-----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, R60dikbLw1P/Rukpr9KOPOycnJc/gQY6+7Rqz8+HB3X4m07CxBJbA5JeVegzzVbE fkN79umFnHyO6+0ijbH/9A== 0000912057-96-024030.txt : 19961030 0000912057-96-024030.hdr.sgml : 19961030 ACCESSION NUMBER: 0000912057-96-024030 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19960731 FILED AS OF DATE: 19961029 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: 1934 Act SEC FILE NUMBER: 000-10964 FILM NUMBER: 96649661 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 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission file number July 31, 1996 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.) 8888 Balboa Avenue San Diego, California 92123 ------------------------------ ---------------- (Address of Principal (Zip Code) Executive Offices) Registrant's telephone number, including area code: (619) 279-5100 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange --------------------- Title of each class on which registered ------------------- ------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.10 par value 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 (Section 229.405 of this chapter) 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 ----- State the aggregate market value of the voting stock held by non- affiliates of the Registrant: $44,421,238 at August 31, 1996 The Registrant has one outstanding class of Common Stock. 2,876,858 shares were outstanding at August 31, 1996. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for the 1996 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A (including the Appendix thereto) are incorporated by reference in Part II and III of this Report. PART I ITEM 1. BUSINESS The Registrant develops, manufactures and markets products and services involving power conversion systems and components, information technologies and purification systems. These advanced technology solutions, many of which were derived from the Registrant's scientific, research and development programs for the federal government, are used in diverse commercial and government markets. A leader in pulsed power technology -- the delivery of brief, high- voltage bursts of electrical energy at high peak power or high average power when repetitive pulses are generated -- the Registrant designs, develops and manufactures power conversion systems and components designed to meet a variety of customer and market requirements for pulsed power. These systems and components range from individual energy storage capacitors to major integrated pulsed power systems. They are used, or being developed for use, in a variety of applications including medical equipment and devices; purification equipment for the reduction of microbial contamination of food, packaging, medical products, air and water; power systems for automotive, utility and communications markets; nuclear effects simulation and conventional defense programs; and commercial and governmental research and development projects. The Registrant has a strong foundation in advanced computer programming and mathematical techniques used in understanding and analyzing complex physical phenomena. This foundation has led to a focus on business initiatives involving sophisticated but user-friendly software and integrated network solutions to the information and data processing needs of state and local agencies, as well as traditional analytical services for the federal government. The Registrant also designs and sells customized PC-based computer systems for integration by original equipment manufacturers into equipment for real-time commercial and industrial applications. The Registrant's business is conducted in four industry segments: (i) Power Conversion Products, in which the Registrant designs, develops and manufactures component parts and subsystems that condition and/or exploit electrical energy, primarily for commercial markets; (ii) Commercial and Industrial PC Products, in which the Registrant designs, develops and manufactures customized PC computers and components for original equipment manufacturers; (iii) Technology Programs and Systems, in which the Registrant performs scientific research, develops and deploys major systems and operates and maintains research and test facilities primarily for the federal government; and (iv) Information Products and Services, in which the Registrant provides sophisticated software and internet products and services and integration and networking services and applications to the commercial and state and local government marketplace. The following table sets forth, for the periods indicated, the Registrant's approximate revenues attributable to its industry segments: Year Ended July 31 ------------------------------ 1996 1995 1994 (In thousands) Power Conversion Products $16,448 $15,207 $16,285 Commercial and Industrial PC Products 26,131 23,319 18,967 Technology Programs and Systems 30,198 31,064 46,625 Information Products and Services 8,134 5,414 3,586 ------- ------- ------- Total $80,911 $75,004 $85,463 ------- ------- ------- ------- ------- ------- -2- Additional financial information relating to these segments is contained in Note 11 of Notes to the Consolidated Financial Statements contained in the Appendix to the Registrant's Proxy Statement for its 1996 Annual Meeting of Shareholders (the "Proxy Statement Appendix"). The Registrant was originally incorporated in California in 1965 and reincorporated in the State of Delaware in 1986. Its principal place of business and executive offices are located in San Diego, California. Shortly after the end of fiscal 1996 the Registrant changed its corporate name from Maxwell Laboratories, Inc. to Maxwell Technologies, Inc., in order to reflect the greater emphasis in Registrant's business on the manufacture, sale and distribution into global markets of commercial products and services with a high technology content. INTRODUCTORY NOTE ON FORWARD-LOOKING STATEMENTS The Registrant's business is a mix of mature products and services and a variety of new products and services, including some which are in development and untested in the commercial marketplace. Many of these new and emerging business areas represent technology advancements over existing competing products and services and are therefore subject to additional risks beyond the standard business risks associated with new product or service offerings relating to technology challenges, patent and other proprietary issues and market acceptance. The Registrant believes that it is important to shareholders and investors to occasionally comment on expected or projected developments or milestones in the commercialization process of such new business areas as well as on progress expected or anticipated in more mature business areas. These statements are considered "forward-looking" and should be read with caution, as explained below. The discussion in this report and other public disclosures of the Registrant's business will use words such as "estimates," "expects" or "projects" or phrases which involve anticipation or expectation of future events or results and similar expressions which are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including those discussed under the caption "Risk Factors and Other Cautionary Information" below, that could cause actual results to differ materially from those projected or expected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date when made. POWER CONVERSION PRODUCTS The Registrant develops, manufactures and sells compact, high performance power conversion subsystems and components to industrial and government customers in a wide range of markets. These activities are carried out in the Energy Products and PurePulse Technologies subsidiaries. PURIFICATION PRODUCTS. The Registrant has been developing new methods and equipment that could significantly alter techniques for reducing microbial contamination. Following seven years of proprietary research and development funded by the Registrant and companies in the food industry, the Registrant formed its majority-owned subsidiary in November, 1988, then named Foodco Corporation and in 1995 renamed PurePulse Technologies, Inc., ("PurePulse") to actively pursue commercial markets for this technology. While food industry applications remain an important focus, substantial markets are emerging for medical and pharmaceutical sterilization as well as for purification of air and water. One of the world's leading suppliers of food processing and packaging equipment companies, Tetra Laval Group ("Tetra Laval"), holds a minority interest in PurePulse, and on August 1, 1996, the Registrant repurchased a minority interest held by Kraft General Foods. During fiscal 1996, testing at pilot-line facilities as well as extensive laboratory testing continued to validate the effectiveness of PUREBRIGHT(R) (pulsed light) technology being commercialized by PurePulse for food packaging applications. PUREBRIGHT systems were also delivered for -3- medical/pharmaceutical pilot tests in fiscal 1996 to acquire data for regulatory approval of PUREBRIGHT for such sterilization applications. During fiscal 1996, a significant portion of PurePulse's activities were performed under an agreement with Tetra Laval, involving the development of commercial PUREBRIGHT equipment for certain packaging applications which Tetra Laval will have the exclusive right to commercialize, subject to further agreement on appropriate royalties and other provisions. During fiscal 1995, PurePulse began a concentrated program to demonstrate the capability to meet stringent lamp life requirements involved in a major application of interest to Tetra Laval and funding is being provided by Tetra Laval for several programs including the lamp life development effort. During fiscal 1996, significant progress was made toward demonstration of the required lamp life for the Tetra Laval application, although there remain additional testing and cost issues. PurePulse is under contract with a large international restaurant chain to develop a compact PUREBRIGHT unit for killing microorganisms in water, which would be designed for use in restaurants world-wide. Final design and specification work is underway, and field tests of water treatment units are scheduled for the first half of calendar 1997. During fiscal 1996, PurePulse began development work with Automatic Liquid Packaging (ALP) for PUREBRIGHT systems integrated into ALP blow-fill-seal plastic packaging equipment. ALP is a major supplier of blow-fill-seal packaging systems to the pharmaceutical industry. The first PUREBRIGHT system for this application was ordered by ALP in fiscal 1996 for delivery in early fiscal 1997 and will be used to acquire data for approval of the U. S. Food and Drug Administration ("FDA") and for contract packaging of pharmaceutical products. Early in fiscal 1997, PurePulse was notified that the FDA had approved the use of its PUREBRIGHT process for reducing microorganism levels on foods. Applications include extending the shelf life of fresh foods and reducing pathogenic microorganism levels to increase food safety. Marketing and pilot testing for such applications was started in fiscal 1996 and is expected to continue in fiscal 1997. PurePulse is also developing technology for cool preservation of liquid foods and beverages under the trade name COOLPURE/TM/. involving the application of pulsed electric fields. Testing and development of the COOLPURE technology is being undertaken by PurePulse under contracts with the U.S. Army Natick Food Laboratory and in conjunction with a large European food company. PurePulse received notification from the FDA in July 1995 that the use of COOLPURE technology for food treatment does not require a food additive petition and FDA approval will not be required for such use. POWER CONVERSION COMPONENTS. The Registrant develops, manufactures and sells compact capacitors which are used to store and deliver electrical energy in single or repetitive pulses, generally at high voltage. The Registrant's capacitors are used for commercial, medical and military applications requiring high levels of reliability and performance. The majority of these capacitors are manufactured using modifications and variations of the Registrant's standard designs to fit specific customer needs. The Registrant continues to be a major supplier of capacitors for use in portable heart defibrillators - medical devices used to restore the normal rhythm of an erratically-beating heart. During fiscal 1996 the Registrant continued to expand its production and sale of a new line of patented feedthrough filter capacitors originally introduced to the marketplace in fiscal 1995. These devices are produced by the Registrant's Sierra Capacitor/Filter operation and are used in filtering out electromagnetic interference in implantable pacemakers and defibrillators. The Registrant also develops, manufactures and sells a line of compact capacitor charging power supplies for both commercial and military markets. The power supply line was primarily developed by the Registrant under funding from the NASA Center for the Commercial Development of Space Power Systems at Auburn University. The product line, introduced in fiscal 1991, is manufactured under license from Auburn University. The compact power supplies charge capacitors used in high -4- voltage pulsed power systems for applications in industrial, medical and scientific lasers, accelerators and research and development devices. Power supplies for other industrial and commercial applications requiring highly regulated current and voltage were added to this product line in fiscal 1993 to broaden the market potential. Efforts at the Auburn NASA Center in fiscal 1996 focused on development of a power supply module for use in industrial PC applications. ULTRACAPACITOR PRODUCT DEVELOPMENT. Under various agreements with automotive manufacturers, clean power delivery companies, telecommunications companies and U.S. government laboratories and agencies, the Registrant continued development during fiscal 1996 of its innovative ultracapacitor product, a high energy density capacitor with applications to low voltage markets. A significant portion of the underlying technology for these applications is the subject of pending patent applications of the Registrant. Currently, the development is focused on requirements for three large commercial markets where the ultracapacitor could have a significant impact: automotive, including electric and hybrid electric vehicles; utility applications requiring uninterruptible power sources; and telecommunication applications. Shortly after the end of fiscal 1996, an international automobile manufacturer entered into an agreement to conduct a detailed evaluation of the Registrant's ultracapacitor for possible use in electric and hybrid electric vehicles, with an expressed intent to entertain a follow-on development agreement if the evaluation yields favorable results. COMMERCIAL AND INDUSTRIAL PC PRODUCTS Through its I-Bus subsidiary, the Registrant is engaged in the design, development and manufacture of customized PC computers, and components such as enclosures, CPUs and passive backplanes, for real-time commercial and industrial applications. These products are sold primarily through strategic partnerships with Original Equipment Manufacturers (OEMs) in which I-Bus typically performs custom design and engineering services to meet the OEM's particular requirements and then manufactures and sells the computers to the OEM for integration into the final product. I-Bus' products are used as data processing and control elements, and incorporate advanced computer technology into complex products and systems. I-Bus sells to OEMs in a variety of markets including voice processing, light industrial, telecommunications, networking, medical imaging and instrumentation. In recent fiscal years, and again in fiscal 1996, sales of these products have constituted a substantial portion of the Registrant's total business. I-Bus' industry is highly competitive, with price, delivery, reliability and service being of significant importance to customers. The I-Bus products are in a growing market and are subject to price erosion. Moreover, I-Bus' business is characterized by continuous technological change, which can lead to product obsolescence. TECHNOLOGY PROGRAMS AND SERVICES The Registrant is engaged in a variety of programs and services primarily for the federal government but also for universities, national laboratories and industrial and defense companies. These efforts involve research related to nuclear and advanced conventional weapons and their effects, on-site technical support for advanced research at a national laboratory, and development of improved pulsed power components for above-ground simulation devices and conventional weapons development. Computer-based modeling is performed for electromagnetic effects due to both naturally occurring and nuclear weapon environments. Research and development is also conducted in the area of space environment effects, with applications to the space station, electric propulsion, mission planning and satellite design. NUCLEAR AND ADVANCED CONVENTIONAL WEAPONS EFFECTS RESEARCH. A substantial portion of this work is performed under contracts with agencies of the Department of Defense ("DOD"), primarily the Defense Special Weapons Agency ("DSWA"), formerly Defense Nuclear Agency. During the last several years, the Registrant has experienced significant reductions in this business area as DSWA has -5- responded to reduced global threats and shrinking defense budgets. Recently, activities in this area have emphasized vulnerability and lethality analysis and experimental verification by above-ground simulation testing. The Registrant is involved in many aspects of weapons effects testing and research, including test design and analysis of weapons effects, as well as designing, building and operating above-ground simulation test facilities. Three of the four radiation simulators in San Diego which were designed, built, and operated by the Registrant and owned by the United States Government ceased operation on October 1, 1995, and the Registrant is providing services to DSWA to assist in the closure of these facilities. The Registrant will continue to provide testing and analysis on the fourth simulation facility and with its gamma ray source after the closure of the other three simulation devices. The Registrant's radiation effects engineering group provides a complete range of services for the hardening of electronics. Hardening is the process by which a component or system is built or modified to withstand hazardous effects of a hostile environment. These hardening services encompass concept definition, development, production assistance, test and field development. The Registrant participates in large non-nuclear simulation tests performed by the DOD. The Registrant provides test design services, develops new instrumentation and participates in performing measurements on such tests. The Registrant also develops new technology and hardware for more powerful, and compact, next-generation X-ray simulators. CONVENTIONAL DEFENSE TECHNOLOGY. The potential use of compact pulsed- power systems to deliver billions of watts of electrical power to a gun barrel offers an alternate approach to extending the range of artillery and naval bombardment guns, and for air defense and defense against tactical ballistic missiles. The Registrant operates an experimental gun facility for DSWA for several mission-oriented programs including projectile development, extended range shore bombardment and anti-armor. The Registrant continued support work in fiscal 1996 on an electrothermal cartridge program which combines electrical energy with chemical energy (chemically inert propellants) to create major improvements in projectile velocities, range and lethality. ON-SITE TECHNICAL SUPPORT. The Registrant provides a wide range of technical, operations and maintenance support to the U.S. Air Force Phillips Laboratory through a staff co-located at the laboratory. These services include primary responsibility for the design, construction, operation and maintenance of large capacitor banks used principally for the study and evaluation of advanced weapons concepts and high energy density plasma physics experiments. The Registrant has supported the Phillips Laboratory in space and advanced weapons technologies, advanced pulsed power development, high power microwave source development and system integration of advanced concept demonstration experiments. OTHER SERVICES AND SYSTEMS. In fiscal 1996, the Registrant demonstrated the ability to fracture rock in a hard rock mine using technology developed out of the electrothermal cartridge program. This technique, called Electroblast, involves the rapid expansion of a non-toxic material initiated by a pulsed electric discharge and represents a possible alternative to dynamite. Further evaluation tests involving tunneling applications are being undertaken. The Registrant also provides environmental consulting services primarily for large engineering firms involved in the remediation of military sites. During fiscal 1996, the Registrant sold its chemical analytical laboratory which was involved in the analysis of environmental samples for hazardous substances. INFORMATION PRODUCTS AND SERVICES The Registrant's Information Systems subsidiary provides software- related products and services in the areas of integrated justice information systems, internet access and content, management information and educational software products and network services. In fiscal 1996, the Registrant -6- continued work on a $1.7 million project involving networking services for a state-wide child support enforcement system in South Carolina. During fiscal 1996, work continued on a two-year $5.2 million program to provide an integrated criminal justice information system for Sarasota County, Florida, which will integrate the information and data processing requirements of all the County's criminal justice agencies and the criminal courts into one networked system. This integrated system will be among the first of its kind in the country. In fiscal 1996, the Registrant was selected by the Florida Association of Court Clerks to implement a $3.2 million networked offender-based tracking and case management system in 37 counties in Florida, which is scheduled for completion in the current fiscal year. In each of the projects in Florida, the Registrant is teamed with NCR to provide computer hardware and other support and with local software vendors. The Registrant's business systems group is marketing accounting and management information software programs with sophisticated job cost accounting capabilities of interest to large contractors. Development continued in fiscal 1996 on a new, open platform, client-server based version of the software which will be introduced to the market in the current fiscal year. During fiscal 1996 the Registrant delivered a physics product and continued development of a mathematics product under a software development and license agreement with Glencoe/McGraw-Hill. The Registrant is developing multimedia software products on CD ROM to supplement textbooks in high school physics and algebra classes. Glencoe, a market leader in supplying textbooks to high schools, provides development funding to the Registrant and will market the software to the secondary education marketplace. In addition, during fiscal 1996, the Registrant's internet group developed traffic and other information accessible on the internet during the Atlanta Olympic Games and the Republican National Convention, and in early fiscal 1997 signed an agreement with Yahoo! for a co-branded traffic information page for Los Angeles, Orange County, San Diego and San Francisco accessible through the Yahoo! search directory. INTERNALLY-FUNDED, COMPANY-SPONSORED RESEARCH AND DEVELOPMENT The Registrant conducts internally-funded, company-sponsored research and development to refine and expand its products and services. In addition, internally-funded, company-sponsored engineering, research and development work is performed to prepare proposals both for research and development contracts and contracts to manufacture and deliver products. In fiscal 1996, 1995, and 1994, the Registrant expended approximately $5,081,000, $5,038,000, and $4,794,000 respectively, on internally-funded, company-sponsored research and development. BACKLOG As of July 31, 1996, 1995 and 1994, the Registrant's funded backlog amounted to approximately $38 million, $38 million, and $32 million, respectively. The funded backlog consists of the unexpended funding under cost reimbursement contracts 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 Registrant expects to complete or deliver substantially all of its currently funded backlog within twenty-four months. At July 31, 1996, the unfunded portion of contracts awarded was an additional $28 million, compared to $33 million at July 31, 1995 and $53 million at July 31, 1994. CUSTOMERS A substantial portion of the Registrant's sales (approximately 40% in fiscal 1996 and 43% in fiscal 1995) is derived from contracts with the United States government, principally agencies of the DOD, and subcontracts with government suppliers. The DSWA is the Registrant's largest single customer, accounting for 11% and 14% of the Registrant's total sales and 30% and 33% of sales of -7- Technology Programs and Services in fiscal 1996 and 1995, respectively. No other customer accounted for as much as 10% of the Registrant's total sales during such periods. GOVERNMENT BUSINESS The reductions in defense budgets over the past three years have affected the Registrant's activities in its Technology Programs and Services segment, particularly in the area of system survivability products and services. In particular, reductions in research and development funding by the government agencies with which the Registrant does business have had a material adverse effect over the past few years upon the Registrant's operations in such segment. For example, as described above, operations at major simulation facilities run by the Registrant for DSWA have been terminated and closure activities have begun. As a result of overall defense cutbacks, the Registrant has experienced increased competition in bidding for ongoing programs from contractors seeking to replace their lost business. Such defense cutbacks and increased competition have resulted in relatively high costs of doing business in many of the Registrant's defense areas and in price pressure on awarded programs. The Registrant's funded government contracts are typically performable over a one-year period. While no assurance can be given that the Registrant will receive further funding under these contracts or be awarded any additional contracts, the Registrant historically has received continuous funding from the DSWA under a series of contracts since 1968; however, there has been a continued decrease in funding for such programs over the past few years. Government agencies may terminate their contracts, in whole or in part, at their convenience. In such event, the government agency is obligated generally to pay the costs incurred by the Registrant thereunder plus a fee based upon work completed. The Registrant has been adversely impacted by curtailment in several of these programs, and further substantial curtailment of these government programs would have a material adverse effect upon the Registrant's sales and profitability. Contract costs for services or products supplied to government agencies, including allocated indirect costs, are subject to audit and adjustment. Contract costs have been agreed upon through fiscal 1992. Contract revenues for periods subsequent to fiscal 1992 have been recorded in amounts which are expected to be realized upon final settlement. NATURE OF CONTRACTS Contracts entered into by the Registrant are fixed price contracts or cost reimbursement contracts. Under a fixed price contract, the customer agrees to pay a specific price for the Registrant's performance. Under a cost reimbursement contract, the customer (a government agency or government prime contractor in substantially all cases) agrees to pay an amount which is equal to the Registrant's allowable costs in performing the contract, plus a fixed or incentive fee. Certain costs of doing business, such as interest and advertising expenses, are not allowable under cost reimbursement contracts. Greater risks are involved under a fixed price contract than under a cost reimbursement contract because in a fixed price contract the Registrant 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 will reduce or eliminate the contemplated profit and can result in a loss. On the other hand, higher profit margins are generally permitted by the government in establishing prices for fixed price contracts because of such risks. During both fiscal 1996 and 1995, approximately 65% of the Registrant's sales were derived from fixed price contracts and standard purchase orders and the balance of the Registrant's sales were derived from cost reimbursement contracts. Substantially all of the Registrant's sales in the Commercial and Industrial PC Computers and the Information Products and Services industry segments area are under fixed price contracts and standard purchase orders. In the Technology Programs and -8- Services and Power Conversion Products industry segments approximately 60% and 57% of sales were derived from cost reimbursement contracts in fiscal 1996 and 1995, respectively, and the balance of sales in those segments in such years were under fixed price contracts. MATERIALS The Registrant generally purchases components and materials, such as electronics components, dielectric materials, and enclosures of metal and plastic, from a number of suppliers. The Registrant's I-Bus subsidiary, however, does rely on single qualified suppliers for some of its critical components, primarily CPU boards and power supplies. I-Bus has experienced interruptions in shipments from such suppliers that have had material short-term impacts on its operations. The Registrant is working with its OEM customers to expand the number of qualified suppliers for these components. In addition, in its Power Conversion Products business, the Registrant has traditionally used one supplier each for capacitor grade paper and polyester film and has considered the availability of these materials to be adequate. During the past two years, however, the Registrant has experienced problems with both of these critical suppliers and the suppliers were unable to adequately meet Registrant's requirements. The Registrant has taken steps to minimize the future likelihood and impact of such occurrences by evaluating alternate sources and has pursued and qualified additional sources for these materials. SALES AND MARKETING The Registrant's sales and marketing activities are coordinated by the relevant operating unit or subsidiary which is responsible for its own sales and marketing planning, product development and sales support activities, supplemented by participation from the Registrant's senior management. The Registrant has sales personnel or product champions for each of its principal product lines with support from scientists, applications engineers and technical specialists. The Registrant develops contract opportunities for its customer- funded technology programs primarily through its technical staff. The Registrant's business focus is to define proprietary products and services utilizing its core technologies and professional capabilities to meet the requirements of its customers and to position the Registrant to enter new niche markets. Sales and marketing in the United States for the Registrant's products are handled directly by the Registrant as well as through sales representatives for selected products. The Registrant utilizes sales representatives to assist in marketing its products outside the United States. EMPLOYEES At July 31, 1996, the Registrant employed 565 persons. None of the Registrant's employees is represented by a labor union. The Registrant considers its relations with its employees to be good. PATENTS, LICENSES AND TRADEMARKS The Registrant relies primarily on its technological and engineering abilities and on its design and production capabilities for the development and maintenance of its business, rather than on patents. However, the Registrant does file patent applications on concepts and processes developed by the Registrant's personnel and has obtained a number of patents which the Registrant believes provide protection for certain of its technologies and products. The Registrant secures from all of its employees agreements designed to preserve the confidentiality of proprietary information and to vest in the Registrant the right to inventions developed in the course of employment. -9- The government obtains certain rights to technology and technical data developed by the Registrant under its government funded contracts. Under certain circumstances, the government may make such technology and data available to the Registrant's competitors for use by them under other government contracts. Except for these rights reserved to the government, the Registrant retains all rights to the technology and technical data developed by it under its government funded research. COMPETITION In most of its activities, the Registrant has a number of competitors, some of which have been established longer and have substantially greater financial and other resources. In its nuclear weapons effects simulation business, the Registrant has one principal competitor. The Registrant believes its ability to compete successfully in its existing products and services is based substantially upon its capability to design and manufacture products which are responsive to the high quality, performance and reliability requirements of its customers at competitive prices and to perform its technology contracts. The Registrant's success also depends upon its ability to hire and retain highly qualified engineers, scientists and management personnel. RISK FACTORS AND OTHER CAUTIONARY INFORMATION In the conduct of its business the Registrant faces financial, marketing, technical and other business risks in common with other companies in the same or similar business areas. These risks include securing adequate financial resources for the conduct and growth of the business; securing development funding for new products; competition from larger and better financed competitors; shrinking defense budgets and delays and uncertainties due to reorganization efforts within the federal government; ability to attract and retain employees with the requisite training and skills for the widely divergent areas in which the Registrant conducts business; accurate and timely anticipation of market requirements for innovative products and services; securing qualified and adequate sources for supply of critical material, components or sub-assemblies; degrees of success in transfer of technology from research and development programs to commercial products; and compliance with government regulations, including those pertaining to the environment and food and medical products and processes. Any such risks can affect the ability of the Registrant to achieve results which might be expected or anticipated in forward-looking statements (see "Introductory Note on Forward-Looking Statements" above). Moreover, certain additional or heightened business risks exist which may particularly affect the performance of Registrant, as follows: TRANSITION ISSUES. The pace of the transition by the Registrant from a business orientation primarily involving defense and other federal government contracting to one emphasizing commercial marketing of high technology products and services quickened during fiscal 1996. Changes were made in the senior management of the Registrant; the operating units of the Registrant were reorganized and restructured along different product and service lines; and significant accounting charges and reserves were taken and established to reflect the impact of such restructuring. The success of these transition steps and the speed with which they and similar actions are implemented at all levels of the Registrant's business operations will have an impact on the ability of the Registrant to accomplish results which are expected or anticipated. SIGNIFICANT SOFTWARE INTEGRATION/DEVELOPMENT CONTRACTS. A substantial portion of the Registrant's activities in its Information Systems unit 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. 