carried by Landlord pursuant to Section 21 hereof) (including proceeds from Tenant and/or Tenant's insurance which Tenant is required to deliver to Landlord pursuant to Section 18.2 below), then Landlord shall commence and proceed diligently with the work of repair, reconstruction and -17- 24 restoration and this Lease shall continue in full force and effect. If, however, the Premises or any other part of the Building is damaged to an extent exceeding twenty-five percent (25%) of the full replacement cost thereof, or Landlord's contractor estimates that such work of repair, reconstruction and restoration will require longer than one hundred twenty (120) days to complete, or Landlord will not receive insurance proceeds (and/or proceeds from Tenant, as applicable) sufficient to cover the costs of such repairs, reconstruction and restoration, then Landlord may elect to either: (a) repair, reconstruct and restore the portion of the Building and Premises damaged by such casualty (including the Tenant Improvements and Tenant Changes), in which case this Lease shall continue in full force and effect; or (b) terminate this Lease effective as of the date which is thirty (30) days after Tenant's receipt of Landlord's election to so terminate. Under any of the conditions of this Section 18.1, Landlord shall give written notice ("ELECTION NOTICE") to Tenant of its intention to repair or terminate within the later of forty-five (45) days after the occurrence of such casualty, or fifteen (15) days after Landlord's receipt of the estimate from Landlord's contractor. 18.2 TENANT'S COSTS AND INSURANCE PROCEEDS. In the event of any damage or destruction of all or any part of the Premises, Tenant shall immediately: (a) notify Landlord thereof; and (b) deliver to Landlord all insurance proceeds received by Tenant with respect to the Tenant Improvements and Tenant Changes in the Premises (excluding proceeds for Tenant's furniture and other personal property), whether or not this Lease is terminated as permitted in this Section 18, and Tenant hereby assigns to Landlord all rights to receive such insurance proceeds. If, for any reason (including Tenant's failure to obtain insurance for the full replacement cost of any Tenant Changes which Tenant is required to insure pursuant to Sections 12.1(c) and/or 20.1(a) hereof), Tenant fails to receive insurance proceeds covering the full replacement cost of such Tenant Changes which are damaged, Tenant shall be deemed to have self-insured the replacement cost of such Tenant Changes, and upon any damage or destruction thereto, Tenant shall immediately pay to Landlord the full replacement cost of such items, less any insurance proceeds actually received by Landlord from Landlord's or Tenant's insurance with respect to such items. 18.3 ABATEMENT OF RENT. In the event that as a result of any such damage, repair, reconstruction and/or restoration of the Premises or the Building, Tenant is prevented from using, and does not use, the Premises or any portion thereof, then the rent shall be abated or reduced, as the case may be, during the period that Tenant continues to be so prevented from using and does not use the Premises or portion thereof, in the proportion that the Rentable Square Feet of the portion of the Premises that Tenant is prevented from using, and does not use, bears to the total Rentable Square Feet of the Premises. Notwithstanding the foregoing to the contrary, if the damage is due to the negligence or willful misconduct of Tenant or any Tenant Parties, there shall be no abatement of rent. Except for abatement of rent as provided hereinabove, Tenant shall not be entitled to any compensation or damages for loss of, or interference with, Tenant's business or use or access of all or any part of the Premises resulting from any such damage, repair, reconstruction or restoration. 18.4 INABILITY TO COMPLETE. Notwithstanding anything to the contrary contained in this Section 18, in the event Landlord is obligated or elects to repair, reconstruct and/or restore the damaged portion of the Building or Premises pursuant to Section 18.1 above, but is delayed from completing such repair, reconstruction and/or restoration beyond the date which is six (6) months after the date Tenant notifies Landlord of the need for such repair, reconstruction or restoration or the date specified in Landlord's Election Notice, whichever is later, then any party who has not caused such delay may elect to terminate this Lease upon thirty (30) days' prior written notice sent to the other; provided, however, if Tenant terminates this Lease, Landlord may rescind such termination by completing such work within ten (10) days following Tenant's election to terminate. 18.5 DAMAGE NEAR END OF TERM. In addition to its termination rights in Sections 18.1 and 18.4 above, Landlord shall have the right to terminate this Lease if any damage to the Building or Premises occurs during the last twelve (12) months of the Term of this Lease and Landlord's contractor estimates in a writing delivered to the parties that the repair, reconstruction or restoration of such damage cannot be completed within the earlier of (a) the scheduled expiration date of the Lease Term, or (b) sixty (60) days after the date of such casualty. 18.6 WAIVER OF TERMINATION RIGHT. This Lease sets forth the terms and conditions upon which this Lease may terminate in the event of any damage or destruction. Accordingly, the parties hereby waive the provisions of California Civil Code Section 1932, Subsection 2, and Section 1933, Subsection 4 (and any successor statutes thereof permitting the parties lo terminate this Lease as a result of any damage or destruction). 19. EMINENT DOMAIN. 19.1 SUBSTANTIAL TAKING. Subject to the provisions of Section 19.4 below in case the whole of the Premises, of such part thereof as shall substantially interfere with Tenant's use and occupancy of the Premises, shall be taken for any public or quasi-public purpose by any lawful power or authority by exercise of the right of appropriation, condemnation or eminent domain, or sold to prevent such taking, either party shall have the right to terminate this Lease effective as of the date possession is required to be surrendered to said authority. 19.2 PARTIAL TAKING; ABATEMENT OF RENT. In the event of a taking of a portion of the Premises which does not substantially interfere with the conduct of Tenant's business, then, except as otherwise provided in the immediately following sentence, neither party shall have the right to terminate this Lease and Landlord shall thereafter proceed to make a functional unit of the remaining portion of the Premises (but only to the extent Landlord receives proceeds therefor from the condemning authority), and rent shall be abated with respect to the part of the Premises which Tenant shall be so deprived on account of such taking. -18- 25 19.3 CONDEMNATION AWARD. Subject to the provisions of Section 19.4 below, in connection with any taking of the Premises or Building, Landlord shall be entitled to receive the entire amount of any award which may be made or given in such taking or condemnation, without deduction or apportionment for any estate or interest of Tenant, it being expressly understood and agreed by Tenant that no portion of any such award shall be allowed or paid to Tenant for any so-called bonus or excess value of this Lease, and such bonus or excess value shall be the sole property of Landlord except for the unamortized value of the Tenant Improvements (in excess of the Improvement Allowance) and any Tenant Changes, which shall belong to Tenant. Tenant shall not assert any claim against Landlord or the taking authority for any compensation because of such taking (including any claim for bonus or excess value of this Lease); provided, however, if any portion of the Premises is taken, Tenant shall be granted the right to recover from the condemning authority (but not from Landlord) any compensation as may be separately awarded or recoverable by Tenant for the taking of Tenant's furniture, fixtures, equipment and other personal property within the Premises, for Tenant's relocation expenses, and for any loss of goodwill or other damage to Tenant's business by reason of such taking. 19.4 TEMPORARY TAKING. In the event of a taking of the Premises or any part thereof for temporary use, (a) this Lease shall be and remain unaffected thereby and rent shall not abate, and (b) Tenant shall be entitled to receive for itself such portion or portions of any award made for such use with respect to the period of the taking which is within the Term, provided that if such taking shall remain in force at the expiration or earlier termination of this Lease, Tenant shall perform its obligations under Section 9 with respect to surrender of the Premises and shall pay to Landlord the portion of any award which is attributable to any period of time beyond the Term expiration date. For purpose of this Section 19.4, a temporary taking shall be defined as a taking for a period of two hundred seventy (270) days or less. 20. TENANT'S INSURANCE. 20.1 TYPES OF INSURANCE. On or before the earlier of the Commencement Date or the date Tenant commences or causes to be commenced any work of any type in or on the Premises pursuant to this Lease, and continuing during the entire Term, Tenant shall obtain and keep in full force and effect, the following insurance: (a) All Risk insurance, including fire and extended coverage, sprinkler leakage (including earthquake sprinkler leakage), vandalism, malicious mischief and earthquake coverage upon property of every description and kind owned by Tenant and located in the Premises or Building, or for which Tenant is legally liable or installed by or on behalf of Tenant including, without limitation, furniture, equipment and any other personal property, and any Tenant Changes (but excluding the initial Tenant Improvements previously existing or installed in the Premises), in an amount not less than the full replacement cost thereof. In the event that there shall be a dispute as to the amount which comprises full replacement cost, the decision of Landlord or the mortgagees of Landlord shall be presumptive. (b) Commercial general liability insurance coverage, including personal injury, bodily injury (including wrongful death), broad form property damage, operations hazard, owner's protective coverage, contractual liability (including Tenant's indemnification obligations under this Lease, including Section 17 hereof), liquor liability (if Tenant serves alcohol on the Premises), products and completed operations liability, and owned/non-owned auto liability, with an initial combined single limit of liability of not less than Two Million Dollars ($2,000,000.00). The limits of liability of such commercial general liability insurance shall be increased every five (5) years during the Term of this Lease to an amount reasonably required by Landlord. (c) Worker's compensation and employer's liability insurance, in statutory amounts and limits. (d) Loss of income, extra expense and business interruption insurance in such amounts as will reimburse Tenant for direct loss of earnings attributable to all perils commonly insured against by prudent tenants or attributable to prevention of access to the Premises, Tenant's parking areas or to the Building as a result of such perils. (e) Any other form or forms of insurance as Tenant or Landlord or the mortgagees of Landlord may reasonably require from time to time, in form, amounts and for insurance risks against which a prudent tenant would protect itself, but only to the extent such risks and amounts are available in the insurance market at commercially reasonable costs. 20.2 REQUIREMENTS. Each policy required to be obtained by Tenant hereunder shall: (a) be issued by insurers authorized to do business in the state in which the Building is located and rated not less than financial class X, and not less than policyholder rating VIII/B+ in the most recent version of Best's Key Rating Guide (provided that, in any event, the same insurance company shall provide the coverages described in Sections 20.1 (a) and 20.1(d) above); (b) be in form reasonably satisfactory from time to time to Landlord; (c) name Tenant as named insured thereunder and shall name Landlord and, at Landlord's request, Landlord's mortgagees and ground lessors of which Tenant has been informed in writing, as additional insureds thereunder, all as their respective interests may appear; (d) shall not have a deductible amount exceeding Twenty-Five Thousand Dollars ($25,000.00); (e) specifically provide that the insurance afforded by such policy for the benefit of Landlord and Landlord's mortgagees and ground lessors shall be primary, and any insurance carried by Landlord or Landlord's mortgagees and ground lessors shall be excess and non-contributing; (f) except for worker's compensation insurance, contain an endorsement that the insurer waives its right to subrogation as described in Section 22 below: (g) contain an undertaking by the insurer to notify Landlord (and the mortgagees and ground lessors of Landlord who are named as additional insureds) in writing not less than ten (10) days prior to any material change, reduction in coverage, cancellation or other termination thereof; and (h) contain a cross liability or severability of interest endorsement. Tenant agrees to deliver to Landlord, as soon as practicable after the placing of the required insurance, but in no event later than ten (10) days after the date Tenant takes possession of all or any part of the Premises, certified copies of each such insurance policy (or certificates from the insurance company evidencing the existence of such insurance and Tenant's compliance with the foregoing provisions of this Section 20). Tenant shall cause replacement policies or certificates to be delivered to Landlord no later than ten (10) days after to the expiration of any such policy or policies. If any such initial or replacement policies or certificates are not furnished within the time(s) -19- 26 specified herein, Tenant shall be deemed to be in material default under this Lease without the benefit of any additional notice or cure period provided in Section 23.1 below, and Landlord shall have the right, but not the obligation, to procure such policies and certificates at Tenant's expense. At Tenant's option, Tenant's insurance may be carried under a blanket policy reasonably approved by Landlord. 20.3 EFFECT ON INSURANCE. Tenant shall not do or permit to be done anything which will (a) violate or invalidate any insurance policy maintained by Landlord or Tenant hereunder, or (b) increase the costs of any insurance policy maintained by Landlord pursuant to Section 21 or otherwise with respect to the Building or the Project. If Tenant's occupancy or conduct of its business in or on the Premises results in any increase in premiums for any insurance carried by Landlord with respect to the Building or the Project, Tenant shall pay such increase as additional rent within ten (10) days after being billed therefor by Landlord. If any insurance coverage carried by Landlord pursuant to Section 21 or otherwise with respect to the Building or the Project shall be cancelled or reduced (or cancellation or reduction thereof shall be threatened) by reason of the use or occupancy of the Premises by Tenant or by anyone permitted by Tenant to be upon the Premises, and if Tenant fails to remedy such condition within five (5) days after notice thereof, Tenant shall be deemed to be in default under this Lease, without the benefit of any additional notice or cure period specified in Section 23.1 below, and Landlord shall have all remedies provided in this Lease, at law or in equity, including, without limitation, the right (but not the obligation) to enter upon the Premises and attempt to remedy such condition at Tenant's cost. 21. LANDLORD'S INSURANCE. During the Term, Landlord shall insure the Building, the Premises and the Tenant Improvements initially installed in the Premises (including the Must Take Space) pursuant to Section 12.5 (excluding, however, Tenant's furniture, equipment and other personal property and any Tenant Changes) against damage by fire and standard extended coverage perils and with vandalism and malicious mischief endorsements, rental loss coverage, at Landlord's option, earthquake damage coverage, and such additional coverage as Landlord deems appropriate. Landlord shall also carry commercial general liability insurance, in such reasonable amounts and with such reasonable deductibles as would be carried by a prudent owner of a similar building in the state in which the Building is located. At Landlord's option, all such insurance may be carried under any blanket or umbrella policies which Landlord has in force for other buildings and projects and Landlord shall reasonably allocate the cost of such blanket or umbrella policies between such other buildings and projects and the Building and the Project. In addition, at Landlord's option, Landlord may elect to self-insure all or any part of such required insurance coverage. Landlord may, but shall not be obligated to, carry any other form or forms of insurance as Landlord or the mortgagees or ground lessors of Landlord may reasonably determine is advisable. The cost of insurance obtained by Landlord pursuant to this Section 21 shall be included in Operating Expenses. Landlord's fire and standard extended coverage insurance shall be in an amount equal to one hundred percent (100%) of the replacement cost of the Building. 22. WAIVER OF CLAIMS; WAIVER OF SUBROGATION. 22.1 MUTUAL WAIVER OF PARTIES. Landlord and Tenant hereby waive their rights against each other with respect to any claims or damages or losses which are caused by or result from (a) property damage insured against under any property insurance policy carried by Landlord or Tenant (as the case may be) pursuant to the provisions of this Lease and enforceable at the time of such damage or loss, or (b) property damage which would have been covered under any insurance required to be obtained and maintained by Landlord or Tenant (as the case may be) under Sections 20 and 21 of this Lease (as applicable) had such insurance been obtained and maintained as required therein. The foregoing waivers shall be in addition to, and not a limitation of, any other waivers or releases contained in this Lease. 22.2 WAIVER OF INSURERS. Each party shall cause each property insurance policy required to be obtained by it pursuant to Sections 20 and 21 to provide that the insurer waives all rights of recovery by way of subrogation against either Landlord or Tenant, as the case may be, in connection with any claims, losses and damages covered by such policy. If either party fails to maintain property insurance required hereunder, such insurance shall be deemed to be self-insured with a deemed full waiver of subrogation as set forth in the immediately preceding sentence. 23. TENANT'S DEFAULT AND LANDLORD'S REMEDIES. 23.1 TENANT'S DEFAULT. The occurrence of any one or more of the following events shall constitute a default under this Lease by Tenant: (a) abandonment of the Premises by Tenant. "ABANDONMENT" is herein defined to include, but is not limited to, any absence by Tenant from the Premises for five (5) business days or longer while in default of any other provision of this Lease; (b) the failure by Tenant to make any payment of rent or additional rent or any other payment required to be made by Tenant hereunder, within ten (10) days after written notice thereof from Landlord to Tenant; (c) the failure by Tenant to observe or perform any of the express or implied covenants or provisions of this Lease to be observed or performed by Tenant, other than as specified in Sections 23.1 (a) or (b) above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Landlord to Tenant; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice Required under California Code of Civil Procedure, Section 1161 and provided further that, if the nature of Tenant's default is such that more than ten (10) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant shall commence such cure within said thirty (30) day period and thereafter diligently prosecute such cure to completion; and (d) (i) the making by Tenant of any general assignment for the benefit of creditors, (ii) the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against the Tenant, the same is dismissed within -20- 27 sixty (60) days), (iii) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within sixty (60) days, or (iv) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease where such seizure is not discharged within sixty (60) days. 23.2 LANDLORD'S REMEDIES; TERMINATION. In the event of any such default by Tenant, in addition to any other remedies available to Landlord under this Lease, at law or in equity, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder. In the event that Landlord shall elect to so terminate this Lease, then Landlord may recover from Tenant: (a) the worth at the time of award of any unpaid rent which had been earned at the time of such termination; plus (b) the worth at the time of the 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 Tenant proves could have been reasonably avoided; plus (c) 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 Tenant proves could be reasonably avoided; plus (d) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant'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: unamortized Tenant Improvement costs: attorneys' fees; brokers' commissions; the costs of refurbishment, alterations, renovation and repair of the Premises; and removal (including the repair of any damage caused by such removal) and storage (or disposal) of Tenant's personal property, equipment, fixtures, Tenant Changes, Tenant Improvements and any other items which Tenant is required under this Lease to remove but does not remove. As used in Sections 23.2(a) and 23.2(b) above, the "WORTH AT THE TIME OF AWARD" is computed by allowing interest at the Interest Rate set forth in Section 1.14 of the Summary. As used in Section 23.2(c) above, the "worth at the time of award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). 23.3 LANDLORD'S REMEDIES; RE-ENTRY RIGHTS. In the event of any such default by Tenant, in addition to any other remedies available to Landlord under this Lease, at law or in equity, Landlord shall also have the right, with or without terminating this Lease, to re-enter the Premises and remove all persons and property from the Premises; such property may be removed, stored and/or disposed of pursuant to Section 12.4 of this Lease or any other procedures permitted by applicable law. No re-entry or taking possession of the Premises by Landlord pursuant to this Section 23.3, and no acceptance of surrender of the Premises or other action on Landlord's part, shall be construed as an election to terminate this Lease unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. 23.4 LANDLORD'S REMEDIES; CONTINUATION OF LEASE. In the event of any such default by Tenant, in addition to any other remedies available to Landlord under this Lease, at law or in equity, Landlord shall have the right to continue this Lease in full force and effect, whether or not Tenant shall have abandoned the Premises. The foregoing remedy shall also be available to Landlord pursuant to California Civil Code Section 1951.4 and any successor statute thereof in the event Tenant has abandoned the Premises. In the event Landlord elects to continue this Lease in full force and effect pursuant to this Section 23.4, then Landlord shall be entitled to enforce all of its rights and remedies under this Lease, including the right to recover rent as it becomes due. Landlord's election not to terminate this Lease pursuant to this Section 23.4 or pursuant to any other provision of this Lease, at law or in equity, shall not preclude Landlord from subsequently electing to terminate this Lease or pursuing any of its other remedies. 23.5 LANDLORD'S RIGHT TO PERFORM. Except as specifically provided otherwise in this Lease, all covenants and agreements by Tenant under this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any abatement or offset of rent. If Tenant shall fail to pay any sum of money (other than Monthly Basic Rent) or perform any other act on its part to be paid or performed hereunder and such failure shall continue for three (3) days with respect to monetary obligations (or ten (10) days with respect to non-monetary obligations) after Tenant's receipt of written notice thereof from Landlord, Landlord may, without waiving or releasing Tenant from any of Tenant's obligations, make such payment or perform such other act on behalf of Tenant. All sums so paid by Landlord and all necessary incidental costs incurred by Landlord in performing such other acts shall be payable by Tenant to Landlord within five (5) days after demand therefor as additional rent. 23.6 INTEREST. If any monthly installment of Rent or Project Operating Expenses, or any other amount payable by Tenant hereunder is not received by Landlord within ten (10) days after written notice to Tenant, it shall bear interest at the Interest Rate set forth in Section 1.14 of the Summary from the date due until paid. All interest, and any late charges imposed pursuant to Section 23.7 below shall be considered additional rent due from Tenant to Landlord under the terms of this Lease. 23.7 LATE CHARGES. Tenant acknowledges that, in addition to interest costs, the late payments by Tenant to Landlord of any Monthly Basic Rent or other sums due under this Lease will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impractical to fix. Such other costs include, without limitation, processing, administrative and accounting charges and late charges that may be imposed on Landlord by the terms of any mortgage, deed of trust or related loan documents encumbering the Premises, the Building or the Project. Accordingly if any monthly installment of Monthly Basic Rent or Project Operating Expenses or any other amount payable by Tenant hereunder is not received by Landlord within five (5) days after written notice to Tenant, Tenant shall -21- 28 pay to Landlord an additional sum of five percent (5%) of the overdue amount as a late charge, but in no event more than the maximum late charge allowed by law. The parties agree that such late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of any late payment as hereinabove referred to by Tenant, and the payment of late charges and interest are distinct and separate in that the payment of interest is to compensate Landlord for the use of Landlord's money by Tenant, while the payment of late charges is to compensate Landlord for Landlord's processing, administrative and other costs incurred by Landlord as a result of Tenant's delinquent payments. Acceptance of a late charge or interest shall not constitute a waiver of Tenant's default with respect to the overdue amount or prevent Landlord from exercising any of the other rights and remedies available to Landlord under this Lease or at law or in equity now or hereafter in effect. 23.8 LANDLORD'S LIEN WAIVER. If Tenant desires to obtain a loan secured by Tenant's personal property in the Premises and requests that Landlord execute a lien waiver in connection therewith, Landlord shall provide Tenant with a commercially reasonable form of lien waiver, provided that Tenant delivers such request in writing to Landlord together with a nonrefundable processing fee in the amount of three hundred dollars ($300.00). 23.9 RIGHTS AND REMEDIES CUMULATIVE. All rights, options and remedies of Landlord contained in this Section 23 and elsewhere in this Lease (including Section 28 below) shall be construed and held to be cumulative, and no one of them shall be exclusive of the other, and Landlord shall have the right to pursue any one or all of such remedies or any other remedy or relief which may be provided by law or in equity, whether or not stated in this Lease. Nothing in this Section 23 shall be deemed to limit or otherwise affect Tenant's indemnification of Landlord pursuant to any provision of this Lease. 24. LANDLORD'S DEFAULT. Landlord shall not be in default in the performance of any obligation required to be performed by Landlord under this Lease unless Landlord has failed to perform such obligation within thirty (30) days after the receipt of written notice from Tenant specifying in detail Landlord's failure to perform; provided however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be deemed in default if it commences such performance within such thirty (30) day period and thereafter diligently pursues the same to completion. Upon any such uncured default by Landlord, Tenant may exercise any of its rights provided in law or at equity; provided, however: (a) Tenant shall have no right to offset or abate rent in the event of any default by Landlord under this Lease, except to the extent offset rights are specifically provided to Tenant in this Lease; and (b) Tenant's rights and remedies hereunder shall be limited to the extent (i) Tenant has expressly waived in this Lease any of such rights or remedies and/or (ii) this Lease otherwise expressly limits Tenant's rights or remedies, including the limitation on Landlord's liability contained in Section 31 hereof. If Landlord fails to perform any obligation under this Lease within the time periods set forth in this Section 24 following receipt of written notice from Tenant to Landlord and its lender pursuant to Section 28 hereof, then Tenant shall be permitted to perform such obligations on Landlord's behalf, provided Tenant first delivers to Landlord (and its lender) an estimate of the cost to cure and an additional two (2) business days' prior written notice that Tenant will be performing such obligations, and provided Landlord fails to commence to perform such obligations within such additional two (2) business day period or to thereafter diligently pursue such cure to completion. If the obligations to be performed by Tenant will affect the Building's life safety, electrical, plumbing or sprinkler systems, then Tenant shall use only those contractors used by Landlord in the Building for work on such systems or such other contractors as are commonly used by owners of first-class office buildings in San Diego. All other contractors shall be licensed and bonded and all requisite permits must have been obtained for the desired work. Any work performed by or on behalf of Tenant shall be performed in accordance with the provisions of Sections 12.1(e) and (f) of this Lease, except that Tenant will not be required to obtain any consent or approval from Landlord. Promptly following completion of any such work, Tenant shall deliver to Landlord an invoice containing a particularized breakdown of the costs incurred by Tenant in connection therewith (the "INVOICE"). If, within thirty (30) days following Landlord's receipt of the Invoice, Landlord does not either pay the sums set forth in the Invoice or deliver written notice to Tenant objecting to the amounts set forth in the Invoice, then Tenant may deduct the amounts set forth in the Invoice, together with interest thereon at the Interest Rate, against rent. If Landlord gives Tenant written notice of Landlord's objection to the amounts set forth in the Invoice within such thirty (30) day period, then Tenant shall not have any right to offset the cost of performing any such obligations against rental or other charges payable under this Lease, but Tenant shall have the right to pursue any other remedies against Landlord available to it under applicable law, including the right to have the dispute resolved by arbitration pursuant to Section 34. If the dispute is resolved by arbitration pursuant to Section 34 and it is held that Tenant is entitled to reimbursement of all or a portion of sums previously objected to by Landlord, and if Landlord fails to reimburse Tenant such sums, together with interest thereon at the Interest Rate, within thirty (30) days following such arbitration decision, then Tenant may deduct such sums against rent. Notwithstanding the foregoing, Tenant may elect to have Tenant's right to perform such obligations of Landlord, and the appropriate cost thereof, determined by arbitration prior to Tenant's undertaking such performance, and such arbitration shall be binding upon the parties. 25. SUBORDINATION. Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, and at the election of Landlord or any mortgagee of a mortgage or a beneficiary of a deed of trust now or hereafter encumbering all or any portion of the Building or Site, or any lessor of any ground or master lease now or hereafter affecting all or any portion of the Building or Site, and conditioned upon such mortgagee or lessor agreeing to provide Tenant with a commercially reasonable form of non-disturbance agreement, this Lease shall be subject and subordinate at all times to such ground or master leases (and such extensions and modifications thereof), and to the lien of such mortgages and deeds of trust (as well as to any advances made thereunder and to all renewals, replacements, modifications and extensions thereof). Notwithstanding the foregoing, Landlord and any mortgagee and/or ground lessor of Landlord, as applicable, shall have the right to subordinate or cause to be subordinated any or all ground or master leases or the lien of any or all mortgages or deeds of trust to this Lease. In the event that any ground or master lease terminates for any reason or any mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, at the election of Landlord's successor in interest, Tenant shall attorn to and become -22- 29 the tenant of such successor. Tenant hereby waives its rights under any current of future law which gives or purports to give Tenant any right to terminate or otherwise adversely affect this Lease and the obligations of Tenant hereunder in the event of any such foreclosure proceeding or sale. Tenant covenants and agrees to execute and deliver to Landlord within ten (10) days after receipt of written demand by Landlord and in the form reasonably required by Landlord, any additional documents evidencing the priority or subordination of this Lease with respect to any such ground or master lease or the lien of any such mortgage or deed of trust. Should Tenant fail to sign and return any such documents within said ten day period, Tenant shall be in default hereunder without the benefit of any additional notice or cure periods specified in Section 23.1 above. Landlord agrees to use commercially reasonable efforts to cause the mortgagee existing as of the date hereof to provide Tenant with a commercially reasonable nondisturbance agreement within sixty (60) days after the date hereof. 26. ESTOPPEL CERTIFICATE. 26.1 TENANT'S OBLIGATIONS. Within ten (10) business days following written request, each party shall execute and deliver to the other an estoppel certificate, in a form substantially similar to the form of Exhibit "F" attached hereto, certifying: (a) the Commencement Date of this Lease; (b) that this Lease is unmodified and in full force and effect (or, if modified, that this Lease is in full force and effect as modified, and stating the date and nature of such modifications); (c) the date to which the rent and other sums payable under this Lease have been paid; (d) that there are not, to the best of the responding party's knowledge, any defaults under this Lease by either Landlord or Tenant, except as specified in such certificate; and (e) such other matters as are reasonably requested by the requesting party. Any such estoppel certificate delivered pursuant to this Section 26.1 may be relied upon by any mortgagee, beneficiary, purchaser or prospective purchaser of any portion of the Site, as well as their assignees. 26.2 TENANT'S FAILURE TO DELIVER. Tenant's failure to deliver such estoppel certificate within such time shall be conclusive upon Tenant that: (a) this Lease is in full force and effect without modification, except as may be represented by Landlord; (b) there are no uncured defaults in Landlord's or Tenant's performance; and (c) not more than one (1) month's rental has been paid in advance. Tenant shall indemnify, defend (with counsel reasonably approved by Landlord in writing) and hold Landlord harmless from and against any and all claims, judgments, suits, causes of action, damages, losses, liabilities and expenses (including attorneys' fees and court costs) attributable to any failure by Tenant to timely deliver any such estoppel certificate to Landlord pursuant to Section 26.1 above. 27. [INTENTIONALLY DELETED]. 28. MODIFICATION AND CURE RIGHTS OF LANDLORD'S MORTGAGEES AND LESSORS. 28.1 MODIFICATIONS. If, in connection with Landlord's obtaining or entering into any financing or ground lease for any portion of the Building or Site, the lender or ground lessor shall request modifications to this Lease, Tenant shall, within fifteen (15) days after request therefor, execute an amendment to this Lease including such modifications, provided such modifications are reasonable, do not increase the obligations of Tenant hereunder, or adversely affect the leasehold estate created hereby or Tenant's rights hereunder. Without limiting the generality of the foregoing, no such modification shall: (i) increase the amount or frequency of payment of rent or other monetary obligations of Tenant; (ii) reduce, enlarge or change the location of the Premises; (iii) reduce Tenant's signage rights; (iv) eliminate or restrict any options granted to Tenant; or (v) eliminate or modify Tenant's rights under Section 33.6 of this Lease. Upon request of Tenant, Landlord shall reimburse Tenant for its reasonable out-of-pocket legal and other costs incurred in reviewing such amendment, not to exceed Two Hundred Fifty Dollars ($250.00). 28.2 CURE RIGHTS. In the event of any default on the part of Landlord, Tenant will give notice by registered or certified mail to any beneficiary of a deed of trust or mortgagee covering the Premises or ground lessor of Landlord whose address shall have been furnished to Tenant, and shall offer such beneficiary, mortgagee or ground lessor a reasonable opportunity to cure the default (including with respect to any such beneficiary or mortgagee, time to obtain possession of the Premises, subject to this Lease and Tenant's rights hereunder, by power of sale or a judicial foreclosure, if such should prove necessary to effect a cure). 29. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant that, upon Tenant performing all of the covenants and provisions on Tenant's part to be observed and performed under this Lease (including payment of rent hereunder) Tenant shall have the right to use and occupy the Premises in accordance with and subject to the terms and conditions of this Lease. 