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 -10- adversely affect the profitability of such contracts, each of which represents a significant portion of the activities of the Information Systems unit. (See also "Nature of Contracts" above.) REVOLUTIONARY PRODUCTS. Certain operations of the Registrant are seeking to introduce products based on new technology which must compete with existing products, while others seek to introduce products involving new technology which must contend with competing new technology developments of rival companies. In the area of purification products, for example, the Registrant often competes with products based on existing technologies of substantially larger companies well established in the marketplace. In other areas, such as ultracapacitors, the Registrant is competing with substantially larger companies with far greater internal research and development resources to achieve the performance required to introduce such a new technology into existing markets. In such situations, the ability of the Registrant to demonstrate a technical or economic advantage, or both, in addition to the technical, financial and other risks involved in any major new product development program is critical to achieving its goals. PROPRIETARY PROTECTION. The Registrant is targeting large commercial markets for various of its products for which the Registrant believes it has patent or trade secret protection. The Registrant has expended, and will continue to expend, significant resources to build patent estates for various of its purification products, its ultracapacitor product, its filter capacitor device for medical applications, and other products. Competing research and patent activity in these areas, particularly with respect to the ultracapacitor, is substantial and the markets are large enough that conflicting patent and trade secret claims may result in disputes or litigation. The commitment of significant resources to such litigation or claims resolution, as well as adverse results therefrom, could impact the Registrant's ability to achieve the results indicated in forward-looking statements. (See also "Patents, Licenses and Trademarks" above.) MANUFACTURING AND DISTRIBUTION CAPABILITY. Several of the commercial opportunities being pursued by the Registrant involve high-volume manufacturing and world-wide sales and distribution. To date, the business of the Registrant has not required these capabilities. The Registrant will require the financial, managerial and operational resources to engage in high-volume manufacturing and distribution, a significant portion of which may occur overseas, and lack of timely availability of these resources is a risk to the Registrant's achieving expected or anticipated results. ITEM 2. DESCRIPTION OF PROPERTY The Registrant owns in fee a 45,600 square foot industrial building, a 22,000 square foot high bay 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 to the company which acquired the Registrant's analytical chemical laboratory during fiscal 1996. The Registrant also leases four other facilities in the San Diego area. The Registrant utilizes its facilities in the following manner: corporate, sales and administrative (35,000 sq. ft.); manufacturing, assembly and testing, research and development laboratories and engineering (255,000 sq. ft.). The Registrant's leased facilities in San Diego, California are for varying terms and some of them contain options permitting the Registrant to extend the lease term as shown in the table below: -11- LEASED FACILITIES - SAN DIEGO, CALIFORNIA
APPROXIMATE YEAR OF APPROXIMATE SQUARE LEASE OPTION CURRENT INDUSTRY FOOTAGE EXPIRATION PERIOD ANNUAL RENT (1) SEGMENT ---------------------------------------------------------------------------------------------------- 68,000 2006 5 Years $420,000 Power Conversion Products 50,000 1999 None $330,000 Technology Programs & Services 19,700 2002 10 Years (3) $146,000 Power Conversion Products 37,900 2000 10 Years (3) $310,000 Commercial & Industrial PC Products ------- TOTAL: 175,600 ------- -------
(1) Annual rentals are subject to adjustments pursuant to Consumer Price Index or other escalation clauses in certain of the leases included in the table. (2) Consecutive one year options. (3) Two (2) five-year options. The Registrant also leases or has commitments to lease approximately 3,200; 2,087; 4,300; 1,150; 2,500; 7,580; and 200 square feet of office space in Reston and Sterling, Virginia; Orlando, Tallahassee and Sarasota, Florida; Albuquerque, New Mexico; and Mission Viejo, California, respectively, at a total approximate annual rent of $266,000. The Registrant also owns a 12,400 square foot industrial building on 2.6 acres of land located in Carson City, Nevada. In addition to the facilities described above, the Registrant utilizes, on a rent free basis, 10,100 square feet of space owned by the government located adjacent to one of the Registrant's research and development facilities in San Diego, California. Additionally, the Registrant utilizes, on a rent free basis, 22,000 square feet at Kirtland Air Force Base in Albuquerque, New Mexico. The Registrant also operates a 500 acre test site in San Diego under a facilities contract with DSWA. The Registrant believes that its facilities are well maintained, in good operating condition and are sufficient for its present operating needs. ITEM 3. LEGAL PROCEEDINGS In January 1991, the California Department of Toxic Substances Control (DTSC) notified the Registrant 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 the Registrant is not in the business of transporting or disposing of waste materials, the Registrant retained the services of the owners of the recycling facility to transport certain waste materials generated by the Registrant. After properly delivering the materials to the transporter, the Registrant was not further involved in the transportation, treatment or disposal of the materials. Under California and Federal "Superfund" laws, the Registrant is a potentially responsible party, even though the Registrant was not involved in the transport or disposal of the substances. Moreover, it is the Registrant's understanding that alleged hazardous substances from at least approximately 160 other parties were released at the facility, and that response costs of approximately $7.9 million have been incurred at the site by the DTSC. In August 1992, the Registrant and approximately 40 other potentially responsible parties signed a Consent Order which had been negotiated with the DTSC agreeing to pay for $4 million of the $7.9 million response costs incurred to that date, and to pay for certain future interim response actions outlined in the Consent Order. -12- The currently estimated cost of such interim response actions is $9.4 million, and the Registrant's share of the cost, as allocated by the parties to the Consent Order, is currently estimated at approximately 7.0%. The eventual cost of all removal and remediation activities, for which the Registrant and the other potentially responsible parties will share in additional reimbursements to the State, and including the $9.4 million referred to above, is currently estimated at the range of $15-$20 million. On the basis of amounts accrued by the Registrant, it is management's opinion that any additional liability resulting from this situation will not have a material effect on the Registrant's financial statements. Government investigators are following-up on allegations of wrongful conduct first made in July, 1994, by a former employee at the Registrant's Sierra Capacitor/Filter operation. The Registrant is cooperating with the investigating agents and has conducted its own examination into the charges. After considerable internal investigation, the Registrant has found no evidence of wrongdoing at the Division and believes that the former employee's charges are unfounded. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 4.1 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Registrant as of the date of this report are set forth in the following table. Officers of the Registrant serve at the pleasure of the Board of Directors. NAME AGE POSITION - ---- --- -------- Kenneth F. Potashner 39 President, Chief Executive Officer, and Director. Mr. Potashner has served Maxwell in these capacities since April of 1996. From 1991 through 1994 he was Vice President, Product Engineering, for Quantum Corporation. From 1994 to April of 1996, he served as Executive Vice President, Operations, of Conner Peripherals. Donn A. Starry 71 Chairman of the Board and Director. General Starry, U.S. Army, Retired, has served on the Registrant's Board of Directors since 1988 and was elected Chairman in October, 1995. 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. Gary J. Davidson 41 Vice President-Finance and Administration, Treasurer and Chief Financial Officer. Mr. Davidson served as Corporate Controller of the Registrant 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. Richard C. Eppel 56 Vice President. Mr. Eppel was appointed Vice President in August, 1995. He is the President of the I-Bus subsidiary -13- and has served in that capacity since the acquisition of that business by the Registrant in 1991. Kelly T. Hickel 54 Vice President. Mr. Hickel was named Vice President ofthe Registrant in June, 1996 and subsequently became President of Maxwell Information Systems, Inc., in August of the same year. He became a consultant to Maxwell in 1993, and was employed by the Company's S-Cubed Division in 1994, eventually being named Vice President, Business Development for the S-Cubed Division in 1995. From 1990 to 1994 Mr. Hickel served as Chairman of the Board of The Innovation Group Ltd. Liability Company , a management consulting company, and since March 1996 he has been a member of the Board of Turtle Mountain Communications, Inc. In 1992 Mr. Hickel's firm, The Innovation Group Ltd. Liability Company, was engaged by Graphic Information Inc. to effect a turn-around of that company. Mr. Hickel served as President of Graphic Information, Inc. during a period in which the assets were sold pursuant to a section 364(b) proceeding under the Bankruptcy Code. Thomas L. Horgan 36 Vice President. Mr. Horgan became Vice President, Business Development, in June of 1996. Prior to joining Maxwell Mr. Horgan served from 1991 through 1993 as European Information Security Center Manager for Digital Equipment. In 1993 he joined Quantum Corporation and until 1995 served as Director, Customer Service. From 1995 until joining Maxwell, he was Vice President, Customer Service, for Conner Peripherals. Gregg L. McKee 53 Vice President. Mr. McKee became Vice President and President of Maxwell Energy Products, Inc., in September of 1996. From 1990 until joining Maxwell he served Quantum Corporation in various capacities. From 1990 to January of 1993 he was Director of the Customer Service Group; from February 1993 to December 1995, he served as Corporate Director of Malaysian Operations; and from January of 1995 until joining Maxwell he was President, Quantum Malaysia. Donald M. Roberts 48 General Counsel and Secretary. Mr. Roberts has served as General Counsel since joining the Registrant in April, 1994, and was appointed Secretary in June, 1996. For more than five years prior thereto, Mr. Roberts was a shareholder of the law firm of Parker, Milliken, Clark, O'Hara & Samuelian, A Professional Corporation, and a partner of the predecessor law partnership, and in that capacity had served the Registrant as outside legal advisor for more than ten years. Walter P. Robertson 54 Vice President. Mr. Robertson was named Vice President and President of Maxwell Federal Division, Inc., in August of 1996. Prior to that he served General Dynamics as Vice -14- President, Aircraft Production from 1991 through 1992 and as Vice President and General Manager, Space Magnetics from 1992 through 1994. From May 1994 through November 1994, Mr. Robertson was Transition Director for Martin Marietta. In April of 1995 and until joining Maxwell, he served BioSolutions Technologies, a start-up company, as President and Chief Executive Officer. Richard E. Smith 55 Vice President. Mr. Smith was named Vice President of the Registrant and President of the Balboa Division in November, 1994. Prior thereto he was General Manager of M/A-COM PHI, a subsidiary of M/A-COM, Inc., and from 1989-1994 he was President of the Ryan Electronics and Kinetics Division of Teledyne, Inc. Since 1993 Mr. Smith has been a member of the Board of Directors of Velcon Industries. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The information required by this Item is contained in Note 13 (Quarterly Results of Operations and Stock Information (Unaudited)) to the Registrant's consolidated financial statements appearing in the Proxy Statement Appendix (filed as Exhibit 13 hereto) at page A-23, and is incorporated herein by this reference. ITEM 6. SELECTED FINANCIAL DATA. The information required by this Item is contained in the Proxy Statement Appendix at page A-7 under the caption "Five Year Selected Financial Data" and is incorporated herein by this reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this Item is contained in the Proxy Statement Appendix at pages A-2 to A-6 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated herein by this reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The following consolidated financial statements of the Registrant and its subsidiary, included in the Proxy Statement Appendix at pages A-8 to A-24, are incorporated herein by this reference: 1. Report of Ernst & Young LLP, Independent Auditors 2. Consolidated Balance Sheet at July 31, 1996 and 1995 3. Consolidated Statement of Income for the Years Ended July 31, 1996, 1995 and 1994 4. Consolidated Statement of Shareholders' Equity for the Three Years Ended July 31, 1996 -15- 5. Consolidated Statement of Cash Flows for the Years Ended July 31, 1996, 1995 and 1994 6. Notes to Consolidated Financial Statements ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEMS 10. THROUGH 13. The information required under Item 10 (Directors and Executive Officers of the Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management) and Item 13 (Certain Relationships and Related Transactions) will be reported in the Registrant's Proxy Statement for the 1996 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A as follows and is incorporated herein by reference: HEADING IN PROXY ITEM NUMBER STATEMENT ----------- ---------------- 10.................. "ELECTION OF DIRECTORS" 11.................. "EXECUTIVE COMPENSATION" 12.................. "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" 13.................. "EXECUTIVE COMPENSATION" (See also Item 4.1 -"Executive Officers of the Registrant," Part I, SUPRA). PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)l. FINANCIAL STATEMENTS. The following consolidated financial statements of the Registrant and its subsidiary, included in the Registrant's Proxy Statement Appendix, are incorporated by reference in Part II, Item 8 of this report: 1. Report of Ernst & Young LLP, Independent Auditors 2. Consolidated Balance Sheet at July 31, 1996 and 1995 3. Consolidated Statement of Income for the Years Ended July 31, 1996, 1995 and 1994 4. Consolidated Statement of Shareholders' Equity for the Three Years Ended July 31, 1996 -16- 5. Consolidated Statement of Cash Flows for the Years Ended July 31, 1996, 1995 and 1994 6. Notes to Consolidated Financial Statements (a)2. 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. 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 Bylaws of the Registrant as amended to date - Exhibit 3.2 to the 1987 Form 10-K is incorporated by reference. 4.1 Form of Rights Certificate - Exhibit 1 to the Registrant's Form 8-A filed June 30, 1989 is hereby incorporated by reference. 4.2 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 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. 10.3 Maxwell Laboratories, Inc. 1995 Stock Option Plan - Exhibit 10.3 to Registrant's Form 10-K Annual Report for the year ended July 31, 1995 ("1995 Form 10-K") is incorporated by reference. 10.4 Maxwell Laboratories, Inc. 1994 Employee Stock Purchase Plan - Exhibit 10.4 to Registrant's 1995 Form 10-K is incorporated by reference. 10.5 Maxwell Laboratories, Inc. 1994 Director Stock Purchase Plan - Exhibit 10.5 to Registrant's 1995 Form 10-K is incorporated by reference. 10.6 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. 10.7 Lease dated June 14, 1996, between the Registrant, as Lessor, and Ceimic Corporation, as Lessee, under which Ceimic is leasing approximately 27,000 square feet of laboratory and office space. -17- 10.8 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. 10.9 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. 10.10 Office Lease Agreement dated August 28, 1987 by and between Airport Property Company, a N.M. Limited Partnership, as Lessor, and the Registrant, as Lessee - Exhibit 10.16 to the Registrant's 1988 Form 10-K is incorporated by reference. 10.11 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 Registrant's 1995 Form 10-K is incorporated by reference. 10.12 Lease dated April 17, 1995, by and between Cody Three, Inc., as Lessor, and the Registrant, as Lessee. 10.13 Maxwell Laboratories, Inc. Special Severance Pay Plan - Exhibit 10.22 to the 1989 Form 10-K is incorporated by reference. 10.14 Consulting Agreement dated June 25, 1996, between the Registrant and Alan C. Kolb. 10.15 Separation Agreement dated June 25, 1996, between the Registrant and Alan C. Kolb. 10.16 Chief Executive Officer Employment Contract dated March 25, 1996 and Amendment dated April 16, 1996 between the Registrant and Kenneth F. Potashner. 10.17 Restricted Stock Agreement dated July 25, 1996, between the Registrant and Kenneth F. Potashner. 10.18 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 Registrant's 1995 Form 10-K is incorporated by reference . 10.20 Line of Credit Agreement dated February 4, 1994, between the Registrant and Sanwa Bank of California - Exhibit 10.21 to 1994 Form 10-K is incorporated by reference. 10.21 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. 10.22 Lease dated February 13, 1994 by and between Terilee Enterprises, Inc., as Lessor, and the Registrant, as Lessee - Exhibit 10.23 to 1994 Form 10-K is incorporated by reference. 10.23 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. 10.24 Severance Agreement dated March 15, 1996, between the Registrant and Sean M. Maloy. 10.25 Executive Bonus Plan for Fiscal 1997. -18- 10.26 PurePulse Technologies, Inc. 1994 Stock Option Plan. 13 Proxy Statement for 1996 Annual Meeting of Shareholders, with Appendix. 23 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, 1996. -19- 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. MAXWELL LABORATORIES, INC. By /s/Kenneth F. Potashner ------------------------------ Kenneth F. Potashner, Chief Executive Officer and President October 22, 1996 ------------------------------ Date Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/Kenneth F. Potashner Chief Executive October 22, 1996 - ------------------------- Officer, President Kenneth F. Potashner and Director /s/Donn A. Starry Chairman of the October 22, 1996 - ------------------------- Board and Director Donn A. Starry /s/Lewis J. Colby, Jr. Director October 22, 1996 - ------------------------- Lewis J. Colby, Jr. /s/Adolphe G. Gueymard Director October 22, 1996 - ------------------------- Adolphe G. Gueymard /s/Alan C. Kolb Director October 22, 1996 - ------------------------- Alan C. Kolb /s/Karl M. Samuelian Director October 22, 1996 - ------------------------- Karl M. Samuelian -20- /s/John W. Weil Director October 22, 1996 - ------------------------- John W. Weil /s/Thomas B. Hayward Director October 22, 1996 - ------------------------- Thomas B. Hayward /s/Henry F. Owsley Director October 22, 1996 - ------------------------- Henry F. Owsley /s/Gary J. Davidson Vice President- Finance October 22, 1996 - ------------------------- & Administration, Treasurer, Gary J. Davidson and Chief Financial Officer (Principal Financial and Accounting Officer) -21- INDEX TO 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 Bylaws of the Registrant as amended to date - Exhibit 3.2 to the 1987 Form 10-K is incorporated by reference. 4.1 Form of Rights Certificate - Exhibit 1 to the Registrant's Form 8-A filed June 30, 1989 is hereby incorporated by reference. 4.2 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 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. 10.3 Maxwell Laboratories, Inc. 1995 Stock Option Plan - Exhibit 10.3 to Registrant's Form 10-K Annual Report for the year ended July 31, 1995 ("1995 Form 10-K") is incorporated by reference. 10.4 Maxwell Laboratories, Inc. 1994 Employee Stock Purchase Plan - Exhibit 10.4 to Registrant's 1995 Form 10-K is incorporated by reference. 10.5 Maxwell Laboratories, Inc. 1994 Director Stock Purchase Plan - Exhibit 10.5 to Registrant's 1995 Form 10-K is incorporated by reference. 10.6 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. 10.7 Lease dated June 14, 1996, between the Registrant, as Lessor, and Ceimic Corporation, as Lessee, under which Ceimic is leasing approximately 27,000 square feet of laboratory and office space. 10.8 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. 10.9 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. 10.10 Office Lease Agreement dated August 28, 1987 by and between Airport Property Company, a N.M. Limited Partnership, as Lessor, and the Registrant, as Lessee - Exhibit 10.16 to the Registrant's 1988 Form 10-K is incorporated by reference. -22- 10.11 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 Registrant's 1995 Form 10-K is incorporated by reference. 10.12 Lease dated April 17, 1995, by and between Cody Three, Inc., as Lessor, and the Registrant, as Lessee. 10.13 Maxwell Laboratories, Inc. Special Severance Pay Plan - Exhibit 10.22 to the 1989 Form 10-K is incorporated by reference. 10.14 Consulting Agreement dated June 25, 1996, between the Registrant and Alan C. Kolb. 10.15 Separation Agreement dated June 25, 1996, between the Registrant and Alan C. Kolb. 10.16 Chief Executive Officer Employment Contract dated March 25, 1996 and Amendment dated April 16, 1996 between the Registrant and Kenneth F. Potashner. 10.17 Restricted Stock Agreement dated July 25, 1996, between the Registrant and Kenneth F. Potashner. 10.18 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 Registrant's 1995 Form 10-K is incorporated by reference . 10.20 Line of Credit Agreement dated February 4, 1994, between the Registrant and Sanwa Bank of California - Exhibit 10.21 to 1994 Form 10-K is incorporated by reference. 10.21 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. 10.22 Lease dated February 13, 1994 by and between Terilee Enterprises, Inc., as Lessor, and the Registrant, as Lessee - Exhibit 10.23 to 1994 Form 10-K is incorporated by reference. 10.23 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. 10.24 Severance Agreement dated March 15, 1996, between the Registrant and Sean M. Maloy. 10.25 Executive Bonus Plan for Fiscal 1997. 10.26 PurePulse Technologies, Inc. 1994 Stock Option Plan. 13 Proxy Statement for 1996 Annual Meeting of Shareholders, with Appendix and 1996 Summary Annual Report. 23 Consent of Ernst & Young LLP, Independent Auditors. 27 Financial Data Schedule. -23- EX-10.7 2 EXHIBIT 10.7 CEIMIC LEASE STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE-MODIFIED NET AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION [LOGO] 1. BASIC PROVISIONS ("BASIC PROVISIONS"). 1.1 PARTIES: This Lease ("Lease"), dated for reference purposes only, June 14, 1996, is made by and between MAXWELL LABORATORIES, INC., a Delaware corporation ("Lessor") and CEIMIC CORPORATION, a Delaware corporation ("Lessee"), (collectively the "Parties," or individually a "Party". 1.2(a) PREMISES: That certain portion of the Building, including all improvements therein or to be provided by Lessor under the terms of this Lease, commonly known by the street address of 8808 Balboa Avenue, located in the City of San Diego, County of San Diego, State of California, with zip code 92123, as outlined on Exhibit A attached hereto ("Premises"). The "Building" is that certain building containing the Premises and generally described as (describe briefly the nature of the Building). A single level industrial/commercial structure comprising approximately 35,840 rentable square feet. (See Paragraph 49 of Addendum) In addition to Lessee's rights to use and occupy the Premises as hereinafter specified. Lessee shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any rights to the root, exterior walls on utility raceways of the Building or to any other buildings in the Industrial Center. The Premises, the Building, the Common Areas, the land upon which they are located, along with all other improvements thereon, are herein collectively referred to as the "Industrial Center." (Also see Paragraph 2.) 1.2(b) PARKING: seventy (70) unreserved vehicle parking spaces ("Unreserved Parking Spaces"); and 0 reserved vehicle parking spaces ("Reserved Parking Spaces"). (Also see Paragraph 2.6.) 1.3 TERM: Six (6) years and ----- months ("Original Term") commencing June 15, 1996 ("Commencement Date") and ending June 14, 2002 ("Expiration Date"). (Also see Paragraph 3.) 1.4 EARLY POSSESSION: N/A ("Early Possession Date"). (Also see Paragraphs 3.2 and 3.3.) 1.5 BASE RENT: $24,192.71 per month ("Base Rent"), payable on the 15th day of each month commencing June 15, 1996 (Also see Paragraph 4.) [x] If this box is checked, this Lease provides for the Base Rent to be adjusted per Addendum paragraph 50, attached hereto. 1.6(a) BASE RENT PAID UPON EXECUTION: $24,192.71 as Base Rent for the period June 15, 1996-July 14, 1996. 1.6(b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: seventy-eight percent (78%) ("Lessee's Share") as determined by [x] prorata square footage of the Premises as compared to the total square footage of the Building or [ ] other criteria as described in Addendum. 1.7 SECURITY DEPOSIT: $24,192.71 ("Security Deposit"). (Also see Paragraph 5.) (See Paragraph 54 of Addendum) 1.8 PERMITTED USE: Commercial laboratory for the testing and analysis of material and related office use ("Permitted Use") (Also see Paragraph 6.) 1.9 INSURING PARTY. Lessor is the "Insuring Party." (Also see Paragraph 8.) 1.10(a) REAL ESTATE BROKERS. The following real estate broker(s) (collectively, the "Brokers") and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): [ ] N/A represents Lessor exclusively ("Lessor's Broker") [ ] N/A represents Lessee exclusively ("Lessee's Broker"); or [ ] N/A represents both Lessor and Lessee ("Dual Agency"). (Also see Paragraph 15.) 1.10(b) PAYMENT TO BROKERS. Upon the execution of this Lease by both Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate written agreement between Lessor and said Broker(s) (or in the event there is no separate written agreement between Lessor and said Broker(s), the sum of $ ) for brokerage services rendered by said Broker(s) in connection with this transaction. 1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be guaranteed by N/A ("Guarantor"). (Also see Paragraph 37.) 1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda consisting of Paragraphs 49 through 66, and Exhibits A through B, all of which constitute a part of this Lease. 2. PREMISES, PARKING AND COMMON AREAS. 2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental and/or Common Area Operating Expenses, is an approximation which Lessor and Lessee agree is reasonable and the rental and Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 CONDITIONS. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, electrical systems, fire sprinkler system, lighting, air conditioning and heating systems and loading doors, if any, in the Premises, other than those constructed by Lessee, shall be in good operating condition on the Commencement Date. If a non-compliance with said warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within thirty (30) days after the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor warrants that any improvements (other that those constructed by Lessee or at Lessee's direction) on or in the Premises which have been constructed or installed by Lessor or with Lessor's consent or at Lessor's direction shall comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Lessor further warrants to Lessee that Lessor has no knowledge of any claim having been made by any governmental agency that a violation or violations of applicable building codes, regulations, or ordinances exist with regard to the Premises as of the Commencement Date. Said warranties shall not apply to any Alterations of Utility Installations (defined in Paragraph 7.3(a)) made or to be made by Lessee. If the Premises do not comply with said warranties, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee given within six (6) months following the Commencement Date and setting forth with specificity the nature and extent of such non-compliance, take such action, at Lessor's expense, as may be reasonable or appropriate to rectify the non-compliance. 