30. TRANSFER OF LANDLORD'S INTEREST. The term "Landlord" as used in this Lease, so far as covenants or obligations on the part of the Landlord are concerned, shall be limited to mean and include only the owner or owners, at the time in question, of the fee title to, or a lessee's interest in a ground lease of, the Site. In the event of any transfer or conveyance of any such title or interest (other than a transfer for security purposes only), the transferor shall be automatically relieved of all covenants and obligations on the part of Landlord contained in this Lease accruing after the date of such transfer or conveyance. Landlord and Landlord's transferees and assignees shall have the absolute right to transfer all or any portion of their respective title and interest in the Site, the Building, the Premises and/or this Lease without the consent of Tenant, and such transfer or subsequent transfer shall not be deemed a violation on Landlord's part of any of the terms and conditions of this Lease. 31. LIMITATION ON LANDLORD'S LIABILITY. Notwithstanding anything contained in this Lease to the contrary, the obligations of Landlord under this Lease (including any actual or alleged breach or default by Landlord) do not constitute personal obligations of the individual partners, directors, officers, members or shareholders of Landlord or Landlord's partners, and Tenant shall not seek recourse against the individual partners, directors, officers, members or shareholders of Landlord or against Landlord's partners or any other persons or entities having any interest in Landlord, or any of their personal assets for satisfaction of any liability with respect to this Lease. In addition, in consideration of the benefits accruing hereunder to Tenant and notwithstanding anything contained in this Lease to the contrary, Tenant hereby -23- 30 covenants and agrees for itself and all of its successors and assigns that the liability of Landlord for its obligations under this Lease (including any liability as a result of any actual or alleged failure, breach or default hereunder by Landlord), shall be limited solely to, and Tenant's and its successors' and assigns' sole and exclusive remedy shall be against, Landlord's interest in the Building and proceeds therefrom, and no other assets of Landlord. 32. MISCELLANEOUS. 32.1 GOVERNING LAW. This Lease shall be governed by, and construed pursuant to, the laws of the state in which the Building is located. 32.2 SUCCESSORS AND ASSIGNS. Subject to the provisions of Section 30 above, and except as otherwise provided in this Lease, all of the covenants, conditions and provisions of this Lease shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective heirs, personal representatives and permitted successors and assigns; provided, however, no rights shall inure to the benefit of any Transferee of Tenant unless the Transfer to such Transferee is made in compliance with the provisions of Section 14, and no options or other rights which are expressly made personal to the original Tenant hereunder or in any rider attached hereto shall be assignable to or exercisable by anyone other than the original Tenant under this Lease. 32.3 NO MERGER. The voluntary or other surrender of this Lease by Tenant or a mutual termination thereof shall not work as a merger and shall, at the option of Landlord, either (a) terminate all or any existing subleases, or (b) operate as an assignment to Landlord of Tenant's interest under any or all such subleases. 32.4 PROFESSIONAL FEES. If either Landlord or Tenant should bring suit against the other with respect to this Lease, including for unlawful detainer or any other relief against the other hereunder, then all reasonable, actual costs and expenses incurred by the prevailing party therein (including, without limitation, its actual appraisers', accountants', attorneys' and other professional fees and court costs), shall be paid by the other party. 32.5 WAIVER. The waiver by either party of any breach by the other party of any term, covenant or condition herein contained shall not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant and condition herein contained, nor shall any custom or practice which may become established between the parties in the administration of the terms hereof be deemed a waiver of, or in any way affect, the right of any party to insist upon the performance by the other in strict accordance with said terms. No waiver of any default of either party hereunder shall be implied from any acceptance by Landlord or delivery by Tenant (as the case may be) of any rent or other payments due hereunder or any omission by the non-defaulting party to take any action on account of such default if such default persists or is repeated, and no express waiver shall affect defaults other than as specified in said waiver. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. 32.6 TERMS AND HEADINGS. The words "Landlord" and "Tenant" as used herein shall include the plural as well as the singular. Words used in any gender include other genders. The Section headings of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. 32.7 TIME. Time is of the essence with respect to performance of every provision of this Lease in which time or performance is a factor. All references in this Lease to "DAYS" shall mean calendar days unless specifically modified herein to be "business" days. 32.8 PRIOR AGREEMENTS; AMENDMENTS. This Lease (and the Exhibits and Riders attached hereto) contain all of the covenants, provisions, agreements, conditions and understandings between Landlord and Tenant concerning the Premises and any other matter covered or mentioned in this Lease, and no prior agreement or understanding, oral or written, express or implied, pertaining to the Premises or any such other matter shall be effective for any purpose. No provision of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest. The parties acknowledge that all prior agreements, representations and negotiations are deemed superseded by the execution of this Lease to the extent they are not expressly incorporated herein. 32.9 SEPARABILITY. The invalidity or unenforceability of any provision of this Lease; (except for Tenant's obligation to pay Monthly Basic Rent and Excess Expenses under Sections 4 and 5 hereof) shall in no way affect, impair or invalidate any other provision hereof, and such other provisions shall remain valid and in full force and effect to the fullest extent permitted by law. 32.10 RECORDING. Neither Landlord nor Tenant shall record this Lease. In addition, neither party shall record a short form memorandum of this Lease without the prior written consent (and signature on the memorandum) of the other, and provided that prior to recordation Tenant executes and delivers to Landlord, in recordable form, a properly acknowledged quitclaim deed or other instrument extinguishing all of the Tenant's rights and interest in and to the Site, Building and Premises, and designating Landlord as the transferee, which deed or other instrument shall be held by Landlord and may be recorded by Landlord once the Lease terminates or expires (but not prior thereto). If such short form memorandum is recorded in accordance with the foregoing, the party requesting the recording shall pay for all costs of or related to such recording, including, but not limited to, recording charges and documentary transfer taxes. 32.11 EXHIBITS AND RIDERS. All Exhibits and Riders attached to this Lease are hereby incorporated in this Lease as though set forth at length herein. 32.12 ACCORD AND SATISFACTION. No payment by Tenant or receipt by Landlord of a lesser amount than the rent payment herein stipulated shall be deemed to be other than on account of the rent, nor shall any endorsement or -24- 31 statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy provided in this Lease. Tenant agrees that each of the foregoing covenants and agreements shall be applicable to any covenant or agreement either expressly contained in this Lease or imposed by any statute or at common law. 32.13 FINANCIAL STATEMENTS. Upon ten (10) days prior written request from Landlord (which Landlord may make at any time during the Term but no more often that two (2) times in any calendar year), Tenant shall deliver to Landlord (a) a current financial statement of Tenant and any guarantor of this Lease, and (b) financial statements of Tenant and such guarantor for the two (2) years prior to the current financial statement year. Such statements shall be prepared in accordance with generally acceptable accounting principles and certified as true in all material respects by Tenant (if Tenant is an individual) or by an authorized officer or general partner of Tenant (if Tenant is a corporation or partnership, respectively). 32.14 NO PARTNERSHIP. Landlord does not, in any way or for any purpose, become a partner of Tenant in the conduct of its business, or otherwise, or joint venturer or a member of a joint enterprise with Tenant by reason of this Lease. The provisions of this Lease relating to Percentage Rent payable hereunder, if any, are included solely for the purpose of providing a method whereby rent is to be measured and ascertained. 32.15 FORCE MAJEURE. In the event that either party hereto shall be delayed or hindered in or prevented from the performance of any act required hereunder by reason of strikes, lock-outs, labor troubles, inability to procure materials, failure of power, governmental moratorium or other governmental action or inaction (including failure, refusal or delay in issuing permits, approvals and/or authorizations), injunction or court order, riots, insurrection, war, fire, earthquake, flood or other natural disaster or other reason of a like nature not the fault of the party delaying in performing work or doing acts required under the terms of this Lease (but excluding delays due to financial inability) (herein collectively, "FORCE MAJEURE DELAYS"), then performance of such act shall be excused for the period of the delay and the period for the performance of any such act shall be extended for a period equivalent to the period of such delay. The provisions of this Section 32.15 shall not apply to nor operate to excuse Tenant from the payment of Monthly Basic Rent, Project Operating Expenses, additional rent or any other payments strictly in accordance with the terms of this Lease. 32.16 COUNTERPARTS. This Lease may be executed in one or more counterparts, each of which shall constitute an original and all of which shall be one and the same agreement. 32.17 NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and agrees that the terms of this Lease are confidential and constitute proprietary information of Landlord. Disclosure of the terms could adversely affect the ability of Landlord to negotiate other leases and impair Landlord's relationship with other tenants. Accordingly, Tenant agrees that it, and its partners, officers, directors, employees, agents and attorneys, shall not intentionally and voluntarily disclose the terms and conditions of this Lease to any newspaper or other publication or any other tenant or apparent prospective tenant of the Building or other portion of the Project, or real estate agent, either directly or indirectly, without the prior written consent of Landlord, provided, however, that Tenant may disclose the terms (i) to prospective subtenants or assignees under this Lease or (ii) as part of Tenant's disclosure requirements under applicable law. 32.18 NON-DISCRIMINATION. Tenant acknowledges and agrees that there shall be no discrimination against, or segregation of, any person, group of persons, or entity on the basis of race, color, creed, religion, age, sex, marital status, national origin, or ancestry in the leasing, subleasing, transferring, assignment, occupancy, tenure, use, or enjoyment of the Premises, or any portion thereof. 33. LEASE EXECUTION. 33.1 TENANT'S AUTHORITY. If Tenant executes this Lease as a partnership or corporation, then Tenant and the persons and/or entities executing this Lease on behalf of Tenant represent and warrant that: (a) Tenant is a duly authorized and existing partnership or corporation, as the case may be, and is qualified to do business in the state in which the Building is located; (b) such persons and/or entities executing this Lease are duly authorized to execute and deliver this Lease on Tenant's behalf in accordance with the Tenant's partnership agreement (if Tenant is a partnership), or a duly adopted resolution of Tenant's board of directors and the Tenant's by-laws (if Tenant is a corporation); and (c) this Lease is binding upon Tenant in accordance with its terms. 33.2 JOINT AND SEVERAL LIABILITY. If more than one person or entity executes this Lease as Tenant: (a) each of them is and shall be jointly and severally liable for the covenants, conditions, provisions and agreements of this Lease to be kept, observed and performed by Tenant; and (b) the act or signature of, or notice from or to, any one or more of them with respect to this Lease shall be binding upon each and all of the persons and entities executing this Lease as Tenant with the same force and effect as if each and all of them had so acted or signed, or given or received such notice. 33.3 [INTENTIONALLY DELETED]. 33.4 NO OPTION. The submission of this Lease for examination or execution by Tenant does not constitute a reservation of or option for the Premises and this Lease shall not become effective as a Lease until it has been executed by Landlord and delivered to Tenant. 33.5 ANTENNAS/COMMUNICATIONS. Subject to the terms hereof, and subject to the approval by all governmental authorities, the Original Tenant shall have the right, at its sole cost and expense and in compliance with all applicable laws, to install an antenna, microwave or other transmission equipment (the "COMMUNICATIONS EQUIPMENT") approved by Landlord on the roof of the Building. Tenant shall submit the proposed location(s) for such Communications Equipment to Landlord for Landlord's approval, which approval shall not be unreasonably withheld. Landlord may require Tenant, at Tenant's sole cost and expense, to screen from view any such Communications Equipment. Tenant shall be -25- 32 responsible to repair all damage to the Project resulting from the installation of such Communications Equipment and shall maintain such Communications Equipment in good condition. The installation of such Communications Equipment shall be performed in accordance with the requirements of Section 12. Upon the expiration or earlier termination of this Lease, Tenant shall, at Landlord's request, remove all such Communications Equipment and repair all damage resulting from such removal. Tenant agrees to reimburse Landlord, upon demand, for any additional cost of insurance attributed to the installation or existence of such Communications Equipment. Tenant shall arrange for its liability and property insurance required to be maintained by Tenant under the Lease to include coverage for the Communications Equipment and for all activities upon the roof of the Building by Tenant or any Tenant Parties. In addition, Tenant's indemnification of Landlord under Section 17 of the Lease shall apply to any acts of Tenant or any Tenant Parties upon the roof of the Building or otherwise with respect to the Communications Equipment. Tenant shall pay for all utilities hook-up charges necessary For the installation of the Communications Equipment, and shall pay for the maintenance and service of said utilities. To the extent feasible (at Landlord's discretion), Landlord shall allow Tenant, at Tenant's sole cost, to hook up the Communications Equipment to the Building electrical system in accordance with the provisions of the Lease and under the supervision of Landlord. Landlord may also require that the utilities serving the Communications Equipment be separately metered at Tenant's sole cost and expense. Tenant shall indemnify, defend, protect and hold harmless Landlord against and from any and all claims arising from or relating to (i) the Communications Equipment and its related improvements and the installation, operation, maintenance and repair thereof, and (ii) electrical power interruptions or interruptions with communication facilities of other Building tenants. For the purposes hereof, "CLAIMS" shall be defined to include without limitation, obligations, liabilities, claims, liens, encumbrances, actions, causes of action, losses, damages, costs, expenses and attorneys' fees and costs; and in case any action or proceeding be brought against Landlord by reason of any such claim, Tenant, upon notice from Landlord, shall defend the same at Tenant's expense by counsel reasonably satisfactory to Landlord. Tenant, as a material part of the consideration to Landlord, hereby assumes all risk of damage to property or injury to person in, upon or about the Building relative to the Communications Equipment from any cause whatsoever except to the extent of the sole gross negligence or willful misconduct of Landlord. 33.6 TENANT'S LIMITED RIGHT TO TERMINATE LEASE. Landlord and Tenant acknowledge and agree that, as a material inducement to Tenant entering into this Lease and notwithstanding the existence of this Lease, Tenant desires to either (a) enter into a build-to-suit lease transaction with Landlord for a minimum of 100,000 square feet of office/manufacturing space in a building to be constructed by Landlord (or that Landlord will cause to be constructed) in the greater San Diego area substantially similar in quality and geographic environment to the Premises for a minimum lease term of ten (10) years (the "BUILD-TO-SUIT TRANSACTION"), or (b) relocate to another project owned by Landlord in the greater San Diego area substantially similar in quality and geographic environment to the Premises for a minimum square footage requirement of at least one hundred twenty-five percent (125%) of the Premises then being leased by Tenant hereunder for a minimum lease term of ten (10) years (the "RELOCATION TRANSACTION"). The Build-to-Suit Transaction and the Relocation Transaction are collectively referred to herein as the "NEW LEASE TRANSACTIONS". As soon as reasonably practicable after the execution and delivery of this Lease by Landlord and Tenant, but in no event later than the first annual anniversary of the Commencement Date, Landlord and Tenant covenant that they will negotiate in good faith either the Build-to-Suit Transaction or the Relocation Transaction. Without limiting the generality of the foregoing, Tenant covenants to Landlord that Tenant will execute a lease with Landlord for a New Lease Transaction to the extent the New Lease Transaction is based on a lease containing commercially reasonable market-based economic and legal terms and provisions; provided, however, that Landlord and Tenant agree that the legal terms and provisions of the New Lease Transaction shall be deemed to be commercially reasonable to the extent the New Lease Transaction contains substantial the same legal terms and provisions as this Lease. In the event that a New Lease Transaction is not consummated by Landlord and Tenant by the second (2nd) annual anniversary of the Commencement Date and provided Tenant fully and completely satisfies each of the conditions set forth in this Section 33.6, Tenant shall have a one-time option ("TERMINATION OPTION") to terminate this Lease exercisable at any time after the second (2nd) annual anniversary of the Commencement Date effective at the end of any of months thirty-six (36) through forty-two (42) of the Term of this Lease as set forth in Tenant's Termination Notice (as defined below) (the "TERMINATION DATE"); provided, however, that Landlord and Tenant agree that in the negotiation and documentation of the New Lease Transaction, Landlord and Tenant shall act reasonably and in good faith and take no action which might result in a frustration of the reasonable expectations of a sophisticated landlord or tenant concerning the benefits to be enjoyed under the New Lease Transaction. In order to exercise the Termination Option and subject to all of the other terms and conditions in this Section 33.6, Tenant must fully and completely satisfy each and every one of the following conditions: (a) Tenant must give Landlord written notice ("TERMINATION NOTICE") of its intention to terminate this Lease, which Termination Notice must be delivered to Landlord at least six (6) months prior to the Termination Date; (b) At the time of the Termination Notice, Tenant shall not be in default under this Lease after the expiration of the applicable notice and cure periods; (c) Concurrently with Tenant's delivery of the Termination Notice to Landlord, Tenant shall pay to Landlord an amount equal to the sum of (i) the unamortized balance, as of the Termination Date, of (1) the Tenant Improvement Allowance actually utilized by Tenant, (2) the real estate brokerage commissions paid by Landlord in connection with this Lease, and (3) Tenant's free rent for months 2-7 of the Lease Term, plus (ii) an amount equal to one (1) months' Monthly Basic Rent calculated at the rate payable at the time of Termination Notice. Amortization pursuant to this Section 33.6 shall be calculated on a sixty-six (66) month amortization schedule commencing as of the Commencement Date based upon equal monthly payments of principal and interest, with interest imputed on the outstanding principal balance at the rate of ten percent (10%) per annum. Upon Tenant's compliance with the provisions of Subsections (a), (b) and (c) above, Landlord agrees to promptly execute and deliver to Tenant an acknowledgment that the Lease terminates as of the Termination Date, except for those rights and obligations in this Lease which expressly survive its expiration. Notwithstanding anything contained in this Section 33.6 to the contrary, Landlord and Tenant acknowledge and agree that it is the intent of Landlord and Tenant that Tenant shall (subject to this Section 33.6) only have the right to terminate this Lease so long as Landlord is unable to -26- 33 accommodate Tenant on a New Lease Transaction and, in this regard, Tenant acknowledges and agrees that Tenant shall not utilize the Termination Option as a subterfuge to avoid Tenant's obligations under this Lease. 33.7 [INTENTIONALLY DELETED]. 34. ARBITRATION. In the event of any dispute by Landlord of Tenant's audit of Operating Expenses as set forth in Section 4.9 or in the event of a dispute under Section 24 concerning Tenant's right to offset, such dispute shall be resolved through binding arbitration pursuant to this Section 34. If demand for arbitration is timely made as provided in Subsection (a) below, such arbitration shall be conducted in accordance with Title 9 of the California Code of Civil Procedure, Section 1280, et seq., unless otherwise specified herein. The arbitrator shall be selected from the Commercial Arbitration panel of the American Arbitration Association and shall have commercial real estate leasing and, with respect to a dispute under Section 4.9 hereof, accounting expertise. Any such arbitration shall be held and conducted, within thirty (30) days after the selection of an arbitrator, in Los Angeles County, California. The provisions of the Commercial Arbitration Rules of the American Arbitration Association shall apply and govern such arbitration, subject, however, to the following: (a) Any demand for arbitration shall be in writing and must be made and served on Tenant within a reasonable time after the claim, dispute or other matter in questions has arisen and in no event shall the demand for arbitration be made after the date that institution of legal or equitable proceedings based on such claim, dispute, or other matter would be barred by the applicable statute of limitations. (b) All proceedings involving the parties shall be reported by a certified shorthand court reporter and written transcripts of the proceedings shall be prepared and made available to the parties. (c) A party can require the arbitrator to make specific rulings on specific items or questions of fact. The arbitrator shall be bound by the provisions of this Lease, and shall not add to, subtract from or otherwise modify such provisions. (d) Final decision by the arbitrator must be provided to the parties within thirty (30) days from the date on which the matter is submitted to the arbitrator. (e) The prevailing party (as defined below) shall be awarded reasonable attorneys' fees, expert and nonexpert witness costs and expenses (including without limitation the fees and costs of the court reporter described in Subsection (c) above), and other costs and expenses incurred in connection with the arbitration, unless the arbitrator for good cause determines otherwise. (f) As used herein, the term "prevailing party" shall mean the party, if any, that the arbitrator determines is "clearly the prevailing party." (g) Costs and fees of the arbitrator shall be borne by the nonprevailing party, unless the arbitrator for good cause determines otherwise. If there is no prevailing party, the parties shall bear their own fees and costs and split the fees and costs of the arbitrator and court reporter. (h) The award or decision of the arbitrator, which may include equitable relief, shall be final and judgment may be entered on it in accordance with applicable law in any court having jurisdiction over the matter. The provisions of this Section 34 are not intended to alter the applicable provisions of law which provide the grounds on which a court may vacate an arbitration award. (i) The provisions of this Section 34 are not intended to require (1) Landlord to arbitrate any matters relating to any monetary default by Tenant under this Lease, which matters shall, at the election of Landlord, be governed by the applicable provisions of this Lease and/or applicable law, or (2) either party to arbitrate any matters arising under this Lease which are not described in the first sentence of this Section 34. IN WITNESS WHEREOF, the parties have executed this Lease as of the day and year first above written. TENANT: LANDLORD: MAXWELL TECHNOLOGIES, INC., AEW/LBA ACQUISITION COMPANY II, LLC, a a Delaware corporation California limited liability company By: LBA, Inc., a California corporation, By: /s/ Gary Davidson Its: Agent ------------------------------ Print Name: Gary Davidson ------------------- Print Title: CFO ----------------- By: /s/ [NAME ILLEGIBLE] --------------------------------- Print Name: ---------------------- Its: Authorized Signatory -27- 34 EXHIBIT "A" SITE PLAN [METROPOLITAN OFFICE PARK MAP] EXHIBIT "A" 35 EXHIBIT "B" FLOOR PLAN [FLOOR PLAN MAP] EXHIBIT "B" 36 EXHIBIT "C" [INTENTIONALLY DELETED] EXHIBIT "C" 37 EXHIBIT "D" SAMPLE FORM OF NOTICE OF LEASE TERM DATES To: _______________________________ Date: __________________________ Re: Office Lease dated ___________________________,1997 between AEW/LBA ACQUISITION COMPANY II, LLC, a California limited liability company, Landlord, and MAXWELL TECHNOLOGIES, INC., a Delaware corporation, Tenant, concerning Suite 400 ("PREMISES") located at 9275 Skypark Court, San Diego, California 92123. Gentlemen: In accordance with the above-referenced Lease, we wish to advise and/or confirm as follows: 1. That the Premises have been accepted by Tenant as being substantially complete in accordance with the Lease, and that there is no deficiency in construction. 2. That Tenant has accepted and is in possession of the Premises, and acknowledges that under the provisions of the Lease, the Term of the Lease is for ________________(__) years, with __________________(__) options to renew for __________________(__) years each, and commenced upon the Commencement Date of _________________, 19__ and is currently scheduled to expire on _________________, 19__, subject to earlier termination as provided in the Lease. 3. That in accordance with the Lease, rental payment has commenced (or shall commence) on _____________________, 19__. 4. If the Commencement Date of the Lease is other than the first day of the month, the first billing will contain a pro rata adjustment. Each billing thereafter, with the exception of the final billing, shall be for the full amount of the monthly installment as provided for in the Lease. 5. Rent is due and payable in advance on the first day of each and every month during the Term of the Lease. Your rent checks should be made payable to ___________________________ at __________________________. 6. The exact number of rentable square feet within the Premises is ___________ square feet. The exact number of usable square feet within the Premises is _____________ square feet. 7. Tenant's Percentage, as adjusted based upon the exact number of Rentable Square Feet within the Premises, is _________% AGREED AND ACCEPTED TENANT: LANDLORD: MAXWELL TECHNOLOGIES, INC., AEW/LBA ACQUISITION COMPANY II, LLC, a a Delaware corporation California limited liability company By: LBA, Inc., a California corporation, By: _____________________________ Its: Agent Print Name:__________________ Print Title:_________________ By: _______________________________ Print Name:____________________ By: _____________________________ Its: Authorized Signatory Print Name:__________________ Print Title:_________________ SAMPLE ONLY (NOT FOR EXECUTION] EXHIBIT "D" 38 EXHIBIT "E" RULES AND REGULATIONS 1. No sign, advertisement, name or notice shall be installed or displayed on any part of the outside or inside of the Building without the prior written consent of Landlord. Landlord shall have the right to remove, at Tenant's expense and without notice, any sign installed or displayed in violation of this rule. All approved signs or lettering on doors and walls shall be printed, painted, affixed or inscribed at the expense of Tenant by a person approved by Landlord, using materials and in a style and format approved by Landlord. 2. Tenant shall not place anything or allow anything to be placed near the glass of any window, door, partition or wall which may appear unsightly from outside the Premises. No awnings or other projection shall be attached to the outside walls of the Building without the prior written consent of Landlord. No curtains, blinds, shades or screens shall be attached to or hung in, or used in connection with, any window or door of the Premises, other than Building standard materials, without the prior written consent of Landlord. 3. Tenant shall not obstruct any sidewalks, halls, passages, exits, entrances, elevators, escalators or stairways of the Building. The halls, passages, exits, entrances, elevators, escalators and stairways are not for the general public, and Landlord shall in all cases retain the right to control and prevent access thereto of all persons whose presence in the judgment of Landlord would be prejudicial to the safety, character, reputation and interests of the Building and its tenants; provided, that nothing herein contained shall be construed to prevent such access to persons with whom any tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal activities. Except as expressly provided in Section 33.5 of the Lease, Tenant and no employee, invitee, agent, licensee or contractor of Tenant shall go upon or be entitled to use any portion of the roof of the Building. 4. [INTENTIONALLY DELETED]. 5. All cleaning and janitorial services for the Building and the Premises shall be provided exclusively through Landlord or Landlord's janitorial contractors in accordance with the provisions of Section 18.1(d) of the Lease. No person or persons other than those approved by Landlord shall be employed by Tenant or permitted to enter the Building for the purpose of cleaning the same. Tenant shall not cause any unnecessary labor by carelessness or indifference to the good order and cleanliness of the Premises. 6. Landlord will furnish Tenant, free of charge, with two keys to each door lock in the Premises. Landlord may impose a reasonable charge for any additional keys. Tenant may not make or have made additional keys, and Tenant shall not, except as otherwise expressly provided in Section 15 of the Lease, alter any lock or install a new additional lock or bolt on any door or window of its Premises. Tenant, upon termination of its tenancy, shall deliver to Landlord the keys of all doors which have been furnished to, or otherwise procured by Tenant, and, in the event of loss of any keys, shall pay Landlord the cost of replacing the same or of changing the lock or locks opened by such lost key if Landlord shall deem it necessary to make such change. 7. Electric wires, telephones, telegraphs, burglar alarms or other similar apparatus shall not be installed in the Premises except with the approval and under the direction of Landlord. The location of telephones, call boxes and any other equipment affixed to the Premises shall be subject to the approval of Landlord. Any installation of telephones, telegraphs, electric wires or other electric apparatus made without permission shall be removed by Tenant at Tenant's own expense. Except for machines for the use contemplated by Section 1.5 of this Lease, no machines other than standard office machines, such as typewriters and calculators, photo copiers, personal computers and word processors, and vending machines permitted by the Lease, shall be used in the Premises without the approval of Landlord. 8. No furniture, freight, or equipment of any kind shall be brought into the Building without prior notice to Landlord and all moving of the same into or out of the Building shall be done at such time and in such manner as Landlord shall designate. No furniture, equipment or merchandise shall be received in the Building or carried up or down in the elevator, except between such hours as shall be reasonably designated by Landlord; provided, however, that Tenant shall be allowed to move into the Premises during the Business Hours for the Building so long as such move-in does not, in Landlord's reasonable discretion, interfere with Landlord's operation of the Building or the business operations of any occupant of the Building and provided further that Tenant complies with Landlord's reasonable directives regarding such move-in during the Business Hours of the Building. Deliveries during normal office hours shall be limited to normal office supplies and other small items. No deliveries shall be made which impede or interfere with other tenants or the operation of the Building. 9. Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry and which is allowed by law. Landlord shall have the right to prescribe the weight, size and position of all equipment, materials, furniture or other property brought into the Building. Heavy objects, if such objects are considered necessary by Tenant, as determined by Landlord, shall stand on such platforms as determined by Landlord to be necessary to properly distribute the weight. Business machines and mechanical equipment which cause noise or vibration that may be transmitted to the structure of the Building or to any space therein to such a degree as to be objectionable to Landlord or to any tenants in the Building, shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to eliminate noise or vibration. Landlord will not be responsible for loss of, or damage to, any such equipment or other property from any cause, and all damage done to the Building by maintaining or moving such equipment or other property shall be repaired at the expense of Tenant. 10. Tenant shall not use or keep in the Premises any kerosene, gasoline or inflammable or combustible fluid or material other than those limited quantities necessary for the operation or maintenance of office equipment, Tenant shall EXHIBIT "E" 39 not use or permit to be used in the Premises any foul or noxious gas or substance, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Project by reason of noise, odors or vibrations, nor shall Tenant bring into or keep in or about the Premises any birds or animals. 11. Tenant shall not use any method of heating or air-conditioning other than that supplied by Landlord unless approved by Landlord in Landlord's reasonable discretion. 12. Tenant shall not waste electricity, water or air-conditioning and agrees to cooperate fully with Landlord to assure the most effective operation of the Building's heating and air-conditioning and to comply with any governmental energy-saving rules, laws or regulations of which Tenant has actual notice, and shall not adjust controls other than room thermostats installed for Tenant's use. Tenant shall keep corridor doors closed. 13. Landlord reserves the right from time to time, in Landlord's sole and absolute discretion, exercisable without prior notice and without liability to Tenant, to: (a) name or change the name of the Building, Site or Project; (b) change the address of the Building or Project, and/or (c) install, replace or change any signs in, on or about the Common Areas, the Building or Site (except for Tenant's signs, if any, which are expressly permitted by the Lease). 14. Landlord reserves the right to exclude from the Building between the hours of 6:00 p.m. and 7:00 a.m., or such other hours as may be established from time to time by Landlord, and on legal holidays, any person unless that person is known to the person or employee in charge of the Building and has a pass or is properly identified. Landlord shall not be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. Tenant shall be responsible for all persons for whom it requests passes and shall be liable to Landlord for all acts of such persons. Landlord reserves the right to prevent access to the Building in case of invasion, mob, riot, public excitement or other commotion by closing the doors or by other appropriate action. 15. Tenant shall close and lock all doors of its Premises and entirely shut off all water faucets or other water apparatus, and, except with regard to Tenant's computers and other equipment which reasonably require electricity on a 24-hour basis, all electricity, gas or air outlets before Tenant and its employees leave the Premises. Tenant shall be responsible for any damage or injuries sustained by other tenants or occupants of the Building or by Landlord for noncompliance with this rule. 16. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed, and no foreign substances of any kind whatsoever shall be thrown therein. 17. Tenant shall not sell, or permit the sale at retail, of newspapers, magazines, periodicals, theater tickets, or any other goods or merchandise to the general public in or on the Premises. Tenant shall not make any room-to-room solicitation of business from other tenants in the Project. Tenant shall not use the Premises for any business or activity other than that specifically provided for in the Lease. 18. Except as expressly provided in Section 33.5 of the Lease, Tenant shall not install any radio or television antenna, loudspeaker or other device on the roof or exterior walls of the Building. Tenant shall not interfere with radio or television broadcasting or reception from or in the Building or elsewhere. 