2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has been advised to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, seismic and earthquake requirements, and compliance with the Americans with Disabilities Act and applicable zoning, municipal, county, state and federal laws, ordinances and regulations and are covenants or restrictions of record (collectively, "APPLICABLE LAWS") and the present and future suitability of the Premises for Lessee's intended use; (b) the Lessee has made such investigation as it deems necessary with reference to such matters, is satisfied with reference thereto, and assumes all responsibility therefore such as the same relate to Lessee's occupancy of the Premises and/or the terms of this Lease; and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. 2.5 LESSEE AS PRIOR OWNER/OCCUPANT. Th warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such event, Lessee shall, at Lessee's sole cost and expense, correct any non-compliance of the Premises with said warranties. 2.6 VEHICLE PARKING. Lessee shall be entitled to use the number of Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph 1.2(b) on those portions of the Common Areas designated from time to time by Lessor for parking. Lessee shall not use more parking spaces than said number. Said parking spaces shall be used for parking by vehicles no larger than full-size passenger automobiles or pick-up trucks, herein called "Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles shall be parked and loaded or unloaded as directed by Lessor in the Rules and Regulations (as defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9). (a) Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, contractors or invitees to be loaded, unloaded or parked in areas other than those designated by Lessor for such activities. (b) If Lessee permits or allows any of the prohibited activities described in this Paragraph 2.6, then Lessor 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 to Lessee, which cost shall be immediately payable upon demand by Lessor. (c) Lessor shall at the Commencement Date of this Lease, provide the parking facilities required by Applicable Law. 2.7 COMMON AREAS - DEFINITION. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Industrial Center and interior utility raceways within the Premises that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and other lessees of the Industrial Center and their respective employees, suppliers, shippers, customers, contractors and invitees, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways and landscaped areas. 2.8 COMMON AREAS - LESSEE'S RIGHTS. Lessor hereby grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms, hereof or under the terms of any rules and regulations or restrictions governing the use of the Industrial Center. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.9 COMMON AREAS - RULES AND REGULATIONS. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable Rules and Regulations with respect thereto in accordance with Paragraph 40, Lessee agrees to abide by and conform to all such Rules and regulations and to cause its employees, suppiers, shippers, customers, contractors and invitees to abide by and conform. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees of the Industrial Center. 2.10 COMMON AREAS - CHANGES. Lessor shall have the right, in Lessor's sole-discretion, from time to time: (See Paragraph 55 of Addendum) (a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways entrances, parking spaces, parking areas, loading and unloading areas, ingress, agrees, direction of traffic, landscaped areas, walkways and utility raceways; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To designate other land outside the boundaries of the Industrial Center to be a part of the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Industrial Center, or any portion thereof; and (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Industrial Center as Lessor may, in the exercise of sound business judgment, deem to be appropriate. 3. TERM. 3.1 TERM. The Commencement Date, Expiration Date and Original term of this Lease are as specified in Paragraph 1.3. 3.2 EARLY POSSESSION. If an Early Possession Date is specified in Paragraph 1.4 and if Lessee totally or partially occupies the Premises after the Early Possession Date but prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early occupancy. All other terms this Lease, however, (including but not limited to the obligations to pay Lessee's Share of Common Area Operating Expenses and to carry the insurance required by Paragraph 8) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. 3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver possession of the Premises to Lessee by the Early Possession Date, if one is specified in Paragraph 1.4, or if no Early Possession Date is specified, by the Commencement Date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premise to Lessee. If possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice writing to Lessor within ten (10) days after the end of said sixty (60) day period, cancel this Lease, in which even the parties shall be discharged from all obligations hereunder; provided further, however, that if such written notice of Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the Original Term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforesaid, the period free of obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal the period during which the Lessee would have otherwise enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omission of Lessee. 4. RENT. 4.1 BASE RENT. Lessee shall pay Base Rent and other rent or charges, as the same may be adjusted from time to time, to Lessor in lawful money of United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for a period during the term hereof which is for less than one full month shall be prorated based upon the actual number of days of the month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 4.2 COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee's Share (as specified in Paragraph 1.6(b) of all Common Area Operating Expenses, as hereinafter defined, during each calendar year of the term of this Lease, in accordance with following provisions: (a) "Common Area Operating Expenses" are defined, for purposes of this Lease, as all costs incurred by Lessor relating to the ownership operation of the Industrial Center, including, but not limited to, the following: (See Paragraph 56 of Addendum) (i) The operation, repair and maintenance, in neat, clean, good order and condition, of the following: (aa) The Common Areas, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, pathways, driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area lighting facilities, fences and gates, elevators and roof. (bb) Exterior signs and any tenant directories. (cc) Fire detection and sprinkler system. (ii) The cost of water, gas, electricity and telephone to service the Common Areas. (iii) Trash disposal, property management and security services and the costs of any environmental inspections. (iv) Reserves set aside for maintenance and repair of Common Areas. (v) Real Property Taxes (as defined in Paragraph 10.2) to be paid by Lessor for the Building and the Common Areas under Paragraph hereof. (vi) The cost of the premiums for the insurance policies maintained by Lessor under Paragraph B hereof. (vii) Any deductible portion of an insured loss concerning the Building or the Common Areas (viii) Any other services to be provided by Lessor that are stated elsewhere in this Lease to be a Common Area Operating Expense. (b) Any Common Area Operating Expenses and Real Property Taxes that are specifically attributable to the Building or to any other build the Industrial Center or to the operation, repair and maintenance thereof, shall be allocated entirely to the Building or to such other building. (c) The inclusion of the improvements, facilities and services set forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation Lessor to either have said improvements or facilities or to provide those services unless the Industrial Center already has the same, Lessor already provide services, or Lessor has agreed elsewhere in this Lease to provide the same or some of them. (d) Lessee's Share of Common Area Operating Expenses shall be payable by Lessee within ten (10) days after a reasonable detailed state of actual expenses is presented to Lessee by Lessor. At Lessor's option, however, an amount may be estimated by Lessor from time to time of Lessee's annual Common Area Operating Expenses and the same shall be payable monthly or quarterly, as Lessor shall designate, during each 12-month period Lease term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to Lessee within sixty (60) days after the expiration of each calendar reasonably detailed statement showing Lessee's Share of the actual Common Area Operating Expenses incurred during the preceding year. If Lessee's pay under this Paragraph 4.2(b) during said preceding year exceed Lessee's Share as indicated on said statement, Lessor shall be credited the amount of such payment against Lessee's Share of Common Area Operating Expenses next becoming due. If Lessee's payment under this Paragraph 4.2(d) during said preceding year were less than Lessee's Share as indicated on said statement, Lessee shall pay to Lessor the amount of the deficiency within ten (10) days after delivery by Lessor to Lessee of said statement. (See Paragraphs 57 and 58 of Addendum) 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon Lessee's execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1). Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorney's fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefore deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Any time the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor as an addition to the Security Deposit so that the total amount of the Security Deposit shall at all times bear the same proportion to the then current Base Rent as the initial Security Deposit bears to the initial Base Rent set forth in Paragraph 1.5 Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any monies to be paid by Lessee under this Lease. 6. USE. 6.1 PERMITTED USE. (a) Lessee shall use and occupy the Premises only for the Permitted Use set forth in Paragraph 1.8, or any other legal use which is reasonably comparable thereof, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to the Premises or neighboring premises or properties. (b) Lessor hereby agrees to not unreasonably withhold or delay its consent to any written request by Lessee, Lessee's assignees or subtenants, and by prospective assignees and subtenants of Lessee, its assignees and subtenants, for a modification of said Permitted Use, so long as the same will not impair the structural integrity of the improvements on the Premises or in the Building or the mechanical or electrical systems therein, does not conflict with uses by other lessees is not significantly more burdensome to the Premises or the Building and the improvements thereon, and is otherwise permissible pursuant in this Paragraph 5. If Lessor elects to withhold such consent, Lessor shall within five (5) business days after such request give a written notification of same, which notice shall include an explanation of Lessor's reasonable objections to the change in use. 6.2 HAZARDOUS SUBSTANCES. (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment, or the Premises, (ii) regulated or monitored by any governmental authority; or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products or by-products thereof. Lessee shall not engage in any activity in or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Requirements (as defined in Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and (iii) the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Laws require that a notice be give to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but upon notice to Lessor and in compliance with all Applicable Requirements, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of the Permitted Use, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to any Reportable Use of any Hazardous Substance by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefor, including but not limited to the installation (and, at Lessor's option, removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under PARAGRAPH 5 hereof. (SEE PARAGRAPH 51 OF ADDENDUM) (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises or the Building, other than as previously consented to by Lessor, Lessee shall immediately give Lessor written notice thereof, together with a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action, or proceeding given to, or received from, any governmental authority or private party concerning the presence, spill, release, discharge of, or exposure to, such Hazardous Substance including but not limited to all such documents as may be involved in any Reportable Use involving the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including, without limitation, through the plumbing or sanitary sewer system). (c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all damages, liabilities, judgments, costs, claims, liens, expenses, penalties, loss of permits and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee or by anyone under Lessee control. Lessee's obligations under this Paragraph 6.2 (c) shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultants' attorneys' fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 LESSEE'S COMPLIANCE WITH REQUIREMENTS. Lessee shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "APPLICABLE REQUIREMENTS," which term is used in this Lease to mean all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants, relating in any manner to* the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill, or release of any Hazardous Substance), now in effect or which may hereafter come into effect. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including but not limited to permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Requirements. *LESSEE'S USE OF 6.4 INSPECTION; COMPLIANCE WITH LAW. Lessor, Lessor's agents, employees, contractors and designated representatives, and the holders of any mortgages deeds of trust or ground leases on the Premises ("LENDERS") shall have the right to enter the Premises at any time in the case of an emergency, and other wise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to employ experts and/or consultants in connection therewith to advise, Lessor with respect to Lessee's activities, including but not limited to Lessee's installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance on or from the Premises. The costs and expenses of any such inspections hall be paid by the party requesting same, unless a *Default of Breach of this Lease or Lessee or a* violation of Applicable Requirements or a contamination, caused or materially contributed to by Lessee, is found to exist or to be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspection. * Material 7. MAINTENANCE, REPAIRS, UTILITY INSTALLATIONS, TRADE FIXTURES AND ALTERATIONS. 7.1 LESSEE'S OBLIGATIONS. (a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 ( Condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair (whether or not such portion of the Premises requiring repair, or the means of repairing the same, are reasonably on readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities specifically serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire hose connections if within the Premises, fixtures, interior walls, interior surfaces of exterior walls, ceilings, floors, windows, doors, plate glass, and skylights, but excluding any items which are the responsibility of Lessee pursuant to Paragraph 7.2 below. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practice Lessee's obligations shall include restorations replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof good order, condition and state of repair. (SEE PARAGRAPH 60 OF ADDENDUM) (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain a contract, with copies to Lessor, in customary form and substance for and with a contractor specializing and experienced in the inspection, maintenance and service of the heating, air conditioning and ventilation system for the Premises. However, Lessor reserves the right, upon notice to Lessee, to procure and maintain the contract for the heating, air conditioning and ventilating system and if Lessor so elects, Lessee shall reimburse Lessor, upon demand, for the cost thereof. (c) If Lessee fails to perform Lessee's obligations under this Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Lessee's behalf, and put the Premises in good order, condition and repair, in accordance with Paragraph 13.2 below. 7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement pursuant to Paragraph 4.2 shall keep in good order, condition and repair the foundations, exterior walls, structural condition of interior bearing walls, exterior roof, fire sprinkler and/or standpipe and hose (if located in the Common Areas) or other automatic fire extinguishing system including fire alarm and/or smoke detection systems and equipment, fire hydrants, parking lots, walkways, parkways, driveways, landscaping, fences, signs and utility systems serving the Common Areas and all parts thereof, as well as providing the services for which there is a Common Area Operating Expense pursuant to Paragraph 4.2 Lessor shall not be obligated to paint the exterior or interior surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or replace windows, doors or plate glass of the Premises. 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 expense or to terminate this Lease because of Lessor's failure to keep the Building, Industrial Center or Common Areas in good order, condition and repair. 7.3 UTILITY INSTALLATIONS, TRADE FIXTURES, ALTERATIONS. (a) Definitions; Consent Required. The term "Utility Installations" is used in this Lease to refer to all air lines, power panels, electrical distribution, security, fire protection systems, communications systems, lighting fixtures, heating, ventilating and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment which can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements on the Premises which are provided by Lessor under the terms of this Lease other than Utility Installations or Trade Fixtures. "Lessee-Owned Alterations and/or Utility Installations" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor cause to be made any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) without Lessor's prior written consent but upon notice to Lessor, so long as they are not visible from the outside of the Premises, do not involve puncturing, relocating or removing the roof or any existing walls, or changing or interfering with the fire sprinkler or fire detection systems and the cost thereof does not exceed. *(See Paragraph 52 of Addendum) (b) CONSENT. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities; (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alterations or Utility Installation to Lessor prior to commencement of the work thereon; and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and be in compliance with all Applicable Requirements. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor Lessor may, (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $2,500.00 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half time the estimated cost of such Alteration or Utility Installation. (c) LIEN PROTECTION. Lessee shall pay when due all claims for labor or materials furnished or alleged to have been furnished to or for Lessee and/or for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor no less than ten (10) days notice prior to the commencement of any work in, on, or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense, defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability to the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorneys' fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 OWNERSHIP, REMOVAL, SURRENDER, AND RESTORATION (a) OWNERSHIP. Subject to Lessor's right to require their removal and to cause Lessee to become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility installations made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee-Owned Alterations and Utility installations. Unless otherwise instructed per Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility installations shall, at the expiration of earlier termination of this Lease, become the property of Lessor and remain upon the Premises and be surrendered with the Promises by Lessee. (b) REMOVAL. Unless otherwise agreed in writing, Lessor may require that any or all Lessee-Owned Alterations or Utility Installations be removed by the expiration or earlier termination of this Lease, notwithstanding that their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Alterations or Utility Installations made without the required consent of Lessor. (See Paragraph 61 of Addendum) (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. Ordinary wear and tear shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified herein, the Premises, as surrendered, shall include the Alterations and Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Lessee-Owned Alterations and Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Requirements and/or good practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. INSURANCE; INDEMNITY. 8.1 PAYMENT OF PREMIUMS. The cost of the premiums for the insurance policies maintained by Lessor under this Paragraph 8 shall be a Common Area Operating Expense pursuant to Paragraph 4.2 hereof. Premiums for policy periods commencing prior to, or extending beyond, the term of this Lease shall be prorated to coincide with the corresponding Commencement Date or Expiration Date. 8.2 LIABILITY INSURANCE. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee, Lessor and any Lender(s) whose names have been provided to Lessee in writing (as additional insureds) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $2,000,000 per occurrence with an "Additional Insured Managers or Lessors of Premises" endorsement and contain the "Amendment of the Pollution Exclusion" endorsement for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "INSURED CONTRACT" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) CARRIED BY LESSOR. Lessor may also maintain liability insurance described in Paragraph 8.2(a) above, in addition to and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE. (a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor with loss payable to Lessor and to any Lender(s), insuring against loss or damage to the Premises. Such insurance shall be for full replacement cost, as the same shall exist from time to time, or the amount required by any Lender(s), but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. Lessee-Owned Alterations and Utility Installations, Trade Fixtures and Lessee's personal property shall be insured by Lessee pursuant to Paragraph 8.4. If the coverage is available and commercially appropriate, Lessor's policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of an ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Building required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered loss, but not including plate glass insurance. Said policy or policies shall also contain an agreed valuation provision in lieu of any co-insurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. (b) RENTAL VALUE. Lessor may also obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with low payable to Lessor and any Lender(s), insuring the loss of the full rental and other charges payable by all lessees of the Building to Lessor for one year (including all Real Property Taxes, insurance costs, all Common Area Operating Expenses and any scheduled rental increases). Said insurance may provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any co-insurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, Real Property Taxes, insurance premium costs and other expenses, if any, otherwise payable, for the next 12-month period. Common Area Operating Expenses shall include a deductible amount in the event of such loss. (c) ADJACENT PREMISES. Lessee shall pay for any increase in the premiums for the property insurance of the Building and for the Common Area or other buildings in the Industrial Center if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) LESSEE'S IMPROVEMENTS. Since Lessor is the Insuring Party, Lessor shall not be required to insure Lessee-Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. 8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property. Trade Fixtures and Lessee-Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by Lessor as the Insuring Party under Paragraph 8.3(a). Said insurance shall be full replacement cost coverage with a deductible not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property and the restoration of Trade Fixtures and Lessee-Owned Alterations and Utility Installations. Upon request from Lessor, Lessee shall provide Lessor with written evidence that such insurance is in force. 8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises is located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, or such other rating as may be required by a Lender, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor, within seven (7) days after the earlier of the Early Possession Date or the Commencement Date, certified copies of, or certificates evidencing the existence and amounts of, the insurance required under Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or subject to modification except after thirty (30) days' prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. 8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss or damage to their property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. Lessor and Lessee agree to have their respective insurance companies issuing property damage insurance waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7 INDEMNITY. Except for Lessor's negligence and/or intentional misconduct and/or material breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, cost, liens, judgments, penalties, loss of permits, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default of Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense Lessor need not have first paid any such claim in order to be so indemnified. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise of other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said injury or damages results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other lessee of Lessor nor from the failure by Lessor to enforce the provisions of any other lease in the Industrial Center. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than fifty percent (50%) of the then Replacement Cost (as defined in Paragraph 9.1(d) of the Premises (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction. (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations, the repair cost of which damage or destructions fifty percent (50%) or more of the then Replacement Cost of the Premises (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction. In addition, damage or destruction to the Building, other than Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any lessees of the Building, the cost of which damage or destruction is fifty percent (50%) or more or the then Replacement Cost (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any lessees of the Building) of the Building shall, at the option of Lessor, be deemed to be Premises Total Destruction. (c) "INSURED LOSS" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a) irrespective of any deductible amounts or coverage limits involved. (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 PREMISES PARTIAL DAMAGE - INSURED LOSS. If Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect. In the event, however, that there is a shortage of insurance proceeds and such shortage is due to the fact that, by reason of the unique nature of the improvements in the Premises, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request thereof. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, Lessor shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within such ten (10) day period, and if Lessor does not so elect to restore and repair, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 PARTIAL DAMAGE - UNINSURED LOSS. If Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect), Lessor may at Lessor's option either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as on the date sixty (60) days following the date of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following such commitment from Lessee. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if Premises Total Destruction occurs (including any destruction required by an authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragrapph 9.7. 9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one month's Base Rent, whether or not an insured Loss, Lessor or Lessee may, at its option terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to the other party of its election to do so within thiry (30) days after the date of occurrence of such damages. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease to (a) exercising such option, and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is ten (10) days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate as of the date set forth in the first sentence of this Paragraph 9.5. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) In the event of (i) Premises Partial Damage or (ii) Hazardous Substance Condition for which Lessee is not legally responsible, the Base Rate Common Area Operating Expenses and other charges, if any, payable by Lessee hereunder for the period during which such damage or condition, its repair, remediation or restoration continues, shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not in excess of proceeds from insurance required to be carried under Paragraph 8.3(b). Except for abatement of Base Rate, Common Area Operating Expenses and other charges, if any, aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair, remediation or restoration. (See Paragraph 62 of Addendum) (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within sixty (60) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lendors of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lendors and such repair restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or Lender commences the repair or restoration of the Premises within thirty (30) days after the receipt of such notice, this lease shall continue in full force and effect. "Commence" as used in this Paragraph 9.6 shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever occurs first. 9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000 whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the excess costs of (a) investigation and remediation of such Hazardous Substance Condition to the extent required by Applicable Requirements, over (b) an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following said commitment by Lessee. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time period specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. (See Paragraph 63 of Addendum) 9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment made by Lessee to Lessor and so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 9.9 WAIVER OF STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises and the Building with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent it is inconsistent herewith. 10. REAL PROPERTY TAXES. 10.1 PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes; as defined in Paragraph 10.2, applicable to the Industrial Center, and except as otherwise provided in Paragraph 10.3, any such amounts shall be included in the calculation of Common Area Operating Expenses in accordance with the provisions of Paragraph 4.2. 