19. Except as expressly permitted in the Lease, Tenant shall not mark, drive nails, screw or drill into the partitions, window mullions, woodwork or plaster, or in any way deface the Premises or any part thereof, except to install normal wall hangings. Tenant shall repair any damage resulting from noncompliance under this rule. 20. Except for the primary use by Tenant's employees, Tenant shall not install, maintain or operate upon the Premises any vending machines without the prior written consent of Landlord, which shall not be unreasonably withheld. 21. Canvassing, soliciting and distribution of handbills or any other written material, and peddling in and around the Project or the Building are expressly prohibited, and each tenant shall cooperate to prevent same. 22. Landlord reserves the right to exclude or expel from the Project and/or the Building any person who, in Landlord's judgment, is intoxicated or under the influence of liquor or drugs or who is in violation of any of the Rules and Regulations of the Project or Building. 23. Tenant shall store all its trash and garbage within its Premises. Tenant shall not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. All garbage and refuse disposal shall be made in accordance with directions reasonably issued from time to time by Landlord. 24. The Premises shall not be used for the storage of merchandise held for sale to the general public, or for lodging or for manufacturing of any kind. No cooking shall be done or permitted by Tenant on the Premises, except that use by Tenant of Underwriters' Laboratory-approved equipment for brewing coffee, tea, hot chocolate and similar beverages shall be permitted and the use of a microwave as well as other equipment to the extent such other equipment is typically found in office space comparable to the Premises in buildings comparable to the Building, shall be permitted, provided that all such equipment and use is in accordance with all applicable federal, state, county and city laws, codes, ordinances, rules and regulations. 25. Tenant shall not use in any space, or in the public halls of the Building, any hand trucks except those equipped with rubber tires and side guards, or such other material-handling equipment as Landlord may approve. Tenant shall not bring any other vehicles of any kind into the Building. E-2 40 26. Tenant shall not use the name of the Project or Building in connection with, or in promoting or advertising, the business of Tenant, except for Tenant's address. 27. Tenant agrees that it shall comply with all fire and security regulations that may be issued from time to time by Landlord, and Tenant also shall provide Landlord with the name of a designated responsible employee to represent Tenant in all matters pertaining to such fire or security regulations. Tenant shall cooperate fully with Landlord in all matters concerning fire and other emergency procedures. 28. Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage. Such responsibility shall include keeping doors locked and other means of entry to the Premises closed. 29. Landlord agrees that the Rules and Regulations shall be enforced in a non-discriminatory manner. 30. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of premises in the Project or Building. 31. Landlord reserves the right to make such other and reasonable non-discriminatory Rules and Regulations as, in its judgment, may from time to time be needed for safety, security, care and cleanliness of the Project and/or Building and for the preservation of good order therein. Tenant agrees to abide by all such Rules and Regulations hereinabove stated and any additional reasonable and non-discriminatory rules and regulations which are adopted. 32. Tenant shall be responsible for the observance of all of the foregoing rules by Tenant's employees, agents, clients, customers, invitees or guests. 33. Tenant shall not lay linoleum, tile, carpet or other similar floor covering so that the same shall be affixed to the floor of the Premises in any manner except by a paste, or other material which may easily be removed with water, the use of cement or other similar adhesive materials being expressly prohibited. The method of affixing any such linoleum, tile, carpet or other similar floor covering shall be subject to the approval of Landlord. The expense of repairing any damage resulting from a violation of this rule shall be borne by Tenant. PARKING RULES AND REGULATIONS In addition to the parking provisions contained in the Lease to which this Exhibit "E" is attached, the following rules and regulations shall apply with respect to the use of the Building's parking facilities. 1. Every parker is required to park and lock his/her own vehicle. All responsibility for damage to or loss of vehicles is assumed by the parker and Landlord shall not be responsible for any such damage or loss by water, fire, defective brakes, the act or omissions of others, theft, or for any other cause. 2. Tenant shall not park or permit its employees to park in any parking areas designated by Landlord as areas for parking by visitors to the Project. Tenant shall not leave vehicles in the parking areas overnight nor park any vehicles in the parking areas other than automobiles, motorcycles, motor driven or non-motor driven bicycles or four wheeled trucks. 3. Parking stickers or any other device or form of identification supplied by Landlord as a condition of use of the parking facilities shall remain the property of Landlord. Such parking identification device must be displayed as requested and may not be mutilated in any manner. The serial number of the parking identification device may not be obliterated. Devices are not transferable and any device in the possession of an unauthorized holder will be void. 4. No overnight or extended term storage of vehicles shall be permitted. 5. Vehicles must be parked entirely within painted stall lines of a single parking stall. 6. All directional signs and arrows must be observed. 7. The speed limit within all parking areas shall be five (5) miles per hour. 8. Parking is prohibited: (a) in areas not striped for parking; (b) in aisles; (c) where "no parking" signs are posted; (d) on ramps; (e) in cross-hatched areas; and (f) in reserved spaces and in such other areas as may be designated by Landlord or Landlord's parking operator. 9. Loss or theft of parking identification devices must be reported to the Management Office immediately, and a lost or stolen report must be filed by the Tenant or user of such parking identification device at the time. Landlord has the right to exclude any vehicle from the parking facilities that does not have an identification device. 10. Any parking identification devices reported lost or stolen found on any unauthorized car will be confiscated and the illegal holder will be subject to prosecution. 11. Washing, waxing, cleaning or servicing of any vehicle in any area not specifically reserved for such purpose is prohibited. 12. The parking operators, managers or attendants are not authorized to make or allow any exceptions to these rules and regulations. E-3 41 13. Tenant's continued right to park in the parking facilities is conditioned upon Tenant abiding by these rules and regulations and those contained in this Lease. Further, if the Lease terminates for any reason whatsoever, Tenant's right to park in the parking facilities shall terminate concurrently therewith. 14. Tenant agrees to sign a parking agreement with Landlord or Landlord's parking operator within five (5) days of request, which agreement shall be consistent with the Lease and these parking rules and regulations. 15. Landlord reserves the right to refuse the sale or use of monthly stickers or other parking identification devices to any tenant or person who willfully refuse to comply with these rules and regulations and all city, state or federal ordinances, laws or agreements. 16. Landlord reserves the right to establish and to modify and/or adopt such other reasonable and non-discriminatory rules and regulations for the parking facilities as it deems necessary for the operation of the parking facilities so long as Tenant's parking rights under the Lease are not adversely affected. Landlord may refuse to permit any person who violates these rules to park in the parking facilities, and any violation of the rules shall subject the vehicle to removal, at such vehicle owner's expense E-4 42 EXHIBIT "F" SAMPLE FORM OF TENANT ESTOPPEL CERTIFICATE The undersigned ("TENANT") hereby certifies to AEW/LBA ACQUISITION COMPANY II, LLC, a California limited liability company ("LANDLORD") as follows: 1. Attached hereto is a true, correct and complete copy of that certain Office Lease dated ___________________, 19__ between Landlord and Tenant (the "LEASE"), which demises Premises which are located at _________________________________. The Lease is now in full force and effect and has not been amended, modified or supplemented, except as set forth in Section 6 below. 2. The term of the Lease commenced on ________________, 19__. 3. The term of the Lease is currently scheduled to expire on ____________, 19__. 4. Tenant has no option to renew or extend the Term of the Lease except: _______ _______________________________________________________________________________. 5. Tenant has no preferential right to purchase the Premises or any portion of the Building or Site upon which the Premises are located, and Tenant has no rights or options to expand into other space in the Building except: _______________________________________________________________________________. 6. The Lease has: (Initial One) ( ) not been amended, modified, supplemented, extended, renewed or assigned. ( ) been amended, modified, supplemented, extended, renewed or assigned by the following described agreements, copies of which are attached hereto: _________________________________________________________________________ ________________________________________________________________________. 7. Tenant has accepted and is now in possession of the Premises and has not sublet, assigned or encumbered the Lease, the Premises or any portion thereof except as follows: _____________________________________________________________ _______________________________________________________________________________. 8. The current Monthly Basic Rent is $_____________; and current monthly parking charges are $________________. 9. Tenant's Percentage is ___________%, and Tenant's Percentage of Operating Expenses currently payable by Tenant is $______________ per month, which amount is Landlord's current estimate of Tenant's Percentage of Operating Expenses in excess of: (Complete One) $________________ per year (expense stop), or the Operating Expenses incurred in calendar year________. 10. The amount of security deposit (if any) is $________. No other security deposits have been made. 11. All rental payments payable by Tenant have been paid in full as of the date hereof. No rent under the Lease has been paid for more than thirty (30) days in advance of its due date. 12. All work required to be performed by Landlord under the Lease has been completed and has been accepted by Tenant, and all tenant improvement allowances have been paid in full. 13. To the best of Tenant's knowledge, as of the date hereof, there are no defaults on the part of Landlord or Tenant under the Lease. 14. Tenant has no defense as to its obligations under the Lease and claims no set-off or counterclaim against Landlord. 15. Tenant has no right to any concession (rental or otherwise) or similar compensation in connection with renting the space it occupies, except as expressly provided in the Lease. 16. All insurance required of Tenant under the Lease has been provided by Tenant and all premiums have been paid. 17. There has not been filed by or against Tenant a petition in bankruptcy, voluntary or otherwise, any assignment of creditors, any petition seeking reorganization or arrangement under the bankruptcy laws of the United States or any state thereof, or any other action brought pursuant to such bankruptcy laws with respect to Tenant. 18. Tenant pays rent due Landlord under the Lease to Landlord and does not have any knowledge of any other person who has any right to such rents by collateral assignment or otherwise. EXHIBIT "F" 43 The foregoing certification is made with the knowledge that is about to [fund a loan to Landlord or purchase the Building from Landlord], and that is relying upon the representations herein made in [funding such loan or purchasing the Building]. Dated: ______________, 19 __. "TENANT" MAXWELL TECHNOLOGIES, INC., a Delaware corporation By: ______________________________ Print Name: _______________________ Its: ______________________________ F-2 EX-10.32 14 EXHIBIT 10.32 1 EXHIBIT 10.32 [MAXWELL TECHNOLOGIES LOGO] EXECUTIVE BONUS PLAN FY 1998 Company Confidential 2 OBJECTIVE: - -------------------------------------------------------------------------------- - - To drive the maximization of company-wide growth, financial performance and shareholder value. Company Confidential 2 3 ELIGIBILITY: - -------------------------------------------------------------------------------- - - The CEO recommends participants and their participation levels (i.e. target bonus.) - - Participants must be actively employed on the last day of the performance period to be eligible for any award. Company Confidential 3 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. Company Confidential 4 5 TIMING AND FORM OF BONUS PAYMENT: - -------------------------------------------------------------------------------- - - The bonus will be paid to participants in cash following year end results. - - $.60 eps must be achieved for an payout to occur. Company Confidential 5 6 BONUS CALCULATION: - -------------------------------------------------------------------------------- Two weighted factors: sales and eps Sales x 1/3 eps x 2/3 Minimum Bonus Participation = 25% $100M sales/$.60 eps Maximum Bonus Participation = 200% $135M sales/$1.00 eps Company Confidential 6 7 BONUS CALCULATION: (continued) - -------------------------------------------------------------------------------- Eps would be calculated after Profit Sharing payments. The exact percentage for each participant will be determined by the CEO and is based on each individual's performance goals. Company Confidential 7 8 CALCULATION IF MINIMUM SURPASSED: - -------------------------------------------------------------------------------- BONUS FORMULA EXAMPLES 100% + [5%*(REVENUE-115M*(1/3)+400%*(EPS -.75*(2/3)]
REVENUE EPS BONUS PERCENTAGE ------- --- ----------------- 100 0.60 25.00% 110 0.70 78.33% 115 0.75 100.00% 125 0.90 156.67% 135 1.00 200.00%
Company Confidential 8 EX-10.34 15 EXHIBIT 10.34 1 EXHIBIT 10.34 MAXWELL FEDERAL DIVISION, INC. 1996 STOCK OPTION PLAN 1. Purpose. The 1996 Stock Option Plan (the "Plan") is intended to advance the interests of Maxwell Federal Division, Inc. (the "Company"), and its shareholders by encouraging and enabling selected "key employees" (as defined below) to acquire and retain a proprietary interest in the Company by ownership of its stock. For purposes of this Plan, the term "key employee" shall include employees of the Company, its parent corporation, Maxwell Technologies, Inc., and any majority-owned subsidiaries of Maxwell Technologies, Inc., upon whose judgment, initiative and effort the Company is dependent for success in the conduct of its business. Selected employees of the Company's parent corporation and subsidiaries of the parent corporation are included within the definition of "key employee" in recognition that the Company's success depends in part on the success of the combined corporate enterprise which includes the Company. It is intended that the Plan provide the flexibility for the issuance of options which qualify as incentive stock options ("incentive stock options") within the meaning of Section 422 of the Internal Revenue Code of 1986 (the "Code") and options which do not so qualify ("non-qualified stock options"). 2. Definitions. (a) "Affiliate" means Maxwell Technologies, Inc. and each corporation in which such entity owns, directly or indirectly, more than 50% of the voting equity interests. (b) "Agreement" means the agreement between the Company and the Optionee under which an option is granted, and setting forth the terms and conditions of the option and the Optionee's rights thereunder. (c) "Board" means the Board of Directors of the Company. (d) "Committee" means the Stock Option Committee (the members of which shall be appointed by the Board from among the directors of the Company) of the Board. If no such committee has been appointed by the Board, then the term "Committee" shall refer to the entire Board. (e) "Common Stock" means the Company's common stock. (f) "Date of Grant" means the date on which an option under the Plan is approved by the Committee. -1- 2 (g) "Option" means an option granted under the Plan. (h) "Optionee" means a person to whom an option, which has not expired, has been granted under the Plan. (i) "Successor" means the legal representative of the estate of the deceased Optionee or the person or persons who acquire the right to exercise an option by bequest or inheritance or by reason of the death of any Optionee. 3. Administration of the Plan. The Plan shall be administered by the Committee which shall report all action taken by it to the Board. The Committee shall have full and final authority in its discretion, subject to the provisions of the Plan, to determine the number of shares and purchase price of Common Stock covered by each option, the individuals to whom and the time or times at which options shall be granted and the nature of each option granted under the Plan, i.e., whether the option will be an incentive stock option or a non-qualified stock option; to construe and interpret the Plan; to determine the terms and provisions of the respective Agreements, which need not be identical, including, but without limitation, terms covering the payment of the option price, and to make all other determinations and take all other actions deemed necessary or advisable for the proper administration of the Plan. All such actions and determinations of the Committee shall be conclusively binding for all purposes and upon all persons. 4. Common Stock Subject to Options. Unless amended in accordance with the provisions of Paragraph 11, and subject to adjustment under the provisions of Paragraph 7, the aggregate number of shares of the Company's Common Stock which may be issued upon the exercise of options granted under the Plan shall not exceed 750,000. The shares of Common Stock to be issued upon the exercise of options may be authorized but unissued shares, shares issued and reacquired by the Company or shares bought on the market for the purposes of the Plan. In the event any option shall, for any reason, terminate or expire or be surrendered without having been exercised in full, the shares subject to such option but not purchased thereunder shall again be available for options to be granted under the Plan. 5. Participants. Options may be granted under the Plan to any person who, in the opinion of the Committee, is a key employee of the Company or any Affiliate. 6. Terms and Conditions of Options. Any option granted under the Plan shall be evidenced by an Agreement executed by the Company and the Optionee and shall contain such terms and be in such form as the Committee may from time to time approve, subject to the following limitations and conditions: -2- 3 (a) Option Price. The option price per share with respect to each option shall be determined by the Committee but shall in no instance be less than 100% of the fair market value of a share of the Common Stock on the Date of Grant; provided that with respect to an option granted to an individual who, on the grant date, is the holder of stock representing more than 10% of the voting equity of the Company or any Affiliate (hereinafter a "10% Holder"), the option price for such option shall be no less than 110% of such fair market value. For the purposes hereof, fair market value shall be as determined by the Committee and such determination shall be binding upon the Company and upon the Optionee. The Committee may make such determination upon any factors which the Committee shall deem appropriate. (b) Period of Option. Except for earlier termination as provided in Subparagraphs (g) and (h) of this Paragraph 6, and in Subparagraph (b) of Paragraph 7, the expiration date of each option shall be fixed by the Committee, but, notwithstanding any provision of the Plan to the contrary, such expiration date shall not be more than ten years from the Date of Grant or, with respect to a 10% Holder, five years from the Date of Grant. (c) Vesting of Shareholder Rights. Neither an Optionee nor any Successor shall have any of the rights of a shareholder of the Company until the option with respect to the applicable shares shall have been duly exercised and the certificate evidencing such shares delivered to such Optionee or any Successor. (d) Exercise of Option. Each option shall be exercisable in such amounts and at such respective dates prior to the expiration of the option as provided in the Agreement. (e) Payment of Option Price. Upon exercise of an option, the Optionee or Successor shall pay the option price by delivering to the Company: (i) cash or a check payable to the Company in an amount equal to the option price; (ii) a stock certificate or certificates, duly endorsed for transfer to the Company, representing shares of Common Stock of the Company owned by the Optionee or Successor which have a fair market value on the date of exercise equal to the option price; or (iii) cash or a check payable to the Company and a stock certificate or certificates, duly endorsed for transfer to the Company, representing shares of Common Stock owned by the Optionee or Successor, which, when added -3- 4 to the amount of the cash or check, have a fair market value on the date of exercise equal to the option price. For the purposes hereof, fair market value shall be determined by the Committee and such determination shall be binding upon the Company and upon the Optionee or Successor. The Committee may make such determination in accordance with Paragraph 6(a) hereof by substituting "date of exercise" for "Date of Grant" each time the latter appears therein and upon any other factors which the Committee shall deem appropriate. (e) Non-Transferability of Option. No option shall be transferable or assignable by an Optionee, otherwise than by will or the laws of descent and distribution and each option shall be exercisable during the Optionee's lifetime only by the Optionee. No option shall be pledged or hypothecated in any way and no option shall be subject to execution, attachment or similar process. (g) Termination of Employment. Upon termination of an Optionee's employment with the Company and all Affiliates other than by reason of the death of the Optionee, the option privileges of such Optionee shall be limited to the shares which were immediately purchasable to him at the date of such termination and such option privilege shall expire unless exercised by him within sixty (60) days after the date of such termination. The granting of an option to any person shall not alter in any way the Company's right to terminate such person's employment at any time for any reason, nor shall it confer upon the Optionee any rights or privileges except as specifically provided for in the Plan. (h) Death of Optionee. If an Optionee dies while in the employ of the Company or any Affiliate, the option privileges of said Optionee shall be limited to the shares which were immediately purchasable by such Optionee at the date of death and such option privileges shall expire unless exercised by said Optionee's Successor within one (1) year after the date of death. 7. Adjustments. (a) In the event that the outstanding shares of Common Stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation, by reason of a recapitalization, reclassification, stock split-up, combination of shares, dividend or other distribution payable in capital stock, appropriate adjustment shall be made by the Board in the number, kind and exercise price of shares for the purchase of which options have theretofore been or may thereafter be granted under the Plan. -4- 5 (b) In the event that the Company shall determine to merge, consolidate or enter into any other reorganization with or into any other corporation, or in the event of any dissolution or liquidation of the Company, then in any such event, at the election of the Board, (i) appropriate adjustment shall be made by the Board in the number, kind and exercise price of shares for the purchase of which options have theretofore been and/or may thereafter be granted under the Plan, and if such event results in Maxwell Technologies, Inc. ceasing to own, directly or indirectly, more than 50% of the voting equity of the Company, each such adjusted option shall be fully vested and exercisable as to all shares thereunder regardless of an otherwise insufficient passage of time; or (ii) the Plan and any options theretofore granted under the Plan shall terminate as of the date of such merger, consolidation, reorganization, dissolution or liquidation, provided that written notice of such event shall have been given to each Optionee not less than 30 days prior to the date of such event. Upon any election by the Board pursuant to the provisions of clause (ii) of this Subparagraph (b), each Optionee shall have the right during the period commencing on the date the notice referred to in said clause (ii) is given and concluding on the date of such merger, consolidation, reorganization, dissolution or liquidation, as the case may be, to exercise such Optionee's outstanding and unexercised stock options, including shares as to which such options would not otherwise have been exercisable by reason of an insufficient lapse of time. (c) All adjustments and determinations under this Paragraph 7 shall be made by the Board, whose decisions as to what adjustments or determinations shall be made, and the extent thereof, shall be final, binding and conclusive. 8. Dollar Limitation on Incentive Stock Options. The aggregate fair market value (determined as of the Date of Grant) of the Common Stock with respect to which incentive stock options are exercisable for the first time by any individual during any calendar year (under the Plan and all other stock option plans of the Company or any Affiliate) shall not exceed $100,000. 9. Restrictions on Issuing Shares. The exercise of each option shall be subject to the condition that if at any time the Company shall determine in its discretion that (i) the satisfaction of withholding tax or other withholding liabilities, or (ii) the listing, registration or qualification of any shares otherwise deliverable upon such exercise upon any securities exchange or under any state or federal law, or (iii) the consent or approval of any regulatory body, or (iv) the perfection of any exemption from any such withholding, listing, registration, qualification, consent or approval is necessary or desirable as a condition of, or in connection with, such exercise or the issuance, delivery or purchase of shares thereunder, then in any such event, such exercise shall not be effective unless such withholding, listing registration, -5- 6 qualification, consent, approval or exemption shall have been effected, obtained or perfected free of any conditions not acceptable to the Company. 10. Use of Proceeds. The proceeds received by the Company from the sale of its Common Stock pursuant to the exercise of options granted under the Plan shall be added to the Company's general funds and used for general corporate purposes. 11. Amendment, Suspension and Termination of the Plan. The Board may at any time suspend or terminate the Plan or may amend it from time to time in such respects as the Board may deem advisable in order that the options granted thereunder may conform to any changes in the law or in any other respect which the Board may deem to be in the best interests of the Company; provided, however, that without approval by the shareholders of the Company representing a majority of the voting power, no such amendment shall (a) except pursuant to Paragraph 7, increase the maximum number of shares for which options may be granted under the Plan, (b) change the provisions of Subparagraph (a) of Paragraph 6 relating to the establishment of the option price, (c) change the provisions of Subparagraph (b) of Paragraph 6 relating to the expiration date of each option or (d) change the provisions of the second sentence of this Paragraph 11 relating to the term of this Plan. Unless the Plan shall theretofore have been terminated by the Board or as provided in Paragraph 12, the Plan shall terminate ten (10) years after the effective date of the Plan. No option may be granted during any suspension or after the termination of the Plan. Except as otherwise provided in the Plan, no amendment, suspension or termination of the Plan shall, without an Optionee's consent, alter or impair any of the right or obligations under any option theretofore granted to such Optionee under the Plan. 12. Effective Date of the Plan and Shareholder Approval. The effective date of the Plan shall be the date of its approval by the Board; provided, however, that in the event that shareholder approval of the Plan is not secured on or before the date which is twelve (12) months from the date of approval by the Board, the Plan shall thereupon terminate. Any options granted prior to the aforesaid shareholder approval being secured shall be subject to such approval being secured. MAXWELL FEDERAL DIVISION, INC. By: /s/ Donald M. Roberts ---------------------------- Donald M. Roberts, Secretary Date: 11/1/96 -------------------------- -6- EX-10.35 16 EXHIBIT 10.35 1 EXHIBIT 10.35 MAXWELL ENERGY PRODUCTS, INC. 1996 STOCK OPTION PLAN 1. Purpose. The 1996 Stock Option Plan (the "Plan") is intended to advance the interests of Maxwell Energy Products, Inc. (the "Company"), and its shareholders by encouraging and enabling selected "key employees" (as defined below) to acquire and retain a proprietary interest in the Company by ownership of its stock. For purposes of this Plan, the term "key employee" shall include employees of the Company, its parent corporation, Maxwell Technologies, Inc., and any majority-owned subsidiaries of Maxwell Technologies, Inc., upon whose judgment, initiative and effort the Company is dependent for success in the conduct of its business. Selected employees of the Company's parent corporation and subsidiaries of the parent corporation are included within the definition of "key employee" in recognition that the Company's success depends in part on the success of the combined corporate enterprise which includes the Company. It is intended that the Plan provide the flexibility for the issuance of options which qualify as incentive stock options ("incentive stock options") within the meaning of Section 422 of the Internal Revenue Code of 1986 (the "Code") and options which do not so qualify ("non-qualified stock options"). 2. Definitions. (a) "Affiliate" means Maxwell Technologies, Inc. and each corporation in which such entity owns, directly or indirectly, more than 50% of the voting equity interests. (b) "Agreement" means the agreement between the Company and the Optionee under which an option is granted, and setting forth the terms and conditions of the option and the Optionee's rights thereunder. (c) "Board" means the Board of Directors of the Company. (d) "Committee" means the Stock Option Committee (the members of which shall be appointed by the Board from among the directors of the Company) of the Board. If no such committee has been appointed by the Board, then the term "Committee" shall refer to the entire Board. (e) "Common Stock" means the Company's common stock. (f) "Date of Grant" means the date on which an option under the Plan is approved by the Committee. -1- 2 (g) "Option" means an option granted under the Plan. (h)"Optionee" means a person to whom an option, which has not expired, has been granted under the Plan. (i) "Successor" means the legal representative of the estate of the deceased Optionee or the person or persons who acquire the right to exercise an option by bequest or inheritance or by reason of the death of any Optionee. 3. Administration of the Plan. The Plan shall be administered by the Committee which shall report all action taken by it to the Board. The Committee shall have full and final authority in its discretion, subject to the provisions of the Plan, to determine the number of shares and purchase price of Common Stock covered by each option, the individuals to whom and the time or times at which options shall be granted and the nature of each option granted under the Plan, i.e., whether the option will be an incentive stock option or a non-qualified stock option; to construe and interpret the Plan; to determine the terms and provisions of the respective Agreements, which need not be identical, including, but without limitation, terms covering the payment of the option price, and to make all other determinations and take all other actions deemed necessary or advisable for the proper administration of the Plan. All such actions and determinations of the Committee shall be conclusively binding for all purposes and upon all persons. 4. Common Stock Subject to Options. Unless amended in accordance with the provisions of Paragraph 11, and subject to adjustment under the provisions of Paragraph 7, the aggregate number of shares of the Company's Common Stock which may be issued upon the exercise of options granted under the Plan shall not exceed 750,000. The shares of Common Stock to be issued upon the exercise of options may be authorized but unissued shares, shares issued and reacquired by the Company or shares bought on the market for the purposes of the Plan. In the event any option shall, for any reason, terminate or expire or be surrendered without having been exercised in full, the shares subject to such option but not purchased thereunder shall again be available for options to be granted under the Plan. 5. Participants. Options may be granted under the Plan to any person who, in the opinion of the Committee, is a key employee of the Company or any Affiliate. 6. Terms and Conditions of Options. Any option granted under the Plan shall be evidenced by an Agreement executed by the Company and the Optionee and shall contain such terms and be in such form as the Committee may from time to time approve, subject to the following limitations and conditions: -2- 3 (a) Option Price. The option price per share with respect to each option shall be determined by the Committee but shall in no instance be less than 100% of the fair market value of a share of the Common Stock on the Date of Grant; provided that with respect to an option granted to an individual who, on the grant date, is the holder of stock representing more than 10% of the voting equity of the Company or any Affiliate (hereinafter a "10% Holder"), the option price for such option shall be no less than 110% of such fair market value. For the purposes hereof, fair market value shall be as determined by the Committee and such determination shall be binding upon the Company and upon the Optionee. The Committee may make such determination upon any factors which the Committee shall deem appropriate. (b) Period of Option. Except for earlier termination as provided in Subparagraphs (g) and (h) of this Paragraph 6, and in Subparagraph (b) of Paragraph 7, the expiration date of each option shall be fixed by the Committee, but, notwithstanding any provision of the Plan to the contrary, such expiration date shall not be more than ten years from the Date of Grant or, with respect to a 10% Holder, five years from the Date of Grant. (c) Vesting of Shareholder Rights. Neither an Optionee nor any Successor shall have any of the rights of a shareholder of the Company until the option with respect to the applicable shares shall have been duly exercised and the certificate evidencing such shares delivered to such Optionee or any Successor. (d) Exercise of Option. Each option shall be exercisable in such amounts and at such respective dates prior to the expiration of the option as provided in the Agreement. (e) Payment of Option Price. Upon exercise of an option, the Optionee or Successor shall pay the option price by delivering to the Company: (i) cash or a check payable to the Company in an amount equal to the option price; (ii) a stock certificate or certificates, duly endorsed for transfer to the Company, representing shares of Common Stock of the Company owned by the Optionee or Successor which have a fair market value on the date of exercise equal to the option price; or (iii) cash or a check payable to the Company and a stock certificate or certificates, duly endorsed for transfer to the Company, representing shares of Common Stock owned by the Optionee or Successor, which, when added -3- 4 to the amount of the cash or check, have a fair market value on the date of exercise equal to the option price. For the purposes hereof, fair market value shall be determined by the Committee and such determination shall be binding upon the Company and upon the Optionee or Successor. The Committee may make such determination in accordance with Paragraph 6(a) hereof by substituting "date of exercise" for "Date of Grant" each time the latter appears therein and upon any other factors which the Committee shall deem appropriate. (e) Non-Transferability of Option. No option shall be transferable or assignable by an Optionee, otherwise than by will or the laws of descent and distribution and each option shall be exercisable during the Optionee's lifetime only by the Optionee. No option shall be pledged or hypothecated in any way and no option shall be subject to execution, attachment or similar process. (g) Termination of Employment. Upon termination of an Optionee's employment with the Company and all Affiliates other than by reason of the death of the Optionee, the option privileges of such Optionee shall be limited to the shares which were immediately purchasable to him at the date of such termination and such option privilege shall expire unless exercised by him within sixty (60) days after the date of such termination. The granting of an option to any person shall not alter in any way the Company's right to terminate such person's employment at any time for any reason, nor shall it confer upon the Optionee any rights or privileges except as specifically provided for in the Plan. (h) Death of Optionee. If an Optionee dies while in the employ of the Company or any Affiliate, the option privileges of said Optionee shall be limited to the shares which were immediately purchasable by such Optionee at the date of death and such option privileges shall expire unless exercised by said Optionee's Successor within one (1) year after the date of death. 