10.2 REAL PROPERTY TAX DEFINITION. As used herein, the term "REAL PROPERTY TAXES" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Industrial Center by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, tire, street, drainage, or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Industrial Center or any portion thereof, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in Applicable Law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Industrial Center or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. In calculating Real Property Taxes for any calendar year, the Real Property Taxes for any real estate tax year shall be included in the calculation of Real Property Taxes for such calendar year based upon the number of days which such calendar year and tax year have in common. 10.3 ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses shall not include Real Property Taxes specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Industrial Center by other lessees or by Lessor for the exclusive enjoyment of such other lessees. Notwithstanding Paragraph 10.1 hereof, Lessees shall, however, pay to Lessor at the time Common Area Operating Expenses are payable under Paragraph 4.2, the entirety of any increase in Real Property Taxes if assessed solely by reason of Alterations, Trade Fixtures or Utility Installations placed upon the Premises by Lessee or at Lessee's request. 10.4 JOINT ASSESSMENT. If the Building is not separately assessed, Real Property Taxes allocated to the Building shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 LESSEE'S PROPERTY TAXES. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or stored within the Industrial Center. When possible, Lessee shall cause its Lessee-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. UTILITIES. Lessee shall pay directly for all utilities and services supplied to the Premises, including but not limited to electricity, telephone, security, gas and cleaning of the Premises, together with any taxes thereon. If any such utilities or services are not separately metered to the Premises or separately billed to the Premises, Lessee shall pay to Lessor a reasonable proportion to be determined by Lessor of all such charges jointly metered or billed with other premises in the Building, in the manner and within the time periods set forth in Paragraph 4.2(d). 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "assign") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36. (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five percent (25%) or more of the voting control of Lessee shall constitute a change in control for this purpose. (See Paragraph 64 of Addendum) (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an amount equal to or greater than twenty-five percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the time of full execution and delivery of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, at whichever time said Net Worth of Lessee was or is greater, shall be considered an assignment of this Lease by Lessee to which Lessor may reasonably withhold its consent. "NET WORTH OF LESSEE" for purposes of this Lease shall be the net worth of Lessee (excluding any Guarantors) established under generally accepted accounting principles consistently applied. (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1, or a non-curable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment or subletting as a non-curable Breach, Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon thirty (30) days' written notice ("LESSOR'S NOTICE"), increase the monthly Base Rent for the Premises in the greater of the then fair market rental value of the Premises, as reasonably determined by Lessor, or one hundred ten percent (110%) of the Base Rent then in effect. Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value as reasonably determined by Lessor (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition, or one hundred ten percent (110%) of the price previously in effect, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall be increased in the same ratio as the new rental bears to the Base Rent in effect immediately prior to the adjustment specified in Lessor's Notice. (e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. 12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, any assignment or subletting shall not (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessor under this Lease, (ii) release Lessee of any obligations hereunder, nor (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any debt or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent for performance shall constitute a waiver a estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment of subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the assignee or sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable under this Lease or the sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or the sublease. (d) In the event of any Default or Breach of Lessee's obligation under this Lease, Lessor may proceed directly against Lessee, any Guarantor or anyone also responsible for the performance of the Lessee's obligations under this Lease, including any sublessee, without first exhausting Lessor's remedies against any other person or entity responsible, therefore to Lessor, or any security held by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a non-refundable deposit of $1,000 or ten percent (10%) of the monthly Base Rent applicable to the portion of the Premises which is the subject of the proposed assignment or sublease, whichever is greater, as reasonable consideration for Lessor's considering and processing the request for consent. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (See Paragraph 65 of Addendum) (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. MULTI-TENANT--MODIFIED NET -6- (g) The occurrence of a transaction described in Paragraph 12.2(c) shall give Lessor the right (but not the obligation) to require that the Security Deposit be increased by an amount equal to six (6) times the then monthly Base Rent, and Lessor may make the actual receipt by Lessor of the Security Deposit increase a condition to Lessor's consent to such transaction. (h) Lessor, as a condition to giving its consent to any assignment or subletting, may require that the amount and adjustment schedule of the rent payable under this Lease be adjusted to what is then the market value and/or adjustment schedule for property similar to the Premises as then constituted, as determined by Lessor. 12.3 ADDITIONAL TERMS CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises, heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of the foregoing provision or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that of Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against such sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the explanation of such sublease provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior defaults or breaches of such sublessor under such sublease. (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No subleases under a sublease approved by Lessor shall further or sublet all or any part of the Promises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The subleasee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. DEFAULT; BREACH; REMEDIES. 13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (as hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice of Default, and that Lessor may include the cost of such services and costs in said notice as rent due and payable to cure said default. A "DEFAULT" by Lessee is defined as a failure by Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "BREACH" by Lessee is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: (a) The abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent, Lessee's Share of Common Area Operating Expenses, or any other monetary payment required to be made by Lessee hereunder as and when due, the failure by Lessor to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with Applicable Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that are to be observed, complied with or performed by Lessee, other than those described in Subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making by Lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this Subparagraph 13.1(e) is contrary to any applicable law, such provision shall be of no force or effect, and shall not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement of Lessee or of any Guarantor, given to Lessor by Lessee or any Guarantor, was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of the Guarantor, (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its guaranty obligation on an anticipatory breach basis, and Lessee's failure within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurances of security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial of Lessee and the Guarantors that existed at the time of execution of this Lease. 13.2 REMEDIES. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including by not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its own option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee (as defined in Paragraph 13.1), with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the form after the time or award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of retelling, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall on computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco or the Federal Reserve Bank District in which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph 13.2. If termination of this Lease is obtained through the provisional remedy of unlawful detainer. Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit for such rec and/or damages. If a notice and grace period required under Subparagraph 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by Subparagraph 13.1(b), (c) or (d). In such case, the applicable grace period under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two (2) such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. Lessor and Lessee agree that the limitations on assignment and subletting in this Lease are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under this Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter to Lessor under the laws or judicial decisions of the state wherein the Premises are located. -7- (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the form hereof or by reason of Lessee's occupancy of the Premises. 13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS" shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the form hereof as the same may be extended. Upon the occurrence of a Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor, as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the core of the Breach which initiated the operation of this Paragraph 13.3 shall not be deemed a waiver by Lessor of the provisions of this Paragraph 13.3 unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee 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 upon Lessor by the terms of any ground lease, mortgage or deed of trust covering the Premises. Accordingly, if any installment of rent or 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, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) 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 or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies, grants hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option become due and payable quarterly in advance. 13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease unless Lessor falls within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by any Lender(s) whose name and address shall have been furnished to Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued in completion. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the portion of the Common Areas designated for Lessee's parking is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within thirty (30) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the Premises. No reduction of Base Rent shall occur if the condemnation does not apply to any portion of the Premises. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution of value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation, separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation Lessor shall to the extent of its net severance damages received, over and above Lessee's Share of the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. BROKERS' FEES. 15.4 REPRESENTATIONS AND WARRANTIES. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder other than as named in Paragraph 1.10(a) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, firm or entity other than said named Broker(s) is entitled to any commission or finder's fee in connection with said transaction. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the Indemnifying Party, including any costs, expenses, and/or attorneys' fees reasonably incurred with respect thereto. 16. TENANCY AND FINANCIAL STATEMENTS. 16.1 TENANCY STATEMENT. Each Party (as "RESPONDING PARTY") shall within ten (10) days after written notice from the other Party (the "REQUESTING PARTY") execute, acknowledge and deliver to the Requesting Party a statement in writing in a form similar to the then most current "TENANCY STATEMENT" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 FINANCIAL STATEMENT. If Lessor desires to finance, refinance, or sell the Premises or the Building, or any part thereof, Lessor and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lendor or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. (See Paragraph 66 of Addendum) 17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease. Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15.3 upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessee. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity at any other provision hereof. 19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within ten (10) days following the date on which it was due, shall bear interest from the date due the prime rate changed by the largest state chartered bank in the state in which the Premises are located plus four percent (4%) per annum, but not exceeding the maximum rate allowed by law, in addition to the potential late charge provided for in Paragraph 13.4. 20. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. RENT DEFINED. All momentary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. Each Broker shall be an intended third party beneficiary of the provisions of this Paragraph 22. 23. NOTICES. 23.1 NOTICE REQUIREMENTS. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission during normal business hours, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 DATE OF NOTICE. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail, the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day -8- delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone or facsimile confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. If notice is received on a Saturday or a Sunday or a legal holiday, it shall be deemed received on the next business day. 24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or any other term, covenant or condition hereof. Lessor's consent to, or approval of, any such act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of any provision hereof. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. RECORDING. (See Paragraph 53 of Addendum.) 26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. In the event that Lessee holds over in violation of this Paragraph 26 then the Base Rent payable from and after the time of the expiration or earlier termination of this Lease shall be increased to two hundred percent (200%) of the Base Rent applicable during the month immediately preceding such expiration or earlier termination. Nothing contained herein shall be construed as a consent by Lessor to any holding over by Lessee. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law of in equity. 28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. BINDING EFFECT: CHOICE OF LAW. This Lease shall be binding upon the Parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default pursuant to Paragraph 13.5. If any Lender shall elect to have this Lease and/or any Option granted hereby superior in the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one month's rent. 30.3 NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this lease, Lessor's subordination of this Lease shall be subject to receiving assurance (a "non disturbance agreement") from the Lendor that Lessee's possession and this Lease, including any options to extend the form hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term "Prevailing Party" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. Lessor shall be entitled to attorneys' fees, costs and expenses incurred in preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. Broker(s) shall be intended third party beneficiaries of this Paragraph 31. 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the Building, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or Building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred eighty (180) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. SIGNS. Lessee shall not place any sign upon the exterior of the Premises or the Building, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business so long as such signs are in a location designated by Lessor and comply with Applicable Requirements and the signage criteria established for the Industrial Center by Lessor. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor reserves all rights to the use of the roof of the Building, and the right to install advertising signs on the Building, including the roof, which not unreasonably interfere with the conduct of Lessee's business: Lessor shall be entitled to all revenues from such advertising signs. (See Paragraph 59 of Addendum.) 35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subordinances. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lessee interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. CONSENTS. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this lease or the Premises, including but not limited to consents to an assignment a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. In addition to the deposit described in Paragraph 12.2(e), Lessor may, as a condition to considering any such request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgement that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify here any particular condition to Lessor's consent shall not preclude the impositions by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 37. GUARANTOR. 37.1 FORM OF GUARANTY. If there are to be any Guarantors of this Lease per Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor shall be in the form most recently published by the American Industrial Real Estate Association, and each such Guarantor shall have the same obligations as Lessee under this lease, including but not limited to the obligation to provide the Tenancy Statement and information required in Paragraph 16. 37.2 ADDITIONAL OBLIGATIONS OF GUARANTOR. It shall constitute a Default of the Lessee under this Lease if any such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a) evidence of the due execution of the guaranty called for by this Lease, including the authority of the Guarantor (and of the party signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and resolution of its board of directors authorizing the making of such guaranty together with a certificate of incumbency showing the signatures of the persons authorized to sign on its behalf, (b) current financial statements of Guarantor may from time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and the performance of all of the covenants, conditions and provisions, Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 9 39. OPTIONS. 40. RULES AND REGULATIONS. Lessee agrees that it will abide by, and keep and observe all reasonable rules and regulations ("Rules and Regulations") which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Industrial Center and their invitees. 41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. RESERVATIONS. Lessor reserves the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights of way, utility raceways, and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights of way, utility raceways, dedications, maps and restrictions do not reasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. AUTHORITY. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. OFFER. Preparation of this Lease by either Lessor or Lessee or Lessor's agent or Lessee's agent and submission of same to Lessee or Lessor shall not be deemed an offer to lease. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 47. AMENDMENTS. This Lease may be modified only in writing, signed by the parties in Interest at the time of the modification. The Parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional insurance company or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee, the obligations of such multiple parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. 10 LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OR LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR ATTORNEY'S REVIEW AND APPROVAL, FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES, NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. Executed at: San Diego, CA Executed at: San Diego, CA ------------- ------------- on: June 14, 1996 on: June 14, 1996 ------------- ------------- BY LESSOR: BY LESSEE: MAXWELL LABORATORIES, INC., CEIMIC CORPORATION, - -------------------------------- ------------------------------------ a Delaware corporation a Delaware corporation - -------------------------------- ------------------------------------ By: Donald M. Roberts By: John F. McGarry, Jr. ---------------------------- -------------------------------- Name Printed: Donald M. Roberts Name Printed: John F. McGarry, Jr. ------------------ ---------------------- Title: General Counsel Title: President ------------------------- ----------------------------- By: By: ---------------------------- -------------------------------- Name Printed: Name Printed: ------------------ ---------------------- Title: Title: -------------------------- ----------------------------- Address: 8888 Balboa Avenue Address: 10 Dean Knauss Drive ----------------------- --------------------------- San Diego, California 92123-1505 Narragansett, Rhode Island 02882 - -------------------------------- ------------------------------------ Telephone: (619) 279-5100 Telephone: (401) 782-8900 --------------------- ------------------------- Facsimile: (619) 277-6754 Facsimile: (401) 782-8905 --------------------- ------------------------- BY BROKER: BY BROKER: Executed at: Executed at: -------------------- ------------------------ on: on: ----------------------------- --------------------------------- By: By: ----------------------------- -------------------------------- Name Printed: Name Printed: ------------------ ---------------------- Title: Title: -------------------------- ------------------------------ Address: Address: ------------------------ ---------------------------- - -------------------------------- ------------------------------------ Telephone: ( ) Telephone: ( ) --------------------- ------------------------- Facsimile: ( ) Facsimile: ( ) --------------------- ------------------------- NOTE: These forms are often modified to meet changing requirements of law and needs of the industry. Always write or call to make sure you are utilizing the most current form: AMERICA INDUSTRIAL REAL ESTATE ASSOCIATION, 345 SO. FIGUEROA ST, M-1, LOS ANGELES, CA 90071. (213) 687-8777. ADDENDUM -------- 49. DESCRIPTION OF PREMISES. The Premises consists of all the Building shown on Exhibit A excluding the portion of the Building outlined to show space retained by Lessor. The Industrial Center shall consist of the legal parcel on which the Building is located and which is described on Exhibit B. 50. BASE RENT ADUSTMENT. Base Rent payable under the Lease shall be increased to the following amounts for the following described periods: Period Monthy Base Rent ------ ---------------- June 15, 1997 - June 14, 1998 . . . . . . . . . . . . . . . $24,918.49 June 15, 1998 - June 14, 1999 . . . . . . . . . . . . . . . $25,666.05 June 15, 1999 - June 14, 2000 . . . . . . . . . . . . . . . $26,436.03 June 15, 2000 - June 14, 2001 . . . . . . . . . . . . . . . $27,229.11 June 15, 2001 - June 14, 2002 . . . . . . . . . . . . . . . $28,045.98 51. HAZARDOUS SUBSTANCES. Lessor acknowledges that a material part of Lessee's business consists of the testing and analysis of materials for the presence of absence of Hazardous Substances. Nothing contained in Paragraph 6.2 of the Lease is intended to prohibit Lessee from conduction its business provided that at all times Lessee complies with all Applicable Requirements (as defined in Paragraph 6.3) and all other provisions of this Lease including but not limited to Paragraphs 6.2 through 6.4 thereof. 52. DEMISING WALLS. As soon as practicable but not later than sixty (60) days following occupancy of the Premises by Lessee, Lessor shall have constructed and finished the interior walls ("demising walls") necessary to separate that portion of the Building constituting the Premises from the portion of the Building retained by Lessor. The cost of constructing and finishing the demising walls shall be borne by Lessor. 53. RECORDATION. Lessee shall not record this Lease or any short form of memorandum thereof without the prior written consent of Lessor which Lessor may give or withhold in its sole and absolute discretion. 54. SECURITY DEPOSIT. One-half (1/2) of the security deposit shall be paid to Lessor by Lessee on or before September 15, 1996; and the balance of the security deposit shall be paid to Lessor by Lessee on or before December 15, 1996. 55. COMMON AREA CHANGES. Notwithstanding the provisions of Paragraph 2.10(a), Lessor shall not make any materail changes to the Common Areas without the prior written * Said Security Deposit shall bear interest at the weighted average return on Lessor's invested funds, calculated annually and paid or applied as provided in the Lease. approval of Lessee which approval shall not be unreasonably withheld or delayed. 56. COMMON AREA OPERATING EXPENSE EXCLUSIONS. Notwithstanding anything to the contrary, Common Area Operation Expenses shall not include the following: (i) repairs to the Building and the Premises where the occurrence which caused the damages or loss necessitating such repair is reimbursable by insurance carried by Lessor (but only to the extent of actual reimbursement); (ii) leasing or procuring of new tenants, including, but not limited to, leasing commissions paid to agents of Lessor, other brokers or any other person, advertising and promotion costs, and attorneys' fees for lease drafting and negotiation; (iii) costs incurred by Lessor for Lessee's alterations and other items which Lessee pays directly for its Leased Premises; (iv) costs specifically attributable to the leaseholds of other tenants, including, but not limited to, the costs of painting and renovating the premises of other tenants, costs of other items which other tenants pay directly for their premises, and costs arising out of special HVAC needs of other tenants; (v) depreciation or the Building and its components; (vi) costs of capital repairs, replacements and improvements, unless those costs reduce operating expeses or relate to repairs, replacement of improvements mandated by law and in either instance, are amortized over the reasonable useful life of the capital item in accordance with generally accepted accounting principles and, with respect to repairs, replacements or improvements to reduce operating expenses, the yearly amortization does not exceed the actual cost reduction for the relevant year; and (vii) interest on debt or amortization payments on any mortgages and rental under any land lease or sublease. 57. OPERATION EXPENSE ADJUSTMENT. Notwithstanding the provisions of Paragraph 4.2, the amount of Common Area Operating Expenses payable by Lessee during each twelve (12) month period of the lease term may not exceed the amount ofCommon Area Operating Expenses payable by Lessee paid or payable with respect to the immediately prior twelve (12) month period of the lease term by more than five percent (5%). 58. AUDIT RIGHTS. Lessee shall have the right, at Lessee's sole cost and expense, to audit or cause to be audited by qualified accounting professionals the books and records of Lessor pertaining to the expeses chargeable to Lessee as Common Area Operation Expenses. The right of Lessee to audit such books and records of Lessor shall teminate with respect to each twelve (12) month period of the lease term six (6) months after Lessee's receipt of Lessor's statement covering the Common Area Operation Expenses for such twelve (12) month period. 59. SIGNS. Notwithstanding the provisions of Paragraph 34, Lessee shall have the right to place signs on the Premises, Building or Industrial Center substantially similar to those signs maintained as of June 12, 1996 by Lessor on the premises, Building or Industrial Center. 60. HVAC MAINTENANCE. Notwithstanding anything else contained in this lease expressly or impliedly to the contrary, Lessee, at Lessee's sole cost and expense, shall maintain the Building's heating, ventilation and air conditioning system in good condition and repair. Within ninety (90) days of the expiration of each twelve (12) month period of the lease term, Lessee shall bill Lessor for twenty-two percent (22%) of the cost of maintaining the heating, ventilation and air conditioning system. Lessor shall have the right to audit Lessee's books and records pertaining to such costs for a period of six (6) months following Lessor's receipt of Lessee's statement. Notwithstanding the foregoing, Lessor and Lessee shall be solely responsible for the cost of relocation or replacing, ventilation and air conditioning ducts located within the interior portions of their respective areas of the Building. 61. REMOVAL. At the time of requesting Lessor's consent to the making of any Alteration or Utility Installation, Lessee shall have the right to require Lessor to advise Lessee whether Lessor will require the removal of such Alteration or Utility Installation at the end of the term of this Lease. 62. ABATEMENT OF RENT. In the event that Lessor does not have in force at the time of any such Premises Partial Damage or Hazardous Substance Condition the insurance referred to in Paragraph 8.3 (b), the Lessee's right to abatement of rent shall not be limited by reference to the proceeds of such insurance. 63. HAZARDOUS SUBSTANCE CONDITION. In the event that because of a Hazardous Substance Condition not the resposibility of Lessee, Lessee is unable to sue all or a material portion of the Premises for a period of six (6) months, Lessee may terminate within thirty (30) days after expiration of such six (6) month period. 64. ASSIGNMENT OR SUBLEASE. Nothwithstanding the provisions of Paragraph 12, Lessee shall have the right to assign this Lease or sublease all or a portion of the Premises to an entity controlled by, controlling or under common control with Lessee upon written notice to Lessor and such entity agreeing in writing to be bound by and observe and perform the terms or this Lease. 65. ATTORNEYS' FEES. Notwithstanding the provisions of Paragraph 36, Lessee shall not be obligated to reimmburse to Lessor its attorneys' fees incurred in considering or responding to a request for consent to an assignment or subletting. 