7. Adjustments. (a) In the event that the outstanding shares of Common Stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation, by reason of a recapitalization, reclassification, stock split-up, combination of shares, dividend or other distribution payable in capital stock, appropriate adjustment shall be made by the Board in the number, kind and exercise price of shares for the purchase of which options have theretofore been or may thereafter be granted under the Plan. -4- 5 (b) In the event that the Company shall determine to merge, consolidate or enter into any other reorganization with or into any other corporation, or in the event of any dissolution or liquidation of the Company, then in any such event, at the election of the Board, (i) appropriate adjustment shall be made by the Board in the number, kind and exercise price of shares for the purchase of which options have theretofore been and/or may thereafter be granted under the Plan, and if such event results in Maxwell Technologies, Inc. ceasing to own, directly or indirectly, more than 50% of the voting equity of the Company, each such adjusted option shall be fully vested and exercisable as to all shares thereunder regardless of an otherwise insufficient passage of time; or (ii) the Plan and any options theretofore granted under the Plan shall terminate as of the date of such merger, consolidation, reorganization, dissolution or liquidation, provided that written notice of such event shall have been given to each Optionee not less than 30 days prior to the date of such event. Upon any election by the Board pursuant to the provisions of clause (ii) of this Subparagraph (b), each Optionee shall have the right during the period commencing on the date the notice referred to in said clause (ii) is given and concluding on the date of such merger, consolidation, reorganization, dissolution or liquidation, as the case may be, to exercise such Optionee's outstanding and unexercised stock options, including shares as to which such options would not otherwise have been exercisable by reason of an insufficient lapse of time. (c) All adjustments and determinations under this Paragraph 7 shall be made by the Board, whose decisions as to what adjustments or determinations shall be made, and the extent thereof, shall be final, binding and conclusive. 8. Dollar Limitation on Incentive Stock Options. The aggregate fair market value (determined as of the Date of Grant) of the Common Stock with respect to which incentive stock options are exercisable for the first time by any individual during any calendar year (under the Plan and all other stock option plans of the Company or any Affiliate) shall not exceed $100,000. 9. Restrictions on Issuing Shares. The exercise of each option shall be subject to the condition that if at any time the Company shall determine in its discretion that (i) the satisfaction of withholding tax or other withholding liabilities, or (ii) the listing, registration or qualification of any shares otherwise deliverable upon such exercise upon any securities exchange or under any state or federal law, or (iii) the consent or approval of any regulatory body, or (iv) the perfection of any exemption from any such withholding, listing, registration, qualification, consent or approval is necessary or desirable as a condition of, or in connection with, such exercise or the issuance, delivery or purchase of shares thereunder, then in any such event, such exercise shall not be effective unless such withholding, listing registration, -5- 6 qualification, consent, approval or exemption shall have been effected, obtained or perfected free of any conditions not acceptable to the Company. 10. Use of Proceeds. The proceeds received by the Company from the sale of its Common Stock pursuant to the exercise of options granted under the Plan shall be added to the Company's general funds and used for general corporate purposes. 11. Amendment, Suspension and Termination of the Plan. The Board may at any time suspend or terminate the Plan or may amend it from time to time in such respects as the Board may deem advisable in order that the options granted thereunder may conform to any changes in the law or in any other respect which the Board may deem to be in the best interests of the Company; provided, however, that without approval by the shareholders of the Company representing a majority of the voting power, no such amendment shall (a) except pursuant to Paragraph 7, increase the maximum number of shares for which options may be granted under the Plan, (b) change the provisions of Subparagraph (a) of Paragraph 6 relating to the establishment of the option price, (c) change the provisions of Subparagraph (b) of Paragraph 6 relating to the expiration date of each option or (d) change the provisions of the second sentence of this Paragraph 11 relating to the term of this Plan. Unless the Plan shall theretofore have been terminated by the Board or as provided in Paragraph 12, the Plan shall terminate ten (10) years after the effective date of the Plan. No option may be granted during any suspension or after the termination of the Plan. Except as otherwise provided in the Plan, no amendment, suspension or termination of the Plan shall, without an Optionee's consent, alter or impair any of the right or obligations under any option theretofore granted to such Optionee under the Plan. 12. Effective Date of the Plan and Shareholder Approval. The effective date of the Plan shall be the date of its approval by the Board; provided, however, that in the event that shareholder approval of the Plan is not secured on or before the date which is twelve (12) months from the date of approval by the Board, the Plan shall thereupon terminate. Any options granted prior to the aforesaid shareholder approval being secured shall be subject to such approval being secured. MAXWELL ENERGY PRODUCTS, INC. By: /s/ Donald M. Roberts ---------------------------- Donald M. Roberts, Secretary Date: 11/1/96 --------------------------- -6- EX-10.36 17 EXHIBIT 10.36 1 EXHIBIT 10.36 I-BUS, INC. 1996 STOCK OPTION PLAN 1. Purpose. The 1996 Stock Option Plan (the "Plan") is intended to advance the interests of I-Bus, Inc. (the "Company"), and its shareholders by encouraging and enabling selected "key employees" (as defined below) to acquire and retain a proprietary interest in the Company by ownership of its stock. For purposes of this Plan, the term "key employee" shall include employees of the Company, its parent corporation, Maxwell Technologies, Inc., and any majority-owned subsidiaries of Maxwell Technologies, Inc., upon whose judgment, initiative and effort the Company is dependent for success in the conduct of its business. Selected employees of the Company's parent corporation and subsidiaries of the parent corporation are included within the definition of "key employee" in recognition that the Company's success depends in part on the success of the combined corporate enterprise which includes the Company. It is intended that the Plan provide the flexibility for the issuance of options which qualify as incentive stock options ("incentive stock options") within the meaning of Section 422 of the Internal Revenue Code of 1986 (the "Code") and options which do not so qualify ("non-qualified stock options"). 2. Definitions. (a) "Affiliate" means Maxwell Technologies, Inc. and each corporation in which such entity owns, directly or indirectly, more than 50% of the voting equity interests. (b) "Agreement" means the agreement between the Company and the Optionee under which an option is granted, and setting forth the terms and conditions of the option and the Optionee's rights thereunder. (c) "Board" means the Board of Directors of the Company. (d) "Committee" means the Stock Option Committee (the members of which shall be appointed by the Board from among the directors of the Company) of the Board. If no such committee has been appointed by the Board, then the term "Committee" shall refer to the entire Board. (e) "Common Stock" means the Company's common stock. (f) "Date of Grant" means the date on which an option under the Plan is approved by the Committee. -1- 2 (g) "Option" means an option granted under the Plan. (h) "Optionee" means a person to whom an option, which has not expired, has been granted under the Plan. (i) "Successor" means the legal representative of the estate of the deceased Optionee or the person or persons who acquire the right to exercise an option by bequest or inheritance or by reason of the death of any Optionee. 3. Administration of the Plan. The Plan shall be administered by the Committee which shall report all action taken by it to the Board. The Committee shall have full and final authority in its discretion, subject to the provisions of the Plan, to determine the number of shares and purchase price of Common Stock covered by each option, the individuals to whom and the time or times at which options shall be granted and the nature of each option granted under the Plan, i.e., whether the option will be an incentive stock option or a non-qualified stock option; to construe and interpret the Plan; to determine the terms and provisions of the respective Agreements, which need not be identical, including, but without limitation, terms covering the payment of the option price, and to make all other determinations and take all other actions deemed necessary or advisable for the proper administration of the Plan. All such actions and determinations of the Committee shall be conclusively binding for all purposes and upon all persons. 4. Common Stock Subject to Options. Unless amended in accordance with the provisions of Paragraph 11, and subject to adjustment under the provisions of Paragraph 7, the aggregate number of shares of the Company's Common Stock which may be issued upon the exercise of options granted under the Plan shall not exceed 750,000. The shares of Common Stock to be issued upon the exercise of options may be authorized but unissued shares, shares issued and reacquired by the Company or shares bought on the market for the purposes of the Plan. In the event any option shall, for any reason, terminate or expire or be surrendered without having been exercised in full, the shares subject to such option but not purchased thereunder shall again be available for options to be granted under the Plan. 5. Participants. Options may be granted under the Plan to any person who, in the opinion of the Committee, is a key employee of the Company or any Affiliate. 6. Terms and Conditions of Options. Any option granted under the Plan shall be evidenced by an Agreement executed by the Company and the Optionee and shall contain such terms and be in such form as the Committee may from time to time approve, subject to the following limitations and conditions: -2- 3 (a) Option Price. The option price per share with respect to each option shall be determined by the Committee but shall in no instance be less than 100% of the fair market value of a share of the Common Stock on the Date of Grant; provided that with respect to an option granted to an individual who, on the grant date, is the holder of stock representing more than 10% of the voting equity of the Company or any Affiliate (hereinafter a "10% Holder"), the option price for such option shall be no less than 110% of such fair market value. For the purposes hereof, fair market value shall be as determined by the Committee and such determination shall be binding upon the Company and upon the Optionee. The Committee may make such determination upon any factors which the Committee shall deem appropriate. (b) Period of Option. Except for earlier termination as provided in Subparagraphs (g) and (h) of this Paragraph 6, and in Subparagraph (b) of Paragraph 7, the expiration date of each option shall be fixed by the Committee, but, notwithstanding any provision of the Plan to the contrary, such expiration date shall not be more than ten years from the Date of Grant or, with respect to a 10% Holder, five years from the Date of Grant. (c) Vesting of Shareholder Rights. Neither an Optionee nor any Successor shall have any of the rights of a shareholder of the Company until the option with respect to the applicable shares shall have been duly exercised and the certificate evidencing such shares delivered to such Optionee or any Successor. (d) Exercise of Option. Each option shall be exercisable in such amounts and at such respective dates prior to the expiration of the option as provided in the Agreement. (e) Payment of Option Price. Upon exercise of an option, the Optionee or Successor shall pay the option price by delivering to the Company: (i) cash or a check payable to the Company in an amount equal to the option price; (ii) a stock certificate or certificates, duly endorsed for transfer to the Company, representing shares of Common Stock of the Company owned by the Optionee or Successor which have a fair market value on the date of exercise equal to the option price; or (iii) cash or a check payable to the Company and a stock certificate or certificates, duly endorsed for transfer to the Company, representing shares of Common Stock owned by the Optionee or Successor, which, when added -3- 4 to the amount of the cash or check, have a fair market value on the date of exercise equal to the option price. For the purposes hereof, fair market value shall be determined by the Committee and such determination shall be binding upon the Company and upon the Optionee or Successor. The Committee may make such determination in accordance with Paragraph 6(a) hereof by substituting "date of exercise" for "Date of Grant" each time the latter appears therein and upon any other factors which the Committee shall deem appropriate. (f) Non-Transferability of Option. No option shall be transferable or assignable by an Optionee, otherwise than by will or the laws of descent and distribution and each option shall be exercisable during the Optionee's lifetime only by the Optionee. No option shall be pledged or hypothecated in any way and no option shall be subject to execution, attachment or similar process. (g) Termination of Employment. Upon termination of an Optionee's employment with the Company and all Affiliates other than by reason of the death of the Optionee, the option privileges of such Optionee shall be limited to the shares which were immediately purchasable to him at the date of such termination and such option privilege shall expire unless exercised by him within sixty (60) days after the date of such termination. The granting of an option to any person shall not alter in any way the Company's right to terminate such person's employment at any time for any reason, nor shall it confer upon the Optionee any rights or privileges except as specifically provided for in the Plan. (h) Death of Optionee. If an Optionee dies while in the employ of the Company or any Affiliate, the option privileges of said Optionee shall be limited to the shares which were immediately purchasable by such Optionee at the date of death and such option privileges shall expire unless exercised by said Optionee's Successor within one (1) year after the date of death. 7. Adjustments. (a) In the event that the outstanding shares of Common Stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation, by reason of a recapitalization, reclassification, stock split-up, combination of shares, dividend or other distribution payable in capital stock, appropriate adjustment shall be made by the Board in the number, kind and exercise price of shares for the purchase of which options have theretofore been or may thereafter be granted under the Plan. -4- 5 (b) In the event that the Company shall determine to merge, consolidate or enter into any other reorganization with or into any other corporation, or in the event of any dissolution or liquidation of the Company, then in any such event, at the election of the Board, (i) appropriate adjustment shall be made by the Board in the number, kind and exercise price of shares for the purchase of which options have theretofore been and/or may thereafter be granted under the Plan, and if such event results in Maxwell Technologies, Inc. ceasing to own, directly or indirectly, more than 50% of the voting equity of the Company, each such adjusted option shall be fully vested and exercisable as to all shares thereunder regardless of an otherwise insufficient passage of time; or (ii) the Plan and any options theretofore granted under the Plan shall terminate as of the date of such merger, consolidation, reorganization, dissolution or liquidation, provided that written notice of such event shall have been given to each Optionee not less than 30 days prior to the date of such event. Upon any election by the Board pursuant to the provisions of clause (ii) of this Subparagraph (b), each Optionee shall have the right during the period commencing on the date the notice referred to in said clause (ii) is given and concluding on the date of such merger, consolidation, reorganization, dissolution or liquidation, as the case may be, to exercise such Optionee's outstanding and unexercised stock options, including shares as to which such options would not otherwise have been exercisable by reason of an insufficient lapse of time. (c) All adjustments and determinations under this Paragraph 7 shall be made by the Board, whose decisions as to what adjustments or determinations shall be made, and the extent thereof, shall be final, binding and conclusive. 8. Dollar Limitation on Incentive Stock Options. The aggregate fair market value (determined as of the Date of Grant) of the Common Stock with respect to which incentive stock options are exercisable for the first time by any individual during any calendar year (under the Plan and all other stock option plans of the Company or any Affiliate) shall not exceed $100,000. 9. Restrictions on Issuing Shares. The exercise of each option shall be subject to the condition that if at any time the Company shall determine in its discretion that (i) the satisfaction of withholding tax or other withholding liabilities, or (ii) the listing, registration or qualification of any shares otherwise deliverable upon such exercise upon any securities exchange or under any state or federal law, or (iii) the consent or approval of any regulatory body, or (iv) the perfection of any exemption from any such withholding, listing, registration, qualification, consent or approval is necessary or desirable as a condition of, or in connection with, such exercise or the issuance, delivery or purchase of shares thereunder, then in any such event, such exercise shall not be effective unless such withholding, listing registration, -5- 6 qualification, consent, approval or exemption shall have been effected, obtained or perfected free of any conditions not acceptable to the Company. 10. Use of Proceeds. The proceeds received by the Company from the sale of its Common Stock pursuant to the exercise of options granted under the Plan shall be added to the Company's general funds and used for general corporate purposes. 11. Amendment, Suspension and Termination of the Plan. The Board may at any time suspend or terminate the Plan or may amend it from time to time in such respects as the Board may deem advisable in order that the options granted thereunder may conform to any changes in the law or in any other respect which the Board may deem to be in the best interests of the Company; provided, however, that without approval by the shareholders of the Company representing a majority of the voting power, no such amendment shall (a) except pursuant to Paragraph 7, increase the maximum number of shares for which options may be granted under the Plan, (b) change the provisions of Subparagraph (a) of Paragraph 6 relating to the establishment of the option price, (c) change the provisions of Subparagraph (b) of Paragraph 6 relating to the expiration date of each option or (d) change the provisions of the second sentence of this Paragraph 11 relating to the term of this Plan. Unless the Plan shall theretofore have been terminated by the Board or as provided in Paragraph 12, the Plan shall terminate ten (10) years after the effective date of the Plan. No option may be granted during any suspension or after the termination of the Plan. Except as otherwise provided in the Plan, no amendment, suspension or termination of the Plan shall, without an Optionee's consent, alter or impair any of the right or obligations under any option theretofore granted to such Optionee under the Plan. 12. Effective Date of the Plan and Shareholder Approval. The effective date of the Plan shall be the date of its approval by the Board; provided, however, that in the event that shareholder approval of the Plan is not secured on or before the date which is twelve (12) months from the date of approval by the Board, the Plan shall thereupon terminate. Any options granted prior to the aforesaid shareholder approval being secured shall be subject to such approval being secured. I-BUS, INC. By: /s/ Donald M. Roberts ---------------------------- Donald M. Roberts, Secretary Date: 11/1/96 --------------------------- -6- EX-10.37 18 EXHIBIT 10.37 1 EXHIBIT 10.37 MAXWELL INFORMATION SYSTEMS, INC. 1996 STOCK OPTION PLAN 1. Purpose. The 1996 Stock Option Plan (the "Plan") is intended to advance the interests of Maxwell Information Systems, Inc. (the "Company"), and its shareholders by encouraging and enabling selected "key employees" (as defined below) to acquire and retain a proprietary interest in the Company by ownership of its stock. For purposes of this Plan, the term "key employee" shall include employees of the Company, its parent corporation, Maxwell Technologies, Inc., and any majority-owned subsidiaries of Maxwell Technologies, Inc., upon whose judgment, initiative and effort the Company is dependent for success in the conduct of its business. Selected employees of the Company's parent corporation and subsidiaries of the parent corporation are included within the definition of "key employee" in recognition that the Company's success depends in part on the success of the combined corporate enterprise which includes the Company. It is intended that the Plan provide the flexibility for the issuance of options which qualify as incentive stock options ("incentive stock options") within the meaning of Section 422 of the Internal Revenue Code of 1986 (the "Code") and options which do not so qualify ("non-qualified stock options"). 2. Definitions. (a) "Affiliate" means Maxwell Technologies, Inc. and each corporation in which such entity owns, directly or indirectly, more than 50% of the voting equity interests. (b) "Agreement" means the agreement between the Company and the Optionee under which an option is granted, and setting forth the terms and conditions of the option and the Optionee's rights thereunder. (c) "Board" means the Board of Directors of the Company. (d) "Committee" means the Stock Option Committee (the members of which shall be appointed by the Board from among the directors of the Company) of the Board. If no such committee has been appointed by the Board, then the term "Committee" shall refer to the entire Board. (e) "Common Stock" means the Company's common stock. (f) "Date of Grant" means the date on which an option under the Plan is approved by the Committee. -1- 2 (g) "Option" means an option granted under the Plan. (h)"Optionee" means a person to whom an option, which has not expired, has been granted under the Plan. (i) "Successor" means the legal representative of the estate of the deceased Optionee or the person or persons who acquire the right to exercise an option by bequest or inheritance or by reason of the death of any Optionee. 3. Administration of the Plan. The Plan shall be administered by the Committee which shall report all action taken by it to the Board. The Committee shall have full and final authority in its discretion, subject to the provisions of the Plan, to determine the number of shares and purchase price of Common Stock covered by each option, the individuals to whom and the time or times at which options shall be granted and the nature of each option granted under the Plan, i.e., whether the option will be an incentive stock option or a non-qualified stock option; to construe and interpret the Plan; to determine the terms and provisions of the respective Agreements, which need not be identical, including, but without limitation, terms covering the payment of the option price, and to make all other determinations and take all other actions deemed necessary or advisable for the proper administration of the Plan. All such actions and determinations of the Committee shall be conclusively binding for all purposes and upon all persons. 4. Common Stock Subject to Options. Unless amended in accordance with the provisions of Paragraph 11, and subject to adjustment under the provisions of Paragraph 7, the aggregate number of shares of the Company's Common Stock which may be issued upon the exercise of options granted under the Plan shall not exceed 750,000. The shares of Common Stock to be issued upon the exercise of options may be authorized but unissued shares, shares issued and reacquired by the Company or shares bought on the market for the purposes of the Plan. In the event any option shall, for any reason, terminate or expire or be surrendered without having been exercised in full, the shares subject to such option but not purchased thereunder shall again be available for options to be granted under the Plan. 5. Participants. Options may be granted under the Plan to any person who, in the opinion of the Committee, is a key employee of the Company or any Affiliate. 6. Terms and Conditions of Options. Any option granted under the Plan shall be evidenced by an Agreement executed by the Company and the Optionee and shall contain such terms and be in such form as the Committee may from time to time approve, subject to the following limitations and conditions: -2- 3 (a) Option Price. The option price per share with respect to each option shall be determined by the Committee but shall in no instance be less than 100% of the fair market value of a share of the Common Stock on the Date of Grant; provided that with respect to an option granted to an individual who, on the grant date, is the holder of stock representing more than 10% of the voting equity of the Company or any Affiliate (hereinafter a "10% Holder"), the option price for such option shall be no less than 110% of such fair market value. For the purposes hereof, fair market value shall be as determined by the Committee and such determination shall be binding upon the Company and upon the Optionee. The Committee may make such determination upon any factors which the Committee shall deem appropriate. (b) Period of Option. Except for earlier termination as provided in Subparagraphs (g) and (h) of this Paragraph 6, and in Subparagraph (b) of Paragraph 7, the expiration date of each option shall be fixed by the Committee, but, notwithstanding any provision of the Plan to the contrary, such expiration date shall not be more than ten years from the Date of Grant or, with respect to a 10% Holder, five years from the Date of Grant. (c) Vesting of Shareholder Rights. Neither an Optionee nor any Successor shall have any of the rights of a shareholder of the Company until the option with respect to the applicable shares shall have been duly exercised and the certificate evidencing such shares delivered to such Optionee or any Successor. (d) Exercise of Option. Each option shall be exercisable in such amounts and at such respective dates prior to the expiration of the option as provided in the Agreement. (e) Payment of Option Price. Upon exercise of an option, the Optionee or Successor shall pay the option price by delivering to the Company: (i) cash or a check payable to the Company in an amount equal to the option price; (ii) a stock certificate or certificates, duly endorsed for transfer to the Company, representing shares of Common Stock of the Company owned by the Optionee or Successor which have a fair market value on the date of exercise equal to the option price; or (iii) cash or a check payable to the Company and a stock certificate or certificates, duly endorsed for transfer to the Company, representing shares of Common Stock owned by the Optionee or Successor, which, when added -3- 4 to the amount of the cash or check, have a fair market value on the date of exercise equal to the option price. For the purposes hereof, fair market value shall be determined by the Committee and such determination shall be binding upon the Company and upon the Optionee or Successor. The Committee may make such determination in accordance with Paragraph 6(a) hereof by substituting "date of exercise" for "Date of Grant" each time the latter appears therein and upon any other factors which the Committee shall deem appropriate. (e) Non-Transferability of Option. No option shall be transferable or assignable by an Optionee, otherwise than by will or the laws of descent and distribution and each option shall be exercisable during the Optionee's lifetime only by the Optionee. No option shall be pledged or hypothecated in any way and no option shall be subject to execution, attachment or similar process. (g) Termination of Employment. Upon termination of an Optionee's employment with the Company and all Affiliates other than by reason of the death of the Optionee, the option privileges of such Optionee shall be limited to the shares which were immediately purchasable to him at the date of such termination and such option privilege shall expire unless exercised by him within sixty (60) days after the date of such termination. The granting of an option to any person shall not alter in any way the Company's right to terminate such person's employment at any time for any reason, nor shall it confer upon the Optionee any rights or privileges except as specifically provided for in the Plan. (h) Death of Optionee. If an Optionee dies while in the employ of the Company or any Affiliate, the option privileges of said Optionee shall be limited to the shares which were immediately purchasable by such Optionee at the date of death and such option privileges shall expire unless exercised by said Optionee's Successor within one (1) year after the date of death. 7. Adjustments. (a) In the event that the outstanding shares of Common Stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation, by reason of a recapitalization, reclassification, stock split-up, combination of shares, dividend or other distribution payable in capital stock, appropriate adjustment shall be made by the Board in the number, kind and exercise price of shares for the purchase of which options have theretofore been or may thereafter be granted under the Plan. -4- 5 (b) In the event that the Company shall determine to merge, consolidate or enter into any other reorganization with or into any other corporation, or in the event of any dissolution or liquidation of the Company, then in any such event, at the election of the Board, (i) appropriate adjustment shall be made by the Board in the number, kind and exercise price of shares for the purchase of which options have theretofore been and/or may thereafter be granted under the Plan, and if such event results in Maxwell Technologies, Inc. ceasing to own, directly or indirectly, more than 50% of the voting equity of the Company, each such adjusted option shall be fully vested and exercisable as to all shares thereunder regardless of an otherwise insufficient passage of time; or (ii) the Plan and any options theretofore granted under the Plan shall terminate as of the date of such merger, consolidation, reorganization, dissolution or liquidation, provided that written notice of such event shall have been given to each Optionee not less than 30 days prior to the date of such event. Upon any election by the Board pursuant to the provisions of clause (ii) of this Subparagraph (b), each Optionee shall have the right during the period commencing on the date the notice referred to in said clause (ii) is given and concluding on the date of such merger, consolidation, reorganization, dissolution or liquidation, as the case may be, to exercise such Optionee's outstanding and unexercised stock options, including shares as to which such options would not otherwise have been exercisable by reason of an insufficient lapse of time. (c) All adjustments and determinations under this Paragraph 7 shall be made by the Board, whose decisions as to what adjustments or determinations shall be made, and the extent thereof, shall be final, binding and conclusive. 8. Dollar Limitation on Incentive Stock Options. The aggregate fair market value (determined as of the Date of Grant) of the Common Stock with respect to which incentive stock options are exercisable for the first time by any individual during any calendar year (under the Plan and all other stock option plans of the Company or any Affiliate) shall not exceed $100,000. 9. Restrictions on Issuing Shares. The exercise of each option shall be subject to the condition that if at any time the Company shall determine in its discretion that (i) the satisfaction of withholding tax or other withholding liabilities, or (ii) the listing, registration or qualification of any shares otherwise deliverable upon such exercise upon any securities exchange or under any state or federal law, or (iii) the consent or approval of any regulatory body, or (iv) the perfection of any exemption from any such withholding, listing, registration, qualification, consent or approval is necessary or desirable as a condition of, or in connection with, such exercise or the issuance, delivery or purchase of shares thereunder, then in any such event, such exercise shall not be effective unless such withholding, listing registration, -5- 6 qualification, consent, approval or exemption shall have been effected, obtained or perfected free of any conditions not acceptable to the Company. 10. Use of Proceeds. The proceeds received by the Company from the sale of its Common Stock pursuant to the exercise of options granted under the Plan shall be added to the Company's general funds and used for general corporate purposes. 11. Amendment, Suspension and Termination of the Plan. The Board may at any time suspend or terminate the Plan or may amend it from time to time in such respects as the Board may deem advisable in order that the options granted thereunder may conform to any changes in the law or in any other respect which the Board may deem to be in the best interests of the Company; provided, however, that without approval by the shareholders of the Company representing a majority of the voting power, no such amendment shall (a) except pursuant to Paragraph 7, increase the maximum number of shares for which options may be granted under the Plan, (b) change the provisions of Subparagraph (a) of Paragraph 6 relating to the establishment of the option price, (c) change the provisions of Subparagraph (b) of Paragraph 6 relating to the expiration date of each option or (d) change the provisions of the second sentence of this Paragraph 11 relating to the term of this Plan. Unless the Plan shall theretofore have been terminated by the Board or as provided in Paragraph 12, the Plan shall terminate ten (10) years after the effective date of the Plan. No option may be granted during any suspension or after the termination of the Plan. Except as otherwise provided in the Plan, no amendment, suspension or termination of the Plan shall, without an Optionee's consent, alter or impair any of the right or obligations under any option theretofore granted to such Optionee under the Plan. 12. Effective Date of the Plan and Shareholder Approval. The effective date of the Plan shall be the date of its approval by the Board; provided, however, that in the event that shareholder approval of the Plan is not secured on or before the date which is twelve (12) months from the date of approval by the Board, the Plan shall thereupon terminate. Any options granted prior to the aforesaid shareholder approval being secured shall be subject to such approval being secured. Maxwell Information Systems, Inc. By: /s/ Donald M. Roberts ---------------------------- Donald M. Roberts, Secretary Date: 11/1/96 --------------------------- -6- EX-10.38 19 EXHIBIT 10.38 1 EXHIBIT 10.38 AMENDMENT NUMBER ONE TO THE MAXWELL LABORATORIES, INC. 1994 EMPLOYEE STOCK PURCHASE PLAN The Maxwell Laboratories, Inc. 1994 Employee Stock Purchase Plan (the "Plan"), is hereby amended in the following respects: 1. Elimination of Six (6) Month Eligibility Period. Section 4(a), under Eligibility, is hereby deleted in its entirety; and Section 6, Participation in the Plan, is hereby amended to delete "after satisfying the eligibility requirements" in the first sentence thereof and is hereby amended to delete "after becoming eligible to participate in such Offering Period under the Plan" in the second sentence thereof. 2. Name of Plan. The name of the Plan is hereby changed to Maxwell Technologies, Inc. 1994 Employee Stock Purchase Plan. 3. Effective Date. This Amendment Number One to the Plan shall be effective as of April 30, 1997. 4. Ratification and Re-Affirmation. Except as specifically amended hereby, the Plan, as heretofore amended to date shall remain in full force and effect in accordance with its terms. MAXWELL TECHNOLOGIES, INC. By: /s/ Donald M. Roberts ---------------------------- Donald M. Roberts, Secretary EX-21.1 20 EXHIBIT 21.1 1 EXHIBIT 21.1 SUBSIDIARIES ENTITY STATE OF INCORPORATION Maxwell Technologies, Inc. Delaware PurePulse Technologies, Inc. Delaware Maxwell Business Systems, Inc. California Maxwell IJIS, Inc. California Maxwell Federal Division, Inc. California Maxwell Information Systems, Inc. California Maxwell Energy Products, Inc. California I-BUS, Inc. California EX-23.1 21 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 (Forms S-8) of Maxwell Technologies, Inc. of our report dated September 12, 1997, 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, 1997. ERNST & YOUNG LLP San Diego, California September 29, 1997 EX-27 22 FINANCIAL DATA SCHEDULE
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 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH S-3. YEAR JUL-31-1997 AUG-01-1996 JUL-31-1997 826,000 0 9,391,000 350,000 8,722,000 29,524,000 49,042,000 32,113,000 47,120,000 18,616,000 0 0 0 614,000 26,796,000 47,120,000 101,411,000 101,411,000 70,107,000 70,107,000 27,203,000 184,000 173,000 4,078,000 0 4,078,000 0 0 0 4,024,000 0.60 0.60
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