66. FINANCIAL STATEMENTS. Such financial statements shall be promptly delivered to the lender or purchaser upon receipt by Lessee or a confidentiality agreement in reasonable form executed by such lender or purchaser. EXHIBIT A [FLOOR PLAN OF MAXWELL LABORATORIES INC.] [MAP] "Assessor's Parcel No. 369-150-18. Parcel 1, in the County of San Diego, State of California, as shown at Page 6191 of Parcel Maps, filed in the Office of the County Recorder of San Diego County, July 22, 1977." EX-10.12 3 EXHIBIT 10.12 CODY THREE LEASE [Letterhead] Exhibit 10.12 ARTICLE ONE: BASIC TERMS This Article One contains the Basic Terms of this 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: April 17, 1995 ------------------------ SECTION 1.02. Landlord (include legal entity): Cody Three, Inc., a ---------------------- Wyoming corporation - -------------------- Address of Landlord: 1800 Grant Street, Denver, CO 80203 ---------------------------------------------------- SECTION 1.03. Tenant (include legal entity); Maxwell Laboratories, Inc., a ----------------------------- Delaware corporation I-Bus Division - ------------------------------------- ADDRESS OF TENANT: 8888 Balboa Avenue, San Diego, CA 92123 -------------------------------------------------------- SECTION 1.04. Property: The Property is part of Landlord's multi-tenant real property development known as Sky Park Centre - --------------------------------------------------------------------------- and described or depicted in Exhibit "A" (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) 9174 Sky Park Court, San Diego, CA, approximately 35,417 - --------------------------------------------------------------------------- square feet as further described in Exhibits "B" & "D" - ------------------------------------------------------- SECTION 1.05. Lease Term: Five (5) years Two (2) months beginning on -------- -------- October 1, 1995 (see "First or such other date as is specified in this - --------------- Lease, and ending on November 30, 2000. Lease Rider" Item 7) ---------------------------------------- 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: CB Commercial Real Estate Group ----------------------------------- Tenant's Broker: CB Commercial Real Estate Group ----------------------------------- SECTION 1.09. Commission Payable to Landlord's Broker: (See Article Fourteen) $ per separate agreement ----------------------- 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 8. --------------------------------- SECTION 1.12. Rent and Other Charges Payable by Tenant: (A) BASE RENT: Twenty four thousand eighty four and no/100 --------------------------------------------- Dollars ($24,084.00) per month for the first 12 months, as provided ------------- -- in Section 3.01, and shall be increased on the first day of the 13th, 25th, 37th & 49th month(s) after the Commencement Date, either (i) - ------------------------- as provided in Section 3.02, or SECTION 1.13. Costs and Charges Payable by Landlord: (a) Base Real Property Taxes (See Section 4.02); (b) Base Insurance Premiums (See Section 4.04(c)): (c) Maintenance and Repair (See Article Six). SECTION 1.14. Landlord's Share of Profit on Assignment or Sublease: (See Section 9.05) zero percent (0.00%) of the Profit (the "Landlord's Share"). ---- ------- SECTION 1.15. 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 Area, Exhibit "D" - Project Site Plan, - --------------------------------------------------------------- Exhibit "E" - Building Rules & Regulations, Exhibit "F" - Work Letter - ------------------------------------------------------------------------- Agreement, Exhibit "G" - Tenant's Use of Hazardous Materials - --------------------------------------------------------------- 1 [Letterhead][Logo] Initials ----------------------- ----------------------- (Multi-Tenant Gross Form) 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 Property to Tenant on the Commencement Date. Landlord's non-delivery of the Property to Tenant on that date shall not affect this Lease or the obligations of Tenant under this Lease except that the Commencement Date shall be delayed until Landlord delivers possession of the Property to Tenant and the Lease Term shall be extended for a period equal to the delay in delivery of possession of the Property to Tenant, plus the number of days necessary to end the Lease Term on the last day of a month. If Landlord does not deliver possession of the Property to Tenant within sixty (60) days after the Commencement Date, Tenant may elect to cancel this Lease by giving written notice to Landlord within ten (10) days after the sixty (60)-day period ends. If Tenant gives such notice, the Lease shall be cancelled and neither Landlord nor Tenant shall have any further obligations to the other. If Tenant does not give such notice, Tenant's right to cancel the Lease shall expire and the Lease Term shall commence upon the delivery of possession of the Property to Tenant. If delivery of possession of the Property to Tenant is delayed, Landlord and Tenant shall, upon such delivery, execute an amendment to this Lease setting forth the actual Commencement Date and expiration date of the Lease. Failure to execute such amendment shall not affect the actual Commencement Date and expiration date of the Lease. see "First Lease Rider" Item 7. SECTION 2.03. EARLY OCCUPANCY. If Tenant occupies the Property prior to the Commencement Date, Tenant's occupancy of the Property shall be subject to all of the provisions of this Lease. Early occupancy of the Property shall not advance the expiration date of this Lease as described in "First Lease Rider" Item 7. 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, except as provided for in "First Lease Rider" Item 7. 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 9. (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. 2 [Letterhead][Logo] Initials ---------------------- ---------------------- (Multi-Tenant Gross Form) 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. As of the date of this Lease, there are no charges that constitute Additional Rent. SECTION 4.02. PROPERTY TAXES. (a) REAL PROPERTY TAXES. Landlord shall pay the "Rent Property Taxes" on the Property during the Lease Term. (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. (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, 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. 3 [Letterhead][Logo] Initials ---------------------- ---------------------- (Multi-Tenant Gross Form) (c) PAYMENT OF PREMIUMS. (i) Landlord shall pay the "Premiums" for the insurance policies maintained by Landlord under Paragraph 4.04(b). (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 leasable 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 8 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 4 Copyright 1988 Southern California Chapter [Logo] Initial ___________ of the Society of Industrial and Office Realtors,[Copyright], Inc. ___________ (Multi-Tenant Gross Form) 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. 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 the 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. 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 promptly 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 5 Copyright 1988 Southern California Chapter [Logo] Initial ___________ of the Society of Industrial and Office Realtors,[Copyright], Inc. ___________ (Multi-Tenant Gross Form) 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 the 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 13. 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. 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 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 (with 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 2, 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 the Section 6.02 shall not, however, exempt Landlord from liability for Landlord's gross negligence or willful misconduct. SECTION 6.03. LANDLORD'S OBLIGATIONS. Subject to the provisions of Article Seven (Damage or Destruction) and Article Eight (Condemnation), and except for damage caused by any act or omission of Tenant, or Tenant's employees, agents, contractors or invitees, Landlord shall keep the foundation, roof and structural portions of exterior walls of the improvements on the Property in good order, condition and repair. However, Landlord shall not be obligated to maintain or repair windows, doors, plate glass or the surfaces of walls. Landlord shall not be obligated to make any repairs under this Section 6.03 until a reasonable time after receipt of a written notice from Tenant of the need for such repairs. 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 nonstructural, interior, systems and equipment except heating, ventilation and air conditioning) 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). Landlord shall undertake the responsibility for preventive maintenance of the heating and air conditioning system. In addition, Tenant shall, at Tenant's expense, repair any damage to the roof, foundation or structural portions of walls caused by Tenant's acts or omissions. It is the Intention of Landlord and Tenant that, at all times during the Lease Term, Tenant shall maintain the Property in an attractive, first-class and fully operative condition. 6 Copyright 1988 Southern California Chapter [Logo] Initial ___________ of the Society of Industrial and Office Realtors,[Copyright], Inc. ___________ (Multi-Tenant Gross Form) (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 an 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. 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 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 TERMINATI0N. 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 policies 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 that 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 Tenant's notice to 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.* If Landlord so elects, Landlord shall rebuild the Property at Landlord's sole expense. Should Landlord so elect, Landlord would bear the reasonable costs of providing temporary replacement facilities, including costs of moving to and from said temporary replacement facilities. 7 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. 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 rule 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 Lease Rider" Item 11. SECTION 9.02. TENANT AFFILIATE. See "First Lease Rider" Item 12. 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 1.14) 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. 8 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 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 transfer 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 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 for 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 (iii) above, the "worth at the time of the award" is computed by discounting such amount at the discount rate of the ------ Reserve Bank of San Francisco at the time of the award, plus one percent (1%). If Tenant has abandoned the Property, ----- 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); 9 (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 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 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. 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. see "First Lease Rider" Item 6. 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 10 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 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 to 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 all transfer taxes and recording fees. [-------------] 11 [-------------] (Multi-Tenant Gross Form) 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. 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 Majoure. 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 Section 14.01. Broker's Fee. When this Lease is signed by and delivered to both Landlord and Tenant, Landlord shall pay a real estate commission to Landlord's Broker named in Section 1.08 above, if any, as provided in the written agreement between Landlord and Landlord's Broker, or the sum stated in Section 1.09 above for services rendered to Landlord by Landlord's Broker in this transaction, Landlord shall shall pay Landlord's Broker a commission if Tenant exercises any option to extend the Lease Term or to buy the Property, or any similar option or right which Landlord may grant to Tenant, or if Landlord's Broker is the procuring cause of any other lease or sale entered into between Landlord and Tenant covering the Property. Such commission shall be the amount set forth in Landlord's Broker's commission schedule in effect as of the execution of this Lease. If a Tenant's Broker is named in Section 1.08 above, Landlord's Broker shall pay an appropriate portion of its commission to Tenant's Broker if so provided in any agreement between Landlord's Broker and Tenant's Broker. Nothing contained in this Lease shall impose any obligation on Landlord to pay a commission or fee to any party other than Landlord's Broker. Section 14.02. Protection of Brokers. If Landlord sells the Property, or assigns Landlord's interest in this Lease, the buyer or assignee shall, by accepting such conveyance of the Property or assignment of the Lease, be conclusively deemed to have agreed to make all payments to Landlord's Broker thereafter required of Landlord under this Article Fourteen. Landlord's Broker shall have the right to bring a legal action to enforce or declare rights under this provision. The prevailing party in such action shall be entitled to reasonable attorneys' fees to be paid by the losing party. Such attorney's fees shall be fixed by the court in such action. This Paragraph is included in this Lease for the benefit of Landlord's Broker. Section 14.03. Agency Disclosure; No Other Brokers. Landlord and Tenant each warrant that they dealt with no other real estate broker(s) in connection with this transaction except: CB Commercial Real Estate Group, Inc., who represents - ------------------------------------------------------------------------------ Landlord - ------------------------------------------------------------------------------ Tenant and -------------------------------------------------------------------------- - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ In the event that CB Commercial represents both Landlord and Tenant, Landlord and Tenant hereby confirm that they were timely advised of the dual representation and that they consent to the same, and that they do not expect said broker to disclose to either of them the confidential information of the other party. ARTICLE FIFTEEN: COMPLIANCE The parties hereto agree to comply with all applicable federal, state and local laws, regulations, codes, ordinances and administrative order 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" [------------] 12 [------------] (Multi-Tenant Gross Form) 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 April 20, 1995 Cody Three, Inc., a Wyoming corporation ------------- at Denver, Colorado. ---------------------------------------- ----------------- ---------------------------------------- By: /s/ Raymond D. Fink ----------------------------------- Raymond D. Fink Its: Vice-President ----------------------------------- By: ----------------------------------- Its: ----------------------------------- "TENANT" Signed on April 17, 1995 Maxwell Laboratories, Inc., a Delaware -------------- -------------------------------------- at San Diego, California corporation, I Bus Division --------------------- --------------------------- By: /s/ Sean M. Maloy ----------------------------------- Sean M. Maloy Its: Executive Vice-President & Chief Operating Officer ----------------------------------- By: ----------------------------------- Its: ----------------------------------- 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-Registered Trademark-, INC. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND OFFICE REALTORS, INC.-Registered Trademark-, 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. Initials [------------] 13 [------------] (Multi-Tenant Gross Form) FIRST LEASE RIDER CODY THREE, INC. AS LANDLORD AND MAXWELL LABORATORIES, INC. AS TENANT The First Lease Rider to Industrial Real Estate Lease ("Rider") is entered into concurrently with and made a part of the Industrial Real Estate Lease between Cody Three, Inc., ("Landlord") and Maxwell Laboratories, Inc. ("Tenant") dated April 17, 1995 for the premises located at 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. 1. Article 16 SIGNAGE: 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 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. 2. Article 17 TENANT IMPROVEMENTS: Landlord agrees to improve the premises as shown and described on Exhibits "A" and "B" attached hereto and made a part hereof. Any additional improvements to the premises not specifically addressd 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 writting 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 untill 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 entirely, 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 building are of a satisfactory air quality. Such air quality testing shall include analyzing the building air handling system to ensure that any toxin-containing materials or fibers are not circulated or vented into the premises. Landlord will be responsible for payment for tests of the system upon completion of tenant inprovements 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 premises, the roof, the existing HVAC system, windows and seals, and electrical and plumbing system and equipment are in good working order as of the date of lease commmencement. In addition, Landlord shall deliver the premises in a condition that meets all codes and regulations, the Americans With Diabilities Act (ADA), and any Title 24 requirements as the aforementioned exist as of the date of the lease. Tenant will be responsible for costs associated with compliance with the ADA only for those interior items 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. To the best of Landlord's knowledge, the building does not contain, nor has ever contained, asbestos containing materials; and there is no current use, storage or disposal of significant quantities of hazardous materials on the site. 3. Article 18 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 give 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; and (c) the Base Rent shall be at the then prevailing fair market rate and increased annually according to Article Three of this Lease. 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 1 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 to Tenant during the renewal term unless expressly granted by Landlord in writing; and (c) the Base Rent shall be at 90% of the then prevailing fair market rate increased according to Article Three of this Lease. 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. 4. Article 19 EXPANSION: Tenant shall be granted a continuous first right of refusal to lease the remaining portion of the mezzanine level (estimated at 7,200 square feet - to be field verified by Landlord's Architect) of the building at 9174 Sky Park Court throughout the lease term. The terms and conditions for that expansion space shall be the same as those in effect under the existing Lease, except as amended by both parties, and at the then prevailing Base Rent for the premises under this Lease. Tenant improvements for the expansion area shall be provided by Landlord and are as shown and described in Exihibits "A", "C" and "F" to this Lease. Any improvements to be made by the Landlord in the expansion space shall be, at the most, in accordance, and in the same general nature, quality and type, as is in the Premises covered by this Lease at the time of commencement of the Lease. If Tenant desires any other nature, quality, type or other deviation from the primary Tenant improvements any additional costs shall be paid by Tenant. Tenant shall also have a first right of refusal to lease the premises currently occupied by Konica and located at 9173 Sky Park Court should Konica vacate the premises. Said right must be exercised within thirty (30) days of receipt of written notification of the impending lease of the premises, under the same terms and conditions offered by the prospective lessee, or this right is invalidated. Tenant shall also have the first right of opportunity to lease any portion of the remainder of the building at 9173 Sky Park Court that becomes available for lease under terms and conditions to be mutually agreed upon by both Tenant and Landlord. 5. Article 20 DOCK WELL USAGE: The dock well between 9173 and 9174 Sky Park Court is an open dock and there will be no exclusivity of use by either Tenant or any tenant in possession of the premises at 9173 Sky Park Court. 6. Article 21 NON-DISTURBANCE: Should the Property be financed 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. 7. Sections 1.05, 2.03 & 3.01 LEASE COMMENCEMENT, OCCUPANCY and RENTAL ABATEMENT: Tenant shall be granted approximately one (1) month of early occupancy for fixturization beginning on or about September 1, 1995 (upon receipt of certificate of occupancy) and the lease shall commence October 1, 1995 with two months of rental abatement during months 2 and 3 (November and December, 1995) of the primary lease term. 8. Sections 1.11 & 4.05(c) PARKING: Tenant will have 131 parking spaces available of which four (4) will be reserved inmmediately in front of the premises, the exact location of which to be mutually agreed upon by Landlord and Tenant, and the remaining 127 will be unreserved. The entire project has a total of 400 parking spaces with a ratio of 3.7/1000 square feet of net rentable area. Any future expansion will add unreserved parking to the Tenant's total at that ratio. 9. Section 3.02(a)BASE RENT: The minimum increase will be two percent (2%) per year and the maximum increase will be five per cent (5%) per year. 10. Section 4.04(a)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. 11. Section 9.01 ASSIGNMENT and SUBLETTING: Tenant may assign this Lease or sublease any portion of the Property to any unaffiliated sub-tenant 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. 2 12. Section 9.02 ASSIGNMENT and SUBLETTING: Tenant may assign this Lease or sublease any portion of the Property to any parent corporation, subsidiary or affiliated entry 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. 13. 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 Hazadous 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 subjected 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 that 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 13 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 directly in the event insurance does not cover thes payments or liabilities. ------------------------ ------------------------- Landlord's Initials Tenant's Initials Date: 4/20/95 Date: 4-17-95 ------------------ ------------------- 3 EXHIBIT "A" Specifications For 9174 Sky Park Court, San Diego I-Bus Tenant Improvements DESCRIPTION OF ITEMS ON THE DRAWINGS AT EXIHIBIT "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 CONVERINGS, 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). 02. 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 EXERIOR 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 TENANTS 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 OA 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 SYSTEN 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. EXIHIBIT 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 RESTROOOM PLUMBING TO REMAIN AS IS. B. SUPPLY WATER AND WASTE LINES TO BE PIPED TO CAFERTERIA ROOM #39. EXISTING SINK COUNTER TO BE INSTALLED AND CONNECTED WITH A GARRAGE 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 EXISTING AND NEW LIGHT FIXTURES AS PER PLANS AND CODES. F. SUPPLY 110V HOOK UP FOR TENANT'S U.P.S. SYSTEM AS PER PLANS AND CODES. G. DISCONNECT AND HOOK UP TENANT'S 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 TENANT'S AIR COMPRESSOR TO 208V AS PER PLANS AND CODES. J. SUPPLY 208V HOOK UP TO TENANT'S 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 MIMINUM 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 APPLICANCES 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 BREAKERS 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 CODE REQUIRE. EXIHBIT A PAGES 3 6. BURN IN 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 A 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 REQUIRMENTS. 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 RESTROOOMS, 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 APROXIMATELY $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 - 5X8 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'X8' 1/2" PLYWOOD BACKBOARD IN ROOM #21 FOR PHONE EQUIPMENT. EXIHIBIT A PAGE 4 K. UPON COMLETION OF CONSTRUCTION, CLEAN UP AND WAX WITH A STANDARD COMMERCIAL JANITORIAL FLOORWAX ROOMS #39 & #109 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 REMOVFABLE 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. 0. PROVIDE ELECTRICAL OUTLET OR SERVICE FOR 1-BUS SIGN ABOVE ROOM #28. EXHIBIT "B" [********************** M A P *********************] GROUND FLOOR EXHIBIT "B" [********************* M A P ***********************] MEZZANINE AREA EXHIBIT "C" [********************** M A P *********************] EXPANSION AREA - MEZZANINE EXHIBIT "D" SKY PARK CENTRE [********************** M A P *********************] 9174 SKY PARK COURT 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, motocycles 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 this 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 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 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 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 quasi-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 the 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 such 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. 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 indemnity 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. 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. 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 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-10.14 4 EXHIBIT 10.14 CONSULTING AGREEMENT Exhibit 10.14 CONSULTING AGREEMENT This Agreement is entered into as of the 25 day of June, 1996, by Maxwell Laboratories, Inc., a Delaware corporation, having its principal place of business at 8888 Balboa Avenue, San Diego, CA 92123 (hereinafter referred to as "Maxwell"), and Dr. Alan C. Kolb, located at Linea del Cielo, Rancho Santa Fe, CA (hereinafter referred to as "Kolb" or "Consultant"). This Agreement will take effect on 1 August 1996. WITNESSETH WHEREAS, Maxwell and Consultant desire to enter into an agreement for the performance by Consultant for professional and technical services in connection with existing programs, and for advanced business and technology development to further exploit Maxwell's core technologies; NOW, THEREFORE, in consideration of the premises and of the mutual promises hereafter contained, the parties hereto agree as follows: 1. SERVICES TO BE RENDERED. Until 30 days after the giving of the notice referred to in paragraph 4a below: a. Maxwell hereby engages Consultant to render, as an independent contractor, consulting services to Maxwell for the further development of Maxwell's proprietary technologies, e.g. 1) power products; 2) high power systems; 3) Pure Pulse technologies, etc., as well as the development of new business that derive from these technologies. b. Maxwell also engages and encourages Consultant to further develop or invent new technologies in the broad field of power products and systems. When these occur, Consultant will present technology and advanced business development plans for consideration by Maxwell's President/CEO along with the relevant Maxwell Division President or General Manager. c. Maxwell also engages Consultant to market Maxwell's existing and developing products and technologies, and to develop alternative business arrangements, that will allow the timely and profitable introduction of Maxwell products into the marketplace, both in the United States and Worldwide. d. Maxwell shall make available facilities and support services necessary and reasonable for use by Consultant (as determined by Maxwell's President/CEO) in order to allow Consultant to efficiently and effectively perform the services contemplated by this Consulting Agreement. e. The Consultant shall work under the general supervision of Maxwell's President/CEO and directly with Maxwell's Divisions, i.e., its President, program managers and professional staff. f. Consultant hereby accepts the engagement to provide consulting services to Maxwell on the terms and conditions set forth herein. 2. THIRD PARTIES. Consultant represents that he has a good right to enter into this Agreement, and that he has no contractual obligations with third parties in conflict herewith. 3. TERM. The term of this Agreement is from August 1, 1996 to July 31, 1999 (the "Consulting Period"). 4. COMPENSATION. In consideration of the services to be performed by Consultant, Maxwell agrees to pay Consultant fees as well as a possible incentive bonus and other expenses as follows: a. Consultant Fees. Consultant shall be paid the following consulting fees: (1) $2,000 per month for each month during the Consulting Period (regardless of the giving of the notice referred to below), and (2) $8,000 per month for the first six months of the Consulting Period and for each remaining month of the Consulting Period until the President/CEO, upon 30 days' prior notice, notifies Consultant that he is no longer required to provide the services outlined in Paragraph 1 above, in each case to be paid on the last business day of each month during the Consulting Period. b. Performance Bonus. Consultant may be paid a bonus of up to sixty thousand dollars ($60,000) for any six month period of the Consulting Period; the bonus will be in the range from $0 to $60,000. If the notice referred to in Paragraph 4a above is given, the bonus maximum for the period will be 2 prorated (EG. $40,000 maximum for a four month period). The exact amount will be determined by Maxwell's President/CEO in his discretion following an evaluation of the contributions made by consultant under the first paragraph of this Agreement. Any performance bonus will be paid within ten (10) days following the applicable period. c. Business and Travel Expenses. Upon submission of itemized expense statements, Consultant will be reimbursed for reasonable business travel expenses as are necessary in the performance of Consultant's services under this Agreement as approved by Maxwell's President/CEO. 5. AUDIT. Consultant shall keep accurate records and books of account showing all charges, disbursements or expenses made or incurred by Consultant in the performance of the services herein. Maxwell shall have the right, upon reasonable notice, to audit or have audited at any time up to one (1) year after payment of a final invoice, Consultant's records documenting Consultant's professional and technical services and related expenses. 6. PRODUCTS AND DOCUMENTS. The results of work performed pursuant to this Agreement or developed during the Consulting Period (unless the President/CEO has otherwise agreed in writing) by Consultant are the property of Maxwell. Upon request, Consultant shall promptly supply Maxwell with all notes, writings, lists, files, reports, correspondence, tapes, cards, maps, machines, technical data, or any other tangible product or document which Consultant produced or received in the performance of work under this Agreement or developed during the Consulting Period. 7. PERSONAL PROPERTY. From time to time Maxwell may provide Consultant with tangible personal property (such as data, tapes, maps, computers, etc.) in order for Consultant to perform this work. All such property remains the property of Maxwell, unless there is a written agreement signed by the President/CEO to the contrary. 8. PUBLIC RELEASE OF INFORMATION. No information relating to this Agreement or work performed under this Agreement shall be released other than to Consultant's employees requiring this information in performance of their duties, without advance 3 written approval of Maxwell. In no event shall the interest of Maxwell in any work performed by Consultant under this Agreement be indicated in any advertising without advance written approval of Maxwell. Requests for such authorization shall be forwarded to Maxwell at least three weeks in advance of the date of presentation or publication. 9. INVENTIONS AND PATENT RIGHTS. The provisions governing inventions and patent rights shall be as follows: a. All inventions, discoveries, improvements, devices, designs, apparatus practices, processes, methods, or products (hereinafter individually or collectively called "inventions"), whether patentable or not, and all copyrightable material made, developed, perfected, devised, conceived or first reduced to practice by Consultant either solely or jointly with others during the Consulting Period (unless the President/CEO has otherwise agreed in writing) or otherwise in the course of Consultant's work for Maxwell shall be the sole and exclusive property of Maxwell. Consultant shall hold each and every such invention in a fiduciary capacity for Maxwell's benefit and promptly disclose to Maxwell in writing complete information relative to any such invention. b. At the request of Maxwell during and after the Consulting Period and without further compensation, Consultant shall (1) assist Maxwell, its attorneys, nominees, or assignees in preparing and prosecuting in the United States and all foreign countries applications for patents covering all such inventions; (2) execute, acknowledge, and deliver any and all instruments, deemed by Maxwell, its attorneys, nominees, or assignees to be necessary to make, file, or prosecute all such applications or in connection with continuations, renewals, or re-issues thereof or in the conduct of all proceedings or litigations thereto; and (3) execute any and all instruments deemed by Maxwell, its attorneys, nominees, or assignees to be necessary to transfer title in and to such applications or title in and to all patents covering inventions to Maxwell or its nominees. Any reasonable expense incurred by Consultant in discharging his 4 obligations pursuant to this subparagraph (b) shall be paid or reimbursed by Maxwell or its nominees, or assignees. c. Consultant shall keep accurate and authentic accounts, notes, data and records of his work hereunder and all such accounts, notes, data, drawings, designs, sketches, specifications, records and memoranda of every description relating to the services hereunder or otherwise covered hereby or any part thereof as Consultant shall produce and all copies of the foregoing shall be the property of and subject to inspection by Maxwell at all reasonable times and shall be delivered to Maxwell or otherwise disposed of by Consultant as Maxwell may direct from time to time. Upon request by Maxwell, Consultant shall promptly surrender the same to Maxwell, or if not so requested, Consultant shall deliver same upon completion or termination of this Agreement, and Maxwell shall have full right to use same in any way. d. Consultant represents that he has no agreement with other parties that would preclude his compliance with his obligations hereinabove set forth in this paragraph. 10. PROPRIETARY INFORMATION. In connection with Consultant's activities on behalf of Maxwell, Consultant may be given access to certain proprietary information and trade secrets of Maxwell. Consultant agrees to preserve in strict confidence all such information during the term of this Agreement and for a period of five (5) years beyond the expiration date of this Agreement as finally amended. Consultant agrees that he will not reveal, disclose, publish, or in any other way utilize this information except in performance of work authorized by the President/CEO as approved in writing by duly authorized representatives of Maxwell. The obligations of Consultant herein shall survive the termination of this Agreement. 11. NATURE OF RELATIONSHIP. a. The relationship of Consultant to Maxwell is that of an independent contractor and nothing herein shall be construed as creating any other relationship. As such, Consultant shall comply with all laws and assume all risks incident to its status as an independent contractor. This includes, but 5 is not limited to, responsibility for all applicable federal and state income taxes, associated payroll and business taxes, licenses and fees, and such insurance as is necessary for Consultant's protection in connection with work performed under this Agreement. Consultant shall be licensed, if required, in accordance with the laws of the State of California, and Consultant, if not so licensed, is subject to the penalties imposed by such laws. b. It is understood that Consultant shall not represent, act, purport to act, or be deemed to be an agent, representative, employee or servant of Maxwell. The Consultant will not enter into agreements or incur obligations on behalf of Maxwell or commit Maxwell in any manner without Maxwell's prior written consent. c. Consultant shall provide all labor, equipment and materials required to complete the services and shall have full control over the mode and manner of performing the services. Consultant has and hereby retains the right to exercise full control and supervision of the services and full control over the employment, direction, compensation and discharge of all persons assisting Consultant in the services. Consultant agrees that he will be solely responsible for all matters relating to payment of Consultant's employees, including, but not limited to compliance with all applicable provisions of worker's compensation laws, unemployment compensation laws, Social Security, withholding and all other federal, state and local laws and regulations governing such matters. Consultant agrees to be responsible for Consultant's own acts and those of Consultant's subordinates, employees and subcontractors during the performance of the work under this Agreement. 12. SECURITY. Consultant shall abide by all applicable security laws and regulations of the United States of America and shall refrain from taking any action which may compromise existing security laws, procedures or regulations. 13. WORK PERFORMED AT MAXWELL FACILITIES. The performance of work under this Agreement requires Consultant to enter the premises of Maxwell. 6 Consultant shall indemnify, defend and hold harmless Maxwell from and against all claims for bodily injuries, including death, or damage to property caused by the condition of any premises, equipment, or other property being used or operated by Consultant or any of Consultant's employees, provided Consultant's aforesaid indemnity and hold harmless agreement shall not be applicable to any liability where bodily injuries, including death, or damage to property result from the sole negligence or willful misconduct of Maxwell. 14. NON-SOLICITATION. Consultant further agrees that he will not solicit or participate or assist in any way in the solicitation of any person in management, professional or technical positions at Maxwell for employment by any other company during the Consulting Period. Consultant will not be in violation of this provision if he pursues a position with a future employer if it occurs without any encouragement or involvement by Consultant directly or indirectly. 15. NON-COMPETE AND COOPERATION AGREEMENT. Consultant agrees that during the Consulting Period he shall abide by the terms hereof. As an independent contractor, subject to the terms of this Agreement, Consultant is free to form his own company or to consult for other companies or the U.S. Government. Should these activities occur, Consultant will abide by all of the terms of this Agreement. Further, during the Consulting Period, Consultant will not work for any person or entity that is now in competition with the Maxwell or on any project or proposal for any other person or entity which would be in competition with the Maxwell. Consultant further agrees that during the Consulting Period, or thereafter, he may be asked to and that he will, in fact, cooperate with Maxwell, its attorneys or experts retained by Maxwell or its attorneys in connection with any litigation matters involving Maxwell that are pending or that may arise hereafter. 16. EXIT INTERVIEW. At Maxwell's request, upon expiration or termination of this Agreement, Consultant agrees to participate in an exit interview. The purpose of this interview is anticipated to be (but is not limited to): accounting for all notes, writings, files, reports, correspondence, tapes, cards, maps, 7 machines, technical data, or any other tangible product or document which Consultant produced or received in connection with this Agreement; accounting for any classified documents provided to Consultant under this Agreement; debriefing Consultant on any appropriate security matters; discussions of any appropriate trade secret or confidential information restrictions; and appropriate technical debriefings. Consultant shall not be entitled to additional compensation for the exit interview. 17. GOVERNING LAW. The Agreement shall be governed by the laws of the State of California. 18. DISPUTES. Any dispute or difference arising out of this Agreement or involving a question of fact which is not settled by mutual agreement and settlement of which is not otherwise provided for herein, shall be decided by Maxwell. Such decision shall be reduced to writing and furnished to Consultant within thirty (30) days after receipt of such decision. Consultant may notify Maxwell, within thirty (30) days, in writing of his disagreement with such decision, and in the absence of such notice, Maxwell's decision shall be final. In the event Consultant gives such notice of disagreement the dispute shall be settled and finally determined by arbitration in the City of San Diego, in the following manner: a. Both parties to this Agreement shall appoint an arbitrator. The two arbitrators so appointed shall thereupon select a third arbitrator. The arbitrators shall meet and give opportunity to each party to this Agreement to present its case and witnesses (if any) in the presence of the other, and shall then make their award. Decision in writing of the three arbitrators, or any two of them, shall be final and binding upon the parties thereto, and judgment may be entered therein in any court having jurisdiction. Such decision shall include the fixing of the expenses of the arbitration and the assessment of the same against either or both parties. If either party shall fail to appoint its arbitrator within thirty days after receipt of notice in writing requiring it to do so, the arbitrator appointed by the other party shall act for both, and his decision in writing shall be final and binding on both parties, as if he had been 8 appointed by consent. Pending final decision of a dispute hereunder and, if performance has not been completed, Consultant shall proceed diligently in accordance with Maxwell's instructions from the President/CEO. b. If, in an appropriate case, the arbitrators appointed by the parties shall fail to select a third arbitrator within two weeks of their appointment, a third arbitrator shall be selected in accordance with the then current rules and regulations of the American Arbitration Association. 19. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between Maxwell and Consultant regarding the provision of consulting services by Consultant to Maxwell. It supersedes all prior or contemporaneous communications, representations or agreements whether oral or written with respect such subject matter and has been induced by no representations, statements, or agreements other than those herein expressed. No agreement hereafter made between the parties shall be binding on either party unless reduced to writing and signed by an authorized representative of the party sought to be bound thereby. 20. SEVERABILITY. The provisions of this Agreement are severable, and if any part of it is found to be unenforceable, the other paragraphs shall remain fully valid and enforceable. 21. WAIVER. No waiver or a breach of any provision to this Agreement shall constitute a waiver of any other breach or of such provision. Failure by either party to enforce at any time, or from time to time, any provision of this Agreement shall not be construed as a waiver thereof. The remedies herein shall be cumulative and additional to any other remedies in law or equity. 22. COUNTERPARTS. This Agreement may be executed in counterparts and each counterpart shall be deemed a duplicate original. 9 This Consulting Agreement consists of paragraphs 1 through 22. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first written above. Maxwell Laboratories, Inc. Consultant President/CEO Alan C. Kolb /s/ Kenneth Potashner /s/ Alan C. Kolb - ----------------------------------- ----------------------------------- Signature Signature Date: June 25, 1996 Date: June 21, 1996 10 EX-10.15 5 EXHIBIT 10.15 SEPARATION AGREEMENT Exhibit 10.15 CONFIDENTIAL SEPARATION AGREEMENT AND RELEASE OF ALL CLAIMS This Confidential Separation Agreement and Release of Claims ("Agreement") is made between Dr. Alan C. Kolb ("Dr. Kolb") and Maxwell Laboratories, Inc. and its divisions and subsidiaries (collectively, "Maxwell" or "the Company") and shall become effective upon the "Effective Date" as set forth in paragraph 15d. RECITALS WHEREAS, Dr. Kolb as a founder of Maxwell has worked with the Company for 26 years and is an employee of Maxwell and a member of Maxwell's Board of Directors; WHEREAS, it is the desire of the parties that Dr. Kolb continue to actively assist the President/CEO and his management team through the development of additional business for Maxwell through his contacts and in-depth knowledge of the technology and its potential applications; and WHEREAS, Dr. Kolb and Maxwell intend to enter into a consulting relationship for Dr. Kolb to continue to work with Maxwell; NOW, THEREFORE, in order to provide benefits to Dr. Kolb flowing from his employment relationship with Maxwell, and in consideration of the mutual promises, covenants and representations set forth below and other good and valuable consideration, the parties agrees as follows: 1. RELINQUISHMENT OF EXECUTIVE POSITIONS/EMPLOYMENT. Pursuant to this Agreement, Dr. Kolb resigns his positions as Chairman and CEO of Pure Pulse Technologies on the Effective Date of this Agreement. Additionally, Dr. Kolb will provide a letter, dated April 26, 1996, resigning his positions of President and CEO of Maxwell. Maxwell's Board of Directors appointed a new President and CEO on April 26, 1996. 2. PAYMENT OF GOOD AND VALUABLE CONSIDERATION. Upon the expiration of his employment agreement on July 31, 1996, Dr. Kolb shall be paid his final paycheck and all accrued but unused vacation and any other accrued but unpaid benefits. a. On August 1, 1996, Dr. Kolb shall thereafter be retained as a consultant pursuant to the terms of the Consulting Agreement, a copy of which is attached hereto as Exhibit A (the "Consulting Agreement"). b. Beginning on August 1, 1996, Maxwell will provide to Dr. Kolb life insurance and disability, dental, and medical insurance or coverage comparable to that provided from time to time to executive officers of Maxwell. These benefits may be provided to Dr. Kolb either by allowing Dr. Kolb to participate in Maxwell's plans or by separate coverage or reimbursement and will continue for 24 months or until July 31, 1998. c. As of the expiration of Dr. Kolb's current employment contract (31 July 1996), Dr. Kolb shall no longer be entitled to any contributions by the Company to his 401(K) account, SERP or Company retirement programs. The balances then in such account or programs shall become the property of Dr. Kolb. d. Maxwell shall pay to Dr. Kolb on the last day of his current employment contract (31 July 1996) the sum of $400,000 as additional compensation. e. Dr. Kolb currently has stock options both in Maxwell Laboratories, Inc. pursuant to the 1985 plan and in Pure Pulse pursuant to the 1994 plan as set forth in Exhibit B attached hereto. These stock options shall be converted to non-qualified stock options at the latest possible date allowable under the plan documents and applicable law, and shall remain in effect until their respective scheduled expiration dates as set forth in Exhibit B. Dr. Kolb and the Company shall sign any agreements or papers necessary to effectuate the conversion of such options. f. Except as expressly provided for in the foregoing subparagraphs and in the Consulting Agreement, Dr. Kolb shall not be entitled to any other payments, benefits or perquisites after the expiration date (31 July 1996) of Dr. Kolb's employment and any such payments, benefits and perquisites then in effect shall cease. Any cash payment that may be made to other Directors of the Company, in their capacity as Directors, during Dr. Kolb's tenure as a Director, shall also be paid to him. 3. INDEMNIFICATION AGAINST CLAIMS. Maxwell agrees to indemnify and hold Dr. Kolb harmless from any liability, claims, demands, costs, expenses and attorneys' fees incurred by him as a result of any actions by him in the course of his employment, or as a Director of the Company to the extent Directors and officers of Maxwell would be so indemnified. 2 4. NON-DISCLOSURE OF TRADE SECRETS AND CONFIDENTIAL INFORMATION. Dr. Kolb understands and agrees that in the course of employment with Maxwell he has acquired confidential information and trade secrets concerning the operations of Maxwell and its future plans and methods of doing business, which information Dr. Kolb understands and agrees would be damaging to Maxwell if disclosed to a competitor or made available to any other person or corporation. Dr. Kolb understands and agrees that such information either has been developed by him or divulged to him in confidence, and he understands and agrees that he will keep all such information secret and confidential. 5. GENERAL RELEASE. a. Dr. Kolb, on behalf of himself and his heirs, executors, administrators, successors and assigns, does hereby irrevocably and unconditionally release, acquit and forever discharge Maxwell, and its divisions, subsidiaries, affiliates and all owners, stockholders, predecessors, successors, assigns, agents, directors, officers, employees, representatives, and attorneys, acting by, through, under or in concert with Maxwell or any parent, subsidiary or related entity, from any and all charges, complaints, grievances, claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses (including attorneys' fees and costs actually incurred), of any nature whatsoever, known or unknown, suspected or unsuspected, joint or several, which Dr. Kolb has had or may hereafter claim to have had, against Maxwell by reason of any matter, act, omission, cause or event whatever from the beginning of time to the Effective Date ("Kolb Claims"); other than those obligations set forth in this Agreement and the Consulting Agreement. b. Maxwell, and all predecessors, successors, assigns, agents, representatives, and attorneys, acting by, through, under or in concert with Maxwell does hereby irrevocably and unconditionally release, acquit and forever discharge Dr. Kolb, on behalf of himself and his heirs, executors, administrators, successors and assigns, from any and all charges, complaints, grievances, claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses (including attorneys' fees and costs actually incurred), of any nature whatsoever, known or unknown, suspected or unsuspected, joint or several, which Maxwell has had or may hereafter claim to have had, against Dr. Kolb by reason of any matter, act, omission, cause or event whatever from the beginning of time to the Effective Date ("Maxwell Claims"); other than those obligations set forth in this Agreement and the Consulting Agreement. 3 The Kolb Claims and the Maxwell Claims are collectively referred to herein as the "Claims." c. This release and waiver of Claims specifically includes, but without limiting the foregoing general terms, the following: (1) all Claims arising from or relating in any way to any act or failure to act by any employee of Maxwell, (2) all Claims arising from or relating in any way to the employment relationship of Dr. Kolb with Maxwell and/or the termination thereof, including any claims which have been asserted or could have been asserted against Maxwell or Dr. Kolb, together with (3) any and all Claims which might have been asserted by Dr. Kolb or Maxwell in any suit, claim, or charge, for or on account of any matter or things whatsoever that has occurred up to and including the effective date of this Agreement, under any and all laws, statutes, orders, regulations, or any other claim or right(s); including without limitation, any claim under Age Discrimination in Employment Act of 1967, as amended, Title VII of the Civil Rights Act of 1964, as amended, and the California Fair Employment and Housing Act or any Claim in contract or tort. Dr. Kolb and Maxwell each waive their rights under section 1542 of the Civil Code of California which states: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known to him must have materially affected his settlement with the debtor. 6. CONFIDENTIALITY OF TERMS OF AGREEMENT. The parties to this Agreement agree that as of the Effective Date of this Agreement, each of them, and their counsel, will keep the terms, amount and fact that this Agreement exists completely confidential and will not disclose any information about this Agreement to anyone, except those provided herein, with the exception for legal, financial, or tax advisors for Dr. Kolb and Maxwell and the officers and directors of Maxwell. 7. BINDING AGREEMENT. This Agreement will be binding upon Dr. Kolb and Maxwell and their respective heirs, administrators, representatives, executors, successors and assigns and shall inure to the benefit of the parties hereto and their representatives, and each of them, and to their heirs, administrators, representatives, executors, successors and assigns. 4 8. DISPUTES. Any dispute or difference arising out of this Agreement, or involving a question of fact which is not settled by mutual agreement and settlement of which is not otherwise provided for herein, shall be decided by Maxwell. Such decision shall be reduced to writing and furnished to Consultant within thirty (30) days after receipt of such decision. Consultant may notify Maxwell, within thirty (30) days, in writing of his disagreement with such decision, and in the absence of such notice, Maxwell's decision shall be final. In the event Consultant gives such notice of disagreement the dispute shall be settled and finally determined by arbitration in the City of San Diego, in the following manner: a. Both parties to this Agreement shall appoint an arbitrator. The two arbitrators so appointed shall thereupon select a third arbitrator. The arbitrators shall meet and give opportunity to each party to this Agreement to present its case and witnesses (if any) in the presence of the other, and shall then make their award. Decision in writing of the three arbitrators, or any two of them, shall be final and binding upon the parties thereto, and judgment may be entered therein in any court having jurisdiction. Such decision shall include the fixing of the expenses of the arbitration and the assessment of the same against either or both parties. If either party shall fail to appoint its arbitrator within thirty days after receipt of notice in writing requiring it to do so, the arbitrator appointed by the other party shall act for both, and his decision in writing shall be final and binding on both parties, as if he had been appointed by consent. Pending final decision of a dispute hereunder and, if performance has not been completed, Consultant shall proceed diligently in accordance with Maxwell's instructions from the President/CEO. b. If, in an appropriate case, the arbitrators appointed by the parties shall fail to select a third arbitrator within two weeks of their appointment, a third arbitrator shall be selected in accordance with the then current rules and regulations of the American Arbitration Association. 9. ATTORNEYS' FEES. Each Party will pay their own respective attorney's fees, both as they occur for this agreement and for any litigation that may occur concerning this Agreement. 10. NON-RELIANCE. Other than as expressly set forth in this Agreement, Dr. Kolb and Maxwell represent and acknowledge that in executing this Agreement they did not rely upon and they have not relied upon any representation nor statement made by any of the parties hereto or by any of their agents, representatives or attorneys 5 with regard to the subject matter, basis or effect of this Agreement or otherwise. 11. AGREEMENT OBLIGATES, EXTENDS AND INURES. The provisions of this Agreement shall be deemed to obligate, extend and inure to the benefit of the legal successors, assigns, transferees, grantees, heirs, shareholders, officers and directors of each signatory party hereto, and to those who may assume any or all of the above-described capacities subsequent to the execution and Effective Date of this Agreement. 12. METHOD OF EXECUTION. This Agreement may be executed in counterparts and each counterpart shall be deemed a duplicate original. 13. APPLICABLE LAW. This Agreement is deemed to have been made and entered into in the State of California and shall in all respects be interpreted, enforced and governed under the laws of said State. 14. SEVERABILITY. The provisions of this Agreement are severable, and should any provision of this Agreement be declared or be determined by any arbitrator or court to be illegal or invalid, any such provision shall be stricken, and the validity of the remaining parts, terms or provisions shall not be affected. 15. OLDER WORKERS BENEFIT PROTECTION ACT. The Release contained in paragraph 5 is intended to release and discharge any and all claims of Dr. Kolb against Maxwell as set forth above, including but not limited to, any claims arising under the Age Discrimination in Employment Act, 29 U.S.C. Section 621 ET. SEQ. It is the intent of Dr. Kolb and Maxwell that such Release satisfy the requirements of the Older Workers Benefit Protection Act, Public Law 101-433, codified at 29 U.S.C. Section 626(f). The following general provisions, along with the other provisions of such Release, are agreed to for this purpose: a. Dr. Kolb acknowledges and agrees that he has read and he understands the terms of this Agreement; b. Dr. Kolb acknowledges that he has been given a full opportunity to consult with a lawyer with respect to the matters referenced in such Release, and that Dr. Kolb has obtained and considered such legal counsel as he deems necessary, such that Dr. Kolb is entering into such Release freely, knowingly and willingly; 6 c. Dr. Kolb acknowledges that he has been given at least twenty-one days in which to consider whether or not to enter into this Agreement; d. This Agreement shall not become effective or enforceable until the eighth day after Dr. Kolb signs this Agreement (the eighth day after Dr. Kolb signs this Agreement being the "Effective Date") unless Dr. Kolb has revoked this Agreement in writing during the seven days after signing this Agreement. 16. ENTIRE AGREEMENT. This Agreement, together with the Consulting Agreement, sets forth the entire agreement between the parties and fully supersedes any and all prior agreements or understandings between the parties pertaining to the relationship between them and the other matters covered hereby, except that Employment Agreement between Maxwell and Dr. Kolb dated June 20, 1989 shall remain in effect until July 31, 1996 at which time it shall be terminated and superseded. Further, this Agreement may not be changed except by explicit written agreement by the parties hereto. Dr. Kolb states that he has carefully read the foregoing Agreement, has had the opportunity to consult with an attorney, knows and understands its contents, and voluntarily executes this Agreement. Dated: June 21, 1996 /s/ Alan C. Kolb ---------------------------- ----------------------------------- Dr. Alan C. Kolb Dated: June 25, 1996 /s/ Donn A. Starry ---------------------------- ----------------------------------- Donn Starry on behalf of Maxwell Laboratories, Inc. 7 EX-10.16 6 EXHIBIT 10.16 CEO EMPLOYMENT CONTRACT EXHIBIT 10.16 MAXWELL LABORATORIES INC. CHIEF EXECUTIVE OFFICER EMPLOYMENT CONTRACT This Employment Contract (the "Agreement") is made as of this 25th day of March, 1996, between MAXWELL LABORATORIES INC. ("Company") and MR. KENNETH POTASHNER ("Executive"). The parties agree with each other as follows: 1. TERM OF EMPLOYMENT. Subject to the terms and conditions set forth in this Agreement, the Company hereby agrees to employ Executive for the period commencing on the Commencement Date (as hereinafter defined) and ending July 31, 1998, unless earlier terminated pursuant to Section 4 below. The "Commencement Date" shall mean the earliest of (a) April 26, 1996, (b) three business days after the date Executive's Conner/Seagate stock options scheduled to vest on or about April 25, 1996 in fact vest and (c) as soon as practicable after Executive and Company agree to additional financial arrangements to compensate Executive for his loss of the vesting of any stock options which would have vested had Executive stayed with his current employer until April 25, 1996. This Agreement may be extended for an additional one (1) year term after the end of this initial term if the parties hereto mutually agree in writing to such extension. 2. DUTIES OF EXECUTIVE. (a) Executive shall serve as the Chief Executive Officer of the Company and serve in such other and/or additional positions as the Company shall determine. In such capacity Executive shall report to the Company's Board of Directors and Executive shall perform the duties and render the services on behalf of the Company associated with the positions he shall hold as set forth from time to time in resolutions of, or other directives issued by, the Company's Board of Directors or authorized delegate of the Board. (b) Executive agrees to perform such duties and render such services to the best of his ability, devoting thereto his entire professional time, attention and energy exclusively to the business and affairs of the Company and its affiliates, as its business and affairs now exist and as they hereafter may be changed, and shall not during the term of his employment hereunder be engaged in any other business activity, whether or not such business activity is pursued for gain or profit; PROVIDED, HOWEVER, that Executive may, after July 31, 1996 for so long as such service does not interfere with Executive's duties hereunder, serve on the Board of Directors of an unaffiliated company which is not in the same or related area of business as the Company and its subsidiaries and is otherwise acceptable to the Company's Board of Directors. The foregoing shall not be construed as preventing Executive from investing his assets in such form or manner as will not require any significant services on his part in the operation of the affairs of the businesses or entities in which such investments are made; provided, however, that Executive shall not invest in any business competitive with the Company or any of its affiliates or otherwise contrary to the policies from time to time adopted by the Company. (c) Executive shall be elected to serve on the Company's Board of Directors. 3. COMPENSATION OF EXECUTIVE. As compensation for the services performed under this Agreement: (a) BASE SALARY. Executive shall be paid a base salary at the annual rate of $400,000, payable in installments consistent with the Company's payroll practices. The base salary shall be reviewed annually by the Board or its Compensation Committee and any increase shall be effective as of the date determined appropriate by the Board or its Compensation Committee. (b) ANNUAL BONUS. Executive shall be entitled to an annual bonus which shall be determined by the Board in its discretion, but subject to the following: (1) In the case of the remaining portion of the fiscal year of the Company (which shall be for the period from the Commencement Date through July 31, 1996), the Board will set non-financial objectives on or before May 1, 1996, and the amount of the bonus will range from $0 to a maximum amount of $100,000 (with a target bonus of $100,000) depending on the Board's determination of Executive's success in meeting such objectives. Such bonus shall be paid on or before August 31, 1996. (2) In the case of the first full year bonus (which shall be for the period from August 1, 1996 through July 31, 1997), the Board will set non-financial business objectives on or before August 31, 1996, and the amount of the bonus will range from a minimum guaranteed amount of $200,000 to a maximum amount of $400,000 (with a target bonus of $400,000) depending on the Board's determination of Executive's success in meeting such objectives. Such first full year bonus shall be paid on or before August 31, 1997. (3) In the case of the second full year bonus (which shall be for the year ending on July 31, 1998), the Board will set specific financial and non-financial objectives on or before August 31, 1997, and the amount of 2 the bonus will range from $0 to a maximum amount of $400,000 (with a target bonus of $400,000) depending on the Board's determination of Executive's success in meeting such objectives. Such second full year bonus shall be paid on or before August 31, 1998. (c) EQUITY INCENTIVES. On the Commencement Date, Executive shall receive (1) a grant of shares of the Company's common stock equal to 3.25% of the number of the Company's common stock outstanding on the Commencement Date (the "Grant Shares") and (2) options to purchase up to a like number of shares of the Company's common stock (the "Options"). (1) GRANT SHARES. The Grant Shares shall be issued pursuant to a Restricted Stock Agreement and shall be subject to forfeiture to the Company. One hundred percent of the Grant Shares shall initially be subject to the forfeiture restriction. Thereafter, the Grant shares held by Executive shall be released from the forfeiture restriction as follows: twenty-five percent (25%) of the Grant Shares on the last day of the month in which the one year anniversary of the Commencement Date occurs and an additional 1/48th of the Grant Shares on the last day of each month thereafter until all shares are released from the forfeiture restrictions. During the time that Grant Shares are subject to the forfeiture restrictions, such Grant Shares may not be sold, encumbered or otherwise disposed of by Executive. The Grant Shares shall contain a legend reflecting the forfeiture restrictions and the Company may take such other steps as it deems reasonable to assure compliance with the forfeiture restrictions. Executive shall be entitled to receive and retain all dividends paid on the Grant Shares regardless of the forfeiture restrictions through the date of forfeiture (if any). (2) THE OPTIONS. One-half of the Options shall be incentive stock options to the maximum extent permitted by applicable law (without adversely affecting the incentive stock option plan) and the remainder of the Options shall be non-qualified stock options, in each case subject to the Maxwell Laboratories, Inc. 1995 Stock Option Plan and a stock option agreement issued thereunder (which will include antidilution protection as set forth in the plan and in respect of below market issuances of the Company's common stock (other than management and director stock incentives)) and shall entitle Executive to purchase from the Company at any time after vesting (as set out below) but prior to March 1, 2006, the shares of the Company subject thereto for an exercise price of the fair market value of the Company's shares on the date 3 of the grant of the Options. One-half of the Options shall be granted on the Commencement Date and one-half of the Options shall be granted on the six month anniversary of the Commencement Date. The Options shall vest as follows: if Executive is employed with the Company on the first anniversary of the Commencement Date, 25% of the Options shall then become vested and fully exercisable on the last day of the month in which such anniversary occurs; and an additional 1/48 of the Options shall become vested and fully exercisable on the last day of each month thereafter so long as Executive remains employed with the Company. It is the current intention of the Company to provide further unspecified stock incentives depending on Executive's performance; provided, however, the Company shall be under no obligation to grant such further incentives. (d) CERTAIN CHANGES OF CONTROL. In the event that (x) a Change of Control (as hereinafter defined) occurs and (y) as a result thereof or in contemplation thereof, without the consent of Executive nor at the behest of Executive, either Executive's compensation or responsibilities are reduced or the headquarters of the Company is moved to a location outside a 30 mile radius of the Company's existing headquarters, then: (1) Immediately prior to the effective date of the Change of Control, notwithstanding the vesting and forfeiture schedules set out in subsection (c) above, all of the Options shall thereupon become fully vested and all of the Grant Shares shall thereupon become free of any forfeiture restrictions; and (2) Immediately prior to the effective date of the Change of Control, Executive shall receive a cash payment equal to a lump sum payment of $1,600,000, which amount represents two years of Executive's initial base salary and the target bonuses for the initial term of this Agreement. (3) For a one year period following the Change of Control, Executive shall be provided with benefits substantially identical to those to which Executive was entitled immediately prior to the Change of Control. (4) In the event that the benefits provided for in this Section 3(d) to Executive constitute "parachute payments" within the meaning of section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and will be subject to the excise tax imposed by Section 4999 of the Code, then Executive shall receive (a) a payment from the 4 Company sufficient to pay such excise tax and (b) an additional payment from the Company sufficient to pay the Federal and California income tax arising from the payment made under clause (a) of this sentence. Unless the Company and Executive otherwise agree, the determination of Executive's excise tax liability and the Federal and California income tax resulting from the payment under clause (a) above shall be made by the Company's independent accountants (the "Accountants"), whose determination shall be conclusive and binding upon the Company and Executive for all purposes. For purposes of making the calculations required by this Section 3(d)(4), the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on interpretations of the Code for which there is a "substantial authority" tax reporting position. The Company and Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make the determinations required by this Section 3(d)(4). The Company shall bear the expenses of the Accountants under this Section 3(d)(4). For purposes of this subsection, "Change of Control" means the occurrence of any one of the following: (i) any transaction or series of transactions (as a result of a tender offer, merger, consolidation or otherwise) that results in any person, entity or group acting in concert, acquiring "beneficial ownership" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of such percentage of the aggregate voting power of all classes of common equity stock of the Company as shall exceed 50% of such aggregate voting power, or (ii) a merger or consolidation of the Company, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the voting power represented by the voting securities of the Company or such entity outstanding immediately after such merger or consolidation, or (iii) the shareholders approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all, or substantially all, of the Company's assets (other than in connection with a sale or disposition to subsidiaries of the Company or in connection with a reorganization or restructuring of the Company), or (iv) there occurs a change in the composition of the Board as a result of which fewer than a majority of the directors are Incumbent Directors (as hereinafter defined). "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of the Commencement Date or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent 5 Directors casting votes at the time of such election or nomination. (e) BENEFITS. Executive shall be entitled to vacation and to participate in the Company's directors and officers' insurance, health, life insurance, long term disability, dental and medical programs as the same may exist from time to time on the terms and conditions applicable to other officers of the Company. Nothing in this Agreement shall preclude the Company or any affiliate of the Company from terminating or amending any employee benefit plan or program or its vacation policy from time to time. (f) RETIREMENT BENEFIT. Executive shall be entitled to a retirement benefit to be mutually agreed upon. The Board of Directors of the Company is currently considering different alternatives. (g) RELOCATION: Upon submission of appropriate receipts, the Company shall reimburse Executive for the following relocation expenses: (1) The reasonable cost of an independent appraiser to appraise Executive's existing home. (2) A guarantee to purchase Executive's current residence at the appraised value if it is not sold within 90 days from the date it is first placed for sale. Such appraised value shall be determined by an independent professional appraiser to be chosen by Executive reasonably acceptable to the Company not more than two weeks after this Agreement has been signed by Executive. In the event that the house is sold to a bona fide buyer in excess of the appraised value, the Executive shall be entitled to the excess amount. (3) All reasonable out-of-pocket moving expenses incurred by Executive in moving from his current home to his permanent new home in the San Diego area including the brokerage commission on the sale of Executive's existing home, attorney and title fees and other closing costs for his existing and his new home (to the extent normal and customary) and, to the extent not waived by the mortgagee, the $20,000 prepayment penalty contained in Executive's current mortgage, storage and shipment of household goods and shipment of up to two vehicles. (4) Temporary and reasonable rental expenses (for up to six months) for living quarters for Executive and his family until Executive moves into his new home. (5) Reasonable travel expenses for up to two house hunting trips for Executive and his family including 6 transportation, accommodations and reasonable expenses for meals and other incidentals. (6) Airline expenses for Executive to travel to or from San Jose and San Diego each weekend until Executive and his family move into their new home and for two trips for Executive's family to travel to or from San Jose and San Diego. To the extent that any of the relocation benefits detailed in this Section 3(g) are taxable to Executive under applicable tax law, upon request of Executive, the benefits shall be provided to Executive on a "grossed up" basis in the year that the benefits are paid. (h) CONSULTING ARRANGEMENT. Between the date of this Agreement and the Commencement Date, Executive shall have the right to act as a consultant to the Company for which he shall be paid compensation at the rate of $2000 for each full day of consulting work. 4. EARLY TERMINATION OF EMPLOYMENT. (a) TERMINATION FOR CAUSE. Notwithstanding anything herein to the contrary, the Company may terminate Executive's employment hereunder upon a finding by the Board of Directors of cause for any one of the following reasons: (i) Executive's loss of legal capacity; (ii) the Executive's conviction of a criminal offense during the term of this Agreement; (iii) a willful breach of this Agreement by Executive; (iv) actions or conduct of Executive which is dishonest, or (v) actions or omissions which constitute a willful disregard of the interests of the Company or which are seriously detrimental to the reputation or business interests of the Company. In each of the foregoing circumstances, except (i) or (ii), written notice shall be given to the Executive specifying in reasonable detail the facts giving rise thereto and that continuation thereof may be cause for termination unless such conduct is not cured to the satisfaction of the Board within five (5) business days of receipt of such notice by the Executive. In the event of termination for any of the above contained in this subsection (a), Executive shall be paid only his salary and unused vacation due him at the time of termination. (b) TERMINATION WITHOUT CAUSE. Notwithstanding anything herein to the contrary, the Company may terminate Executive's employment hereunder at any time, for any reason, with or without notice; provided, however, that in the event of such termination for other than "cause" as described in the preceding subsection (a), Executive will be paid immediately the greater of (x) one year's annual base salary at the time of his termination plus the target bonus 7 for that year and (y) the aggregate base salary plus the target bonus due Executive from the date of termination of employment through the end of the stated term set forth in Section 1 above. In the event of such termination for other than "cause" as described in the preceding subsection (a), notwithstanding anything herein to the contrary, all of the Options shall thereupon become fully vested and all of the Grant Shares shall thereupon become free of any forfeiture restrictions. (c) TERMINATION BY EXECUTIVE. Executive may terminate his employment hereunder at any time, for any reason upon the giving of not less than 30 days prior notice to the Board of Directors. In the event of termination by Executive, notwithstanding anything herein to the contrary, Executive shall be paid only the base salary and unused vacation time then due him on the effective date of his termination. (d) COOPERATION. In the event of termination of employment by the Company or by Executive (whether by expiration of the stated term in Section 1 or pursuant to a subsection of this Section 4) Executive shall cooperate with the Company, as requested by the Company, to effect a transition of Executive's responsibilities and to ensure that the Company is aware of all matters being handled by Executive. 5. RESOLUTION OF DISPUTES. The parties recognize that claims, controversies and disputes may arise out of this Agreement with respect to Executive's employment, termination of employment, or other terms of this Agreement or based on common law or statute, either during the existence of the employment relationship or afterwards. The parties agree that should any such claim, controversy or dispute arise, the parties will use their best efforts to resolve such dispute informally, between them. In the event that any such claim, controversy or dispute between Company and Executive cannot be resolved within thirty (30) days after either party first gives notice in writing that any such claim, controversy or dispute exists, either party may then refer the matter to arbitration before JAMS/ENDISPUTE pursuant to its rules for resolution of employment disputes. The parties hereby agree that referral to arbitration shall be the sole recourse of either party under this Agreement with respect to any such claim, controversy or dispute and that the decision of the arbitrator(s) shall be binding on the parties in accordance with applicable law; provided, however, that nothing in this Section 5 shall be construed as precluding either party from bringing an action for injunctive relief or other equitable relief. The parties shall keep confidential the existence of each such the claim, controversy or dispute from third parties (other than arbitrator(s)), and the determination 8 thereof, unless otherwise required by law. Such decision rendered by the arbitrator shall be final and conclusive and may be entered in any court having jurisdiction thereof as a basis of judgment and of the issuance of execution for its collection. The parties further agree that the party prevailing in the arbitration shall be entitled to its reasonable attorney's fees and that the arbitration itself shall take place within the County of San Diego, California, and that the internal laws of the State of California shall apply. 6. NO SOLICITATION. Executive agrees that in the event he is no longer employed by the Company, for any reason, he shall not hire, solicit or otherwise cause to be solicited for employment elsewhere, either directly or indirectly, for a period of one year from his termination of employment, any employee, officer or director of the Company or any individual who chooses not to join Maxwell, provided that Executive participated actively in the recruiting of such individual. 7. CONFIDENTIALITY AGREEMENT. Executive shall sign an Employee Non-Disclosure and Confidentiality Agreement in the form attached hereto as Exhibit A (the "Confidentiality Agreement"). 8. NONCOMPETITION. Executive agrees that for a period of one year following termination of his employment with the Company for any reason, he will not, nor will he permit any entity or other person under his control to, directly or indirectly, own, manage, operate or control, or participate in the ownership, management, operation or control of, or be connected with or have any interest in, as a shareholder, director, officer, employee, agent, consultant, partner, creditor or otherwise, any business or activity which is competitive with any business or activity engaged in by the Company or any of its subsidiaries or affiliates anywhere within (i) the State of California, or (ii) any other state of the United States and the District of Columbia in which the Company engages in or has engaged in business during the past five years. 9. ENTIRE AGREEMENT. This Agreement constitutes the entire Employment Agreement between the parties and contains all agreements between them with the exception of the Restricted Stock Agreement, the 1995 Stock Option Plan (and the agreement issued thereunder) and the Confidentiality Agreement which are supplementary to this Employment Agreement but are incorporated herein by reference. Each party to this Agreement acknowledges that no representations, inducements, promises or agreements, orally or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not embodied in this Agreement, and that no agreement, statement or promise not 9 contained in this Agreement shall be valid or binding. This Agreement also supersedes any and all other agreements and contracts whether verbal or in writing relating to the subject matter hereof. 10. AMENDMENT. Except as otherwise specifically provided herein, the terms and conditions of this Agreement may be amended at any time by mutual agreement of the parties; provided that before any amendment shall be valid or effective, it shall have been reduced to writing and signed by the Chairman of the Board on behalf of the Company and by Executive. 11. INVALIDITY. The invalidity or unenforceability of any particular provision of this Agreement shall not affect its other provisions, and this contract shall be construed in all respects as if such invalid or unenforceable provision has been omitted. 12. BINDING NATURE. Executive's rights and obligations under this Agreement shall not be assignable, transferable or delegable by assignment or otherwise, and any purported assignment, transfer or delegation thereof shall be void. This Agreement shall inure to the benefit of, and be enforceable by, any purchaser of substantially all of the Company's assets, any corporate successor to the Company or any assignee thereof. 13. ASSISTANCE IN LITIGATION. Executive shall, during and after termination of employment, upon reasonable notice, furnish such information and proper assistance to the Company as may reasonably be required by the Company in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become a party. Except where Executive is a named defendant, Executive shall be paid a reasonable hourly fee to be mutually agreed upon. 14. INDEMNIFICATION. The Company shall indemnify Executive in accordance with its standard indemnification policy for officers and directors of the Company and as required by applicable law. 15. NO DUTY TO MITIGATE. Executive shall not be required to mitigate the amount of any payment contemplated by this Agreement (whether by seeking new employment or in any other manner), nor shall any such payment be reduced by any earnings that executive may receive from any other source not paid for by the Company. 10 16. CHOICE OF LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. 17. COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and either of the parties to this Agreement may execute this Agreement by signing any such counterpart. Dated: March 25, 1996 /s/ Kenneth Potashner ---------------------------- ----------------------------------- Kenneth Potashner Dated: March 25, 1996 /s/ Donn Starry ---------------------------- ----------------------------------- Donn A. Starry Chairman of the Board 11 AMENDMENT TO EMPLOYMENT CONTRACT This Amendment to Employment Contract ("Amendment") is made as of this 18th day of April, 1996, by and between 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 ("Employment Contract") dated March 25, 1996, 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 equity incentives in the form of stock options provided for in the Employment Contract; NOW, THEREFORE, the parties agree as follows: 1. AMENDMENTS TO SECTION 3(C). Section 3(c) of the Employment Contract is hereby amended as follows: (a) The phrase "On the Commencement Date," at the beginning of the first sentence of said section 3(c) is hereby deleted, and the sentence shall begin with the word "Executive" following such phrase. (b) The first sentence of section 3(c)(1) is hereby amended to read in its entirety as follows: "The Grant Shares shall be issued on the Commencement Date pursuant to a Restricted Stock Agreement and shall be subject to forfeiture to the Company." (c) The last sentence of section 3(c)(2) is hereby amended to read in its entirety as follows: "The Options shall be granted on such date between the date hereof and the Commencement Date as the Stock Option Committee of the Company's Board of Directors shall determine." 2. EFFECT OF AMENDMENT. This 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. SIGNATURES. The parties hereto have executed this Amendment as of the date first above mentioned. MAXWELL LABORATORIES, INC. By /s/Donn A. Starry ------------------------------------- /s/Kenneth Potashner ------------------------------------- Kenneth Potashner EX-10.17 7 EXHIBIT 10.17 RESTRICTED STOCK AGREEMENT Exhibit 10.17 MAXWELL LABORATORIES INC. RESTRICTED STOCK AGREEMENT THIS RESTRICTED STOCK AGREEMENT (the "Agreement") is made and entered into as of July 25, 1996 between MAXWELL LABORATORIES, 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. Chief Executive Officer Employment Agreement, dated March 25, 1996 ("Employment Agreement"); and WHEREAS, the Employment Agreement provides for the award to Executive of shares of the Company's Common Stock which are subject to forfeiture upon the occurrence of certain events unless and until such shares shall have vested; NOW, THEREFORE, the parties hereby agree as follows: 1. AWARD OF RESTRICTED STOCK. The Company hereby awards to Executive 88,980 shares of Company common stock, $.10 par value, subject to the terms and conditions set forth in this Agreement (the "Restricted Stock"). 2. VESTING SCHEDULE. Subject to the provisions of Sections 4 and 5 of this Agreement, the shares of Restricted Stock granted hereunder and not hereafter forfeited shall vest and cease to be subject to forfeiture in accordance with the following schedule: 22,245 shares of Restricted Stock shall vest on April 30, 1997 and an additional 1,854 shares of Restricted Stock shall vest on the last day of each month thereafter for the next 35 such months, and 1,845 shares of Restricted Stock shall vest in the last day of the month immediately following such 35 month period, at which time all shares of Restricted Stock shall be vested (each such date and the date of any event described in Section 5 is referred to hereinafter as a "Vesting Date"). Upon the vesting of shares of Restricted Stock, the Transfer Restrictions (as described in Section 3 hereof) thereon shall lapse. 3. RESTRICTIONS. Prior to vesting in accordance with Sections 2 or 5 hereof, Executive shall not be permitted to sell, assign, transfer, pledge or otherwise encumber (the "Transfer Restrictions") any shares of Restricted Stock granted hereunder and they shall not be subject to attachment, garnishment, execution or other creditor's processes; provided that such shares, even when vested, may not be sold or otherwise disposed of by the Executive unless there is then in effect a registration statement under the Securities Act of 1933 (the "Act") permitting the resale to the public by the Executive of the Restricted Stock or an exemption from -1- such registration exists and the Executive delivers an opinion of counsel, satisfactory to counsel to the Company, that such exemption is available. 4. FORFEITURE UPON A TERMINATION OF EMPLOYMENT. Except to the extent otherwise provided in Section 5 hereof, in the event the Executive's employment is terminated, all shares of Restricted Stock then subject to Transfer Restrictions shall be forfeited by Executive and shall be immediately returned to the Company without payment of any consideration to Executive. 5. ACCELERATION OF VESTING; CHANGE IN CONTROL AND OTHER SIGNIFICANT EVENTS. (a) Notwithstanding the provisions of Sections 2 and 4, in the event the Executive's employment is terminated by the Company for other than "cause" as defined in Section 4(a) of the Employment Agreement, Executive shall at the time of such termination vest in any unvested shares of Restricted Stock and all Transfer Restrictions shall lapse. (b) Notwithstanding the provisions of Section 2, in the event that (x) a "Change in Control" as defined in Section 3(d) of the Employment Agreement occurs, and (y) as a result thereof or in combination thereof, without the consent of Executive nor at the behest of Executive, either Executive's compensation or responsibilities are reduced or the headquarters of the Company is moved to a location outside a 30 mile radius of the Company's existing headquarters, then immediately prior to the effective date of the Change of Control Executive shall vest in any unvested shares of Restricted Stock and all Transfer Restrictions shall lapse. 6. STOCK CERTIFICATES. Stock certificates issued in respect of the shares of Restricted Stock shall be registered in the name of Executive (in the records of the Company's transfer agent). While such shares are subject to Transfer Restrictions, all stock certificates evidencing shares of Restricted Stock shall bear the following legend: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions contained in a Restricted Stock Agreement, dated July 25, 1996, between Kenneth Potashner and Maxwell Laboratories Inc. A copy of such Agreement is on file in the office of the Secretary of Maxwell Laboratories Inc., 8888 Balboa, San Diego, California 92123." With regard to any shares of Restricted Stock which cease to be subject to Transfer Restrictions pursuant to Sections 2 or 5 of this Agreement, the Company shall, within sixty (60) days after the date such shares cease to be subject to the Transfer -2- Restrictions, deliver to Executive a certificate evidencing such shares free of the foregoing legend. 7. INVESTMENT REPRESENTATION. Executive represents and agrees that: (i) he is acquiring the Restricted Stock for the purpose of investment and not with a view to their resale or distribution, (ii) if and when the Executive proposes to publicly offer or sell shares of Restricted Stock, the Executive shall notify the Company prior to any such offering or sale and shall abide by the opinion of counsel to the Company as to whether and under what conditions and circumstances, if any, Executive may offer and sell such shares of Restricted Stock; and (iii) the certificate or certificates representing the Restricted Stock may bear a legend referring to the foregoing matters and any limitations under the Act and state securities laws with respect to the transfer of such Restricted Stock, and the Corporation may impose stop transfer instructions to implement such limitations, if applicable. Notwithstanding the provisions of Section 6, stock certificates evidencing shares of Restricted Stock, both during the period during which Transfer Restrictions are in effect and thereafter, shall bear such legends as may be required to evidence restrictions imposed by the Act and state securities laws and by the Executive's status as an affiliate of the Company. 8. WITHHOLDING TAXES. (a) In order to provide the Company with the opportunity to claim the benefit of any income tax deduction which may be available to it from the award of the Restricted Stock and to permit the Company to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to insure that, if necessary, all applicable federal or state payroll, income or other taxes are withheld from any amounts payable by the Company to the Executive. If the Company is unable to withhold such federal or state taxes, for whatever reason, the Executive hereby agrees to pay to the Company an amount equal to the amount the Company would otherwise be required to withhold under federal or state law prior to the transfer of any certificates for the shares of Restricted Stock. (b) The Executive may, subject to the discretion of the Company's Board of Directors, elect to have all or a portion of such tax withholding obligations satisfied by delivering previously acquired shares of the Company's Common Stock, including shares of Restricted Stock as to which the risks of forfeiture have lapsed, such shares having a fair market value, as of the date the amount of tax to be withheld is determined under applicable tax laws, equal to such obligations. Such election shall comply with such rules as may be adopted by the Board to ensure compliance with Rule 16b-3, or any successor provision, as then in effect, of the General Rules and Regulations under the Securities Exchange Act of 1934, if applicable. For purposes of this Section 8(b), the "fair market value" of the -3- Company's Common Stock shall mean the last sale price of such stock as reported by NASDAQ on the relevant date. 9. RIGHTS AS A SHAREHOLDER. Except as otherwise provided herein, the Executive shall have all of the rights of a stockholder of the Company, including the right to receive any cash or stock dividends and shall have the right to vote the Restricted Stock. 10. GOVERNING LAW. This Agreement shall be governed by the laws of the State of Delaware. 11. ENTIRE AGREEMENT. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the subject matter herein other than those expressly set forth herein. 12. COUNTERPARTS. This Agreement may be signed in counterparts, each of which shall be an original with the same effect as if the signature thereof and hereto were upon the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. MAXWELL LABORATORIES, INC. By: /s/Gary Davidson ------------------------------ Gary J. Davidson, Vice President - Finance & Administration By: /s/Kenneth Potashner ------------------------------ Kenneth Potashner -4- EX-10.24 8 EXHIBIT 10.24 SEVERANCE AGREEMENT EXHIBIT 10.24 CONFIDENTIAL SEPARATION AGREEMENT AND RELEASE OF CLAIMS THIS CONFIDENTIAL SEPARATION AGREEMENT AND RELEASE OF CLAIMS ("Agreement"), is made between SEAN MALOY ("Maloy"), and Maxwell Laboratories, Inc. and its divisions and subsidiaries (collectively, "Maxwell" or "the Company") and shall become effective immediately upon the date signed by Maloy (the "Effective Date"). RECITALS WHEREAS, Maloy has been employed by Maxwell as Executive Vice President and Chief Operating Officer of Maxwell Laboratories, Inc., and the parties hereto desire to end that relationship, and to settle, fully, finally and amicably, all claims against each other, including, but not limited to, any claims related to the employment of Maloy and the termination of that employment. NOW, THEREFORE, in order to provide said benefits and in consideration of the mutual promises, covenants and representations set forth below and other good and valuable consideration, the parties agree as follows: 1. RELINQUISHMENT OF POSITIONS/EMPLOYMENT The Effective Date of this Agreement is the date it is signed by Maloy. Pursuant to this Agreement, Maloy agrees to resign all of his positions as an officer and director of the Company, including, without limitation, as a director of Maxwell Laboratories, Inc., as Chief Operating Officer of Maxwell Laboratories, Inc., as Executive Vice President of Maxwell Laboratories, Inc., and as a Maxwell Laboratories, Inc., employee. Such resignation shall become effective without further action on a date (Resignation Date) to be determined by the Chairman after consultation with the new Chief Executive Officer/President but in no event later than June 1, 1996. Maloy agrees to execute a resignation letter dated appropriately. Such resignation shall take effect at the time specified therein. Until the effective Resignation Date, Maloy shall continue in his current capacity as Executive Vice President, Chief Operating Officer and Director of Maxwell Laboratories, Inc. and receive his current salary and benefits. 2. PAYMENT OF GOOD AND VALUABLE CONSIDERATION Within 72 hours of the Resignation Date, Maloy shall be paid his final paycheck and all accrued but unused vacation. a. Maloy shall thereafter be paid $13,786 per month without any deductions or withholdings for a period of eighteen (18) months commencing on the Resignation Date. Maxwell shall make these payments between the 1st and 5th of each month and will provide Maloy with a 1099. Except as to the continuing payment, Maloy shall not be entitled to any other cash payments. b. Maloy currently has stock options both in Maxwell Laboratories, Inc. pursuant to the 1985 plan and in Pure Pulse pursuant to the 1994 plan as set forth in Schedule A attached hereto. Those stock options shall be converted to non-qualified stock options and shall remain in effect until their expiration dates as set forth in Schedule A. Maloy and Maxwell shall sign any agreements or papers necessary to effectuate such conversion. c. Maloy is not now and shall not be entitled to any Supplemental Retirement Annuity after the Resignation Date of this Agreement. d. Maxwell will continue to provide Maloy with the current benefits for life, disability, dental and medical plans until the earlier of (i) any coverage under his next employer for medical, disability, dental and life insurance or (ii) the expiration of 18 months from the Resignation Date. 3. NON-DISCLOSURE OF TRADE SECRETS AND CONFIDENTIAL INFORMATION Maloy understands and agrees that in the course of employment with Maxwell he has acquired confidential information and trade secrets concerning the operations of Maxwell and its future plans and methods of doing business, which information Maloy understands and agrees would be damaging to Maxwell if disclosed to a competitor or made available to any other person or corporations. Maloy understands and agrees that such information has been divulged to him in confidence, and he understands and agrees that he will keep such information secret and confidential. Furthermore, Maloy agrees that he will on the date of resignation turn over to Maxwell all Company confidential files, records, and other documents. In addition, Maloy will return all property in his possession owned by Maxwell. 4. NON-SOLICITATION Maloy further agrees that he will not solicit or participate in or assist in any way in the solicitation of any person in management, professional or technical positions at Maxwell for employment by any other company for a period of 18 months after the Resignation Date. However, Maloy will not violate this provision if said employee pursues a position with Maloy's future employer without any encouragement or involvement direct or indirect of Maloy. - 2 - In view of the nature of Maloy's employment and the information and trade secrets which he has received during the course of his employment, he likewise agrees that Maxwell would be irreparably harmed by any violation of paragraphs 3, 4, 5 and 10 of this Agreement and that, therefore, Maxwell shall be entitled to an injunction prohibiting him from any violation of paragraphs 3, 4, 5 and 10 of this Agreement. 5. NON-COMPETE AND COOPERATION AGREEMENT a. Maloy agrees that during the 18 months after the Resignation Date, he shall, make every effort to be reasonably available to consult and provide Maxwell transition assistance at reasonable times as may be requested by the Chief Executive Officer of Maxwell, provided Maloy is reimbursed for any reasonable out of pocket expenses incurred by him providing such assistance. Where there are business conflicts for Maloy's time, the CEO and Maloy will agree on a mutually agreeable schedule for his assistance. Maloy further agrees that during this 18 month period he shall not establish any company, or otherwise work for any company or entity identified on Schedule B hereto. b. Maloy further agrees that during this 18 month period, or thereafter, he may be asked to and that he will, in fact, cooperate with Maxwell, its attorneys or experts retained by Maxwell or its attorneys in connection with any litigation matters involving Maxwell that are pending or that may arise hereafter. To the extent that such cooperation or assistance is requested of Maloy, he shall be paid at a rate of $100 per hour and any reasonable out-of-pocket expenses for any such work, provided, however, that he will not be paid any money for any effort he undertakes in connection with legally compelled testimony or preparation for such testimony, unless such testimony is required as a direct result of Maxwell's designating Maloy as an expert witness or the most knowledgeable corporate person. 6. NO OTHER CLAIMS Maloy represents and warrants that he has not filed against Maxwell or any of its representatives, any claim, complaint, charge or suit, with any federal, state or other agency, court, board, office or other forum or entity, including without limitation, any application for workers compensation benefits. Maloy agrees that he will not, at any time hereafter, file any such claim, complaint, charge or suit based upon circumstances heretofore arising, other than a claim arising from a breach by the Company of this Agreement, and that if any agency, court, board, office, forum or entity assumes jurisdiction of any such grievance, complaint, charge or suit he will request such entity to withdraw from the matter. - 3 - 7. GENERAL RELEASE a. As a material inducement to Maxwell to enter into this Agreement, Maloy, on behalf of himself and his heirs, executors, administrators, successors and assigns, does hereby irrevocably and unconditionally release, acquit and forever discharge Maxwell, and its owners, stockholders, predecessors, successors, assigns, agents, directors, officers, employees, representatives, attorneys, divisions, subsidiaries, affiliates (and agents, directors, officers, employees, representatives, attorneys, and successors of such divisions, parents, subsidiaries and affiliates), acting by, through, under or in concert with any of them, or any of them, from any and all charges, complaints, grievances, claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses (including attorneys' fees and costs actually incurred), of any nature whatsoever, known or unknown, suspected or unsuspected, joint or several, which Maloy has had or may hereafter claim to have had, against Maxwell by reason of any matter, act, omission, cause or event whatever from the beginning of time to the Resignation Date ("Claims"); other than those obligations set forth in this Agreement. This release specifically includes, but without limiting the foregoing general terms, the following: (1) all Claims arising from or relating in any way to any act or failure to act by any employee of Maxwell, (2) all Claims arising from or relating in any way to the employment relationship of Maloy with Maxwell and/or the termination thereof, including any claims which have been asserted or could have been asserted against Maxwell, together with (3) any and all Claims which might have been asserted by Maloy in any suit, claim, or charge, for or on account of any matter or things whatsoever that has occurred up to and including the date of this Agreement, under any and all laws, statutes, orders, regulations, or any other claim of right(s), including without limitation, any claim under Title VII of the Civil Rights Act of 1964 and the California Fair Employment and Housing Act or any Claim in contract or tort. b. As a material inducement to Maloy to enter into this Agreement, Maxwell, on behalf of itself and its subsidiaries, affiliates, divisions, directors, officers, shareholders, employees, representatives, attorneys, agents, predecessors, successors and assigns, does hereby irrevocably and unconditionally release, acquit and forever discharge Maloy, and his heirs, executors, administrators, successors, assigns, agents, representatives and attorneys, acting by, through, under or in concert with any of them, or any of them, from any and all charges, complaints, grievances, claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses (including attorneys' fees and costs actually incurred), of any - 4 - nature whatsoever, known or unknown, suspected or unsuspected, joint or several, which Maxwell has had or may hereafter claim to have had, against Maloy by reason of any matter, act, omission, cause or event whatever from the beginning of time to the Resignation Date ("Claims"); other than those obligations set forth in this Agreement. Provided, however, this release does not extend to any actions brought against Maloy as an individual defendant as opposed to as an officer or director of Maxwell with regard to any claims outside the course and scope of his employment. 8. RELEASE OF UNKNOWN OR UNSUSPECTED CLAIMS For the purpose of implementing a full and complete release and discharge of the parties hereto, Maloy and Maxwell expressly acknowledge that this Agreement is intended to include in its effect, without limitation, all Claims which the parties have against one another but do not know or suspect to exist in their favor at the time of execution hereof, which if known or suspected by them would materially affect their decision to execute this release; that this Agreement contemplates the extinguishment of any such Claim or Claims, and that all rights under Section 1542 of the California Civil Code are hereby expressly waived. Section 1542 of the Civil Code provides: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." The parties represent that they have read and understood the provisions of California Civil Code Section 1542. 9. INDEMNITY FOR BREACH OR FALSE REPRESENTATION As a further material inducement to Maxwell to enter into this Agreement, Maloy hereby agrees to indemnify and hold harmless Maxwell and their representatives from and against any and all loss, cost, damage or expense, including, without limitation, attorneys' fees, caused by any prior claims filed by Maloy. 10. CONFIDENTIALITY OF SETTLEMENT AGREEMENT Maloy represents and agrees that since he first received the proposed agreement on March 12, 1996, he has not disclosed the terms of the agreement and he will keep the terms, amounts and all other specific facts of this Agreement completely confidential and that he will not disclose any information concerning this Agreement to any person or entity, other than that which is legally required and his immediate family and professional representatives or to any prospective employer to the extent - 5 - necessary to inform such employer of Maloy's obligation pursuant to this Agreement; provided that disclosure to his immediate family or professional representatives is conditioned on the fact that they agree to keep said information confidential and not disclose it to others. Provided, however, disclosures made to the Company's general counsel or officers and directors of the Company prior to the effective date of this Agreement are not subject to this confidentiality clause. Maloy acknowledges that a major and significant consideration on behalf of Maxwell in entering into this Agreement is the assurance that there will be no publicity of this Agreement and that all terms and conditions and the very fact thereof shall remain confidential. In the event Maloy discloses the alleged facts upon which this Agreement is based, the amount of consideration tendered to him, or the terms of the Agreement in violation of this Agreement, Maxwell shall be entitled to terminate any payment due under this Agreement or take any other action legally allowable. Maloy agrees that any direct dispute, controversy or claim among the parties to this Agreement arising out of or relating to this paragraph, or any breach or asserted breach thereof, shall be determined and settled by arbitration in accordance with the rules for dispute resolution of JAMS/ENDISPUTE. The prevailing party in such arbitration shall be entitled to its reasonable costs and expenses (including reasonable attorneys' fees in such arbitration as part of the award. Judgment on the award may be entered in any court having jurisdiction thereof, and the parties specifically reserve all rights to appeal such judgment as if it were rendered in a court of law. If Maxwell discloses any information concerning this Agreement or Maloy's employment and termination from Maxwell to the general shareholders who are not otherwise associated with the Company or members of the public, Maloy is automatically released from any and all obligations contained in this paragraph. 11. RIGHT TO APPROVE PRESS RELEASE On the Resignation Date, Maxwell shall issue a mutually agreed upon press release to the public concerning Maloy's resignation. No other press release can be made concerning Maloy's resignation or the circumstances concerning his departure from the Company. 12. INDEMNIFICATION AGAINST CLAIMS Maxwell agrees to indemnify and hold Maloy harmless from any liability, claims, demands, costs, expenses and attorneys' fees incurred by him as a result of any actions by him in the course of his employment, or as a director of the Company to the extent other directors would be so indemnified. Maxwell further agrees to indemnify and hold Maloy harmless from any liability, claims, demands, costs, expenses, and attorneys' fees incurred by him as a result of any actions by him, specifically in connection with providing transition assistance to Maxwell. - 6 - 13. BINDING AGREEMENT This Agreement shall be binding upon Maloy and Maxwell and their respective heirs, administrators, representatives, executors, successors and assigns and shall inure to the benefit of the parties hereto and their representatives, and each of them, and to their heirs, administrators, representatives, executors, successors and assigns. 14. ATTORNEY'S FEES Each party hereto will bear its own costs and attorneys' fees incurred in achieving the settlement and release of this matter. If any party defaults under the terms of this Agreement, and the other party employs an attorney to enforce or interpret the terms of this Agreement, or to obtain a declaration of rights under this Agreement, whether or not legal proceedings are commenced, then such other party shall be entitled to recover from the defaulting party all attorneys' fees, costs and expenses incurred. If a party commences an action against the other to enforce or interpret the terms of this Agreement, or to obtain a declaration of rights under this Agreement, the prevailing party shall be entitled to all attorneys' fees, costs and expenses incurred in such action or any appeal or enforcement of such action. 15. NON-RELIANCE Other than as expressly set forth in this Agreement, Maloy and Maxwell represent and acknowledge that in executing this Agreement they did not rely upon and they have not relied upon any representation nor statement made by any of the parties hereto or by any of their agents, representatives or attorneys with regard to the subject matter, basis or effect of this Agreement or otherwise. 16. AGREEMENT OBLIGATES, EXTENDS AND INURES The provisions of this Agreement shall be deemed to obligate, extend and inure to the benefit of the legal successors, assigns, transferees, grantees, heirs, shareholders, officers and directors of each signatory party hereto, and to those who may assume any or all of the above-described capacities subsequent to the execution and Resignation Date of this Agreement. 17. NON-ADMISSION OF LIABILITY This Agreement shall not in any way be construed as an admission by Maxwell that it has acted in any manner in violation of the common law or in violation of any federal, state or local statute or regulation. - 7 - 18. METHOD OF EXECUTION This Agreement may be executed in counterparts and each counterpart shall be deemed a duplicate original. 19. APPLICABLE LAW This Agreement is deemed to have been made and entered into in the State of California and shall in all respects be interpreted, enforced and governed under the laws of said State. The language of all part is this Agreement shall in all causes be construed as a whole, according to its fair meaning, and not strictly for or against any of the parties. 20. SEVERABILITY The provisions of this Agreement are severable, and should any provision of this Agreement be declared or be determined by any arbitrator or court to be illegal or invalid, any such provision shall be stricken, and the validity of the remaining parts, terms or provisions shall not be affected. 21. ENTIRE AGREEMENT This Agreement sets forth the entire agreement between the parties and fully supersedes any and all prior agreements or understandings between the parties pertaining to the same subject matter, further, this Agreement may not be changed except by explicit written agreement by the parties hereto. MALOY states that he has carefully read the foregoing Agreement, knows and understands its contents, and voluntarily executes this Agreement. Date: March 14, 1996 /s/ Sean Maloy ------------------ ----------------------- At 4:20 pm (PST) Sean Maloy Date: March 15, 1996 /s/ Donn A. Starry ------------------ ----------------------- At 10:20 am (EST) Donn Starry on behalf of Maxwell Laboratories, Inc. - 8 - SCHEDULE A Maxwell (Pursuant to 1985 Plan) ------------------------------- NO. OF SHARES EXPIRATION DATE 7,350 May 31, 1998 20,000 September 30, 1999 10,000 August 31, 2000 Pure Pulse (Pursuant to 1994 Plan) ---------------------------------- NO. OF SHARES EXPIRATION DATE 600 August 31, 2000 The foregoing shares shall be converted to non-qualified stock options and shall expire at the respective times as set forth above. A-1 SCHEDULE B MAXWELL COMPETITORS AVX Aerovox Beta Physics - Titan Deltek DTI Jaycor LCC - France NWL Physics International PSI - Titan SAIC - only with those divisions which have in the past competed directly with Maxwell Texas Microsystems - Sequoia B-1 EX-10.25 9 EXHIBIT 10.25 EXECUTIVE BONUS PLAN Exhibit 10.25 MAXWELL TECHNOLOGIES, INC. EXECUTIVE BONUS PLAN DESCRIPTION FY '97 OBJECTIVE: To drive the maximization of company-wide financial performance and shareholder value. Executive management participating in the Plan will have target bonuses that can vary up to 50% of base salary as set by the CEO. The following key management positions would be included in the plan: Division Vice Presidents Division Presidents Human Resources Director Chief Financial Officer Corporate Controller Corporate Vice Presidents Corporate General Counsel The target bonus will be paid to participants in cash following year end results. The Bonus Schedule would be calculated on Earnings Per Share for the year (calculated after payment of the Profit Sharing Plan and these Executive Bonuses and excluding the effect of extraordinary non-operating events.) EPS % OF TARGET BONUS - --- ----------------- $1.00 or more 75-100% $ .70-.99 50-74% $ .50-.69 30-49% $ .35-.49 15-29% Below $.35 None The exact percentage within the range for each participant in the plan will be determined by the CEO and based on each individual's performance goals and the resulting impact on the calculation of the earnings per share. EX-10.26 10 EXHIBIT 10.26 PUREPULSE TECH. STOCK OPTION Exhibit 10.26 FOODCO CORPORATION 1994 STOCK OPTION PLAN 1. PURPOSE. The 1994 Stock Option Plan (the "Plan") is intended to advance the interests of Foodco Corporation (the "Company"), and its shareholders by encouraging and enabling selected key employees (including officers and directors) upon whose judgment, initiative and effort the Company is largely dependent for the successful conduct of its business to acquire and retain a proprietary interest in the Company by ownership of its stock. 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 1954, as amended (the "Code") and options which do not so qualify ("non-qualified stock options"). 2. DEFINITIONS. (a) "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. (b) "Board" means the Board of Directors of the Company. (c) "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. (d) "Common Stock" means the Company's common stock. (e) "Date of Grant" means the date on which an option under the Plan is approved by the Committee. (f) "Option" means an option granted under the Plan. (g)"Optionee" means a person to whom an option, which has not expired, has been granted under the Plan. (h) "Subsidiary" or "Subsidiaries" means a subsidiary corporation or corporations of the Company as defined in Section 425 of the Code. (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. -1- 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 15,000. 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 Subsidiary. 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: (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. 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, -2- notwithstanding any provision of the Plan to the contrary, such expiration date shall not be more than ten 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, 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 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 other than by reason of the death of the optionee, the option privileges of such optionee shall be limited to the shares which were -3- 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, 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. (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, 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. -4- 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 parent or subsidiary of the Company) 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 is 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, 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. -5- 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 of Directors of the Company; provided, however, that in the event that shareholder approval of the Plan is not secured on or before August 29, 1995, the Plan shall thereupon terminate. Any options granted prior to the aforesaid shareholder approval being secured shall be subject to such approval being secured. -6- EX-13 11 EXHIBIT 13 PROXY STATEMENT; A/R SUMMARY Exhibit 13 MAXWELL TECHNOLOGIES, INC. 8888 BALBOA AVENUE SAN DIEGO, CA 92123 -------------------- NOTICE OF THE 1996 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON JANUARY 22, 1997 -------------------- To the Shareholders of Maxwell Technologies, Inc. The 1996 Annual Meeting of Shareholders of Maxwell Technologies, Inc., a Delaware corporation (the "Company"), will be held on January 22, 1997 at 10:00 A.M., local time, at the La Jolla Marriott, 4240 La Jolla Village Drive, La Jolla, California, for the following purposes, all as more fully set forth in the accompanying Proxy Statement: 1. To elect 2 directors of the Company of Class I, to serve until the annual meeting of shareholders in 1999 and until their successors shall have been duly elected and qualified. 2. To consider and approve an amendment to the Company's 1995 Stock Option Plan, increasing the number of shares reserved for options thereunder by 150,000 shares. 3. To consider and approve an amendment to the Company's Director Stock Option Plan to remove the provision that options held by directors whose Board membership terminates will expire 60 days after such termination. 4. To transact such other business as may properly come before the meeting or any adjournment or adjournments thereof. The Board of Directors has fixed the close of business on November 26, 1996 as the record date for determining shareholders entitled to notice of and to vote at the meeting and any adjournment or adjournments thereof. By Order of the Board of Directors, Donald M. Roberts Secretary Dated: December 4, 1996 YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING. IF YOU DO NOT EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE AS SOON AS POSSIBLE. MAXWELL TECHNOLOGIES, INC. 8888 BALBOA AVENUE SAN DIEGO, CALIFORNIA 92123 ----------------- PROXY STATEMENT FOR THE 1996 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON JANUARY 22, 1997 ----------------- GENERAL INFORMATION This Proxy Statement is being mailed on or about December 4, 1996 to the shareholders of Maxwell Technologies, Inc., a Delaware corporation (the "Company"), in connection with the solicitation of proxies on behalf of the Board of Directors of the Company to be used at the 1996 Annual Meeting of the Shareholders of the Company to be held on January 22, 1997 (the "Meeting") and any adjournment or adjournments thereof. Any proxy given may be revoked at any time prior to the exercise of the powers conferred by it by filing with the Secretary of the Company a written notice signed by the shareholder revoking such proxy or a duly executed proxy bearing a later date. In addition, the powers conferred by such proxy may be suspended if the person executing the proxy is present at the meeting and elects to vote in person. All shares represented by each properly executed and unrevoked proxy received in time for the Meeting will be voted (unless otherwise indicated thereon) in the manner specified therein at the Meeting and any adjournment or adjournments thereof. The Company will pay the expenses of soliciting proxies, including the charges and expenses of brokerage firms and others for forwarding solicitation material to beneficial owners of shares. In addition to the use of the mails, some of the Company's directors, officers and regular employees, without extra compensation, may solicit proxies by telegram, telephone and personal interview. A Summary Annual Report of the Company for the fiscal year ended July 31, 1996 ("fiscal 1996") is being mailed to shareholders concurrently with the mailing of this Notice of Annual Meeting and Proxy Statement. The Summary Annual Report contains, among other things, summary financial information regarding the Company and a discussion of developments in the Company's business during fiscal 1996. In addition, there is included as an Appendix to this Proxy Statement complete financial statements of the Company together with the report of the Company's independent auditors thereon. The Appendix also contains certain additional financial and related information regarding the Company. VOTING RIGHTS The close of business on November 26, 1996 (the "Record Date") has been fixed by the Board of Directors as the record date for determining shareholders entitled to notice of and to vote at the Meeting and any adjournment or adjournments thereof. On the Record Date, there were outstanding ________________________shares of the Company's Common Stock, $.10 par value ("Common Stock"), all of one class and all of which are entitled to be voted at the Meeting. Holders of such issued and outstanding shares of Common Stock are entitled to one vote for each share held by them. A majority of the outstanding shares will constitute a quorum at the meeting. Abstentions and broker non-votes are counted for purposes of determining the presence or absence of a quorum for the transaction of business. Abstentions are counted in the tabulation of the votes cast on proposals presented to stockholders, whereas broker non-votes are not counted for purposes of determining whether a proposal has been approved. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT BENEFICIAL OWNERSHIP OF PRINCIPAL SHAREHOLDERS The following table sets forth, as of August 31, 1996, certain information concerning the beneficial ownership of the Company's equity securities of each person known by the Company to own beneficially five percent or more of the Company's Common Stock, the Company's only outstanding class of securities presently entitled to vote. A person is deemed to be the beneficial owner of securities, whether or not he has any economic interest therein, if he directly or indirectly has (or shares with others) voting or investment power with respect to the securities or has the right to acquire such beneficial ownership within sixty days. NUMBER OF SHARES NAME AND ADDRESS OF OF COMMON STOCK PERCENT BENEFICIAL OWNER BENEFICIALLY OWNED (1) OF CLASS ---------------- ---------------------- -------- The TCW Group, Inc..................... 232,588 8.1% 865 South Figueroa Street Los Angeles, California 90017 Dimensional Fund Advisors, Inc. (2).... 179,306 6.2% 1299 Ocean Avenue, 11th Floor Santa Monica, California 90401 - --------------- (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. (2) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment advisor, is deemed to have beneficial ownership of 179,306 shares of the Company's Common Stock as of June 30, 1996, 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 179,306 shares and sole voting power over 128,969 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 officer of the Fund and the Trust, these persons vote 29,446 additional shares which are owned by the Fund and 20,891 shares which are owned by the Trust (both included in Sole Dispositive Power above). BENEFICIAL OWNERSHIP OF DIRECTORS, NOMINEES FOR DIRECTOR AND EXECUTIVE OFFICERS The following table sets forth, as of August 31, 1996, certain information concerning the beneficial ownership of the equity securities of the Company of (i) each director and nominee for director of the Company, (ii) each person serving as Chief Executive Officer during fiscal 1996, the other four most highly compensated executive officers of the Company who earned in excess of $100,000 during fiscal 1996 and two former executive officers who would have been among such four executive officers except 2 that they ceased serving as such prior to the end of fiscal 1996, and (iii) all directors and executive officers of the Company as a group. The percentages set forth in the following table as to each person's ownership of the Company's Common Stock are based on the 2,876,858 shares outstanding on August 31, 1996, plus any shares which may be acquired upon exercise of stock options held by such person which are exercisable on or within sixty days after August 31, 1996. Accordingly, the percentages are based upon different denominators. NUMBER OF SHARES NAME OF OF COMMON STOCK PERCENT BENEFICIAL OWNER BENEFICIALLY OWNED (1) OF CLASS ---------------- ---------------------- -------- Lewis J. Colby, Jr.. . . . . . . 15,915(2) * Adolphe G. Gueymard. . . . . . . 18,667(2)(3) * Thomas B. Hayward. . . . . . . . 9,824(2) * Henry F. Owsley. . . . . . . . . 36,461(2) 1.3% Karl M. Samuelian. . . . . . . . 11,587(2) * Donn A. Starry . . . . . . . . . 8,667(2) * John W. Weil . . . . . . . . . . 15,612(2) * Kenneth F. Potashner . . . . . . 98,980 3.4% Alan C. Kolb (4) . . . . . . . . 97,248(2) (5) 3.3% Kedar D. Pyatt (4) . . . . . . . 35,788(2) 1.2% Sean M. Maloy (4). . . . . . . . 38,644(2) (5) 1.3% Richard C. Eppel . . . . . . . . 13,735(2) * Richard E. Smith . . . . . . . . 12,500(2) * Donald M. Roberts. . . . . . . . 4,220(2) * Eduardo M. Waisman . . . . . . . 14,700(2) * All Directors and Executive Officers as a group (18 persons) . . . . . . . . 446,752(2) 14.6% - --------------- * Less than 1% ownership. (1) Information with respect to beneficial ownership is based on information furnished to the Company by each shareholder included in the table. Except as indicated in the notes to the table, each shareholder included in the table has sole voting and dispositive power with respect to the shares shown to be beneficially owned by such shareholder. The table may not reflect limitations on voting power and investment power arising under community property and similar laws. (2) Includes the following numbers of shares acquirable under options which were exercisable on or within sixty days after August 31, 1996: Alan C. Kolb, 42,000; Kedar D. Pyatt, 4,680; Sean M. Maloy, 37,350; Richard C. Eppel, 10,860; Richard E. Smith, 7,500; Donald M. Roberts, 3,000; Eduardo M. Waisman, 14,700; Messrs. Gueymard, Samuelian, Hayward and Drs. Weil and Colby, 8,667 each; Henry Owsley, 6,461; Donn Starry, 5,514; and all directors and executive officers as a group, 182,900. (3) Does not include 1,157 shares held of record by Mr. Gueymard's wife. Mr. Gueymard disclaims beneficial ownership of such shares. 3 (4) Dr. Kolb stepped down as President and Chief Executive Officer in April, 1996 and continues as a member of the Company's Board of Directors. Dr. Pyatt and Mr. Maloy ceased serving as executive officers and directors during 1996. (5) Dr. Kolb and Mr. Maloy also own 2,750 and 500 shares, respectively, of common stock of the Company's subsidiary, PurePulse Technologies, Inc., representing approximately 2.3% and 0.4% of the outstanding shares of that company. ELECTION OF DIRECTORS The Board of Directors of the Company is divided into three classes, with the terms of office of each class ending in successive years. The terms of the two directors currently serving in Class I expire with this Annual Meeting of Shareholders. The directors in Class II and Class III will continue in office until their terms expire at the 1997 and 1998 Annual Meeting of Shareholders, respectively. Each director elected in Class I at the Meeting will hold office for a term expiring at the 1999 Annual Meeting of Shareholders and until his successor is duly elected and qualified. Holders of Common Stock are entitled to cast one vote for each share held for each of two nominees for director in Class I. The two nominees receiving the greatest number of votes will be elected directors of the Company in Class I. It is intended that the shares represented by the enclosed proxy will be voted, unless otherwise instructed, for the election of the two nominees named below. While the Company has no reason to believe that either of the nominees will be unable to stand for election as a director, it is intended that if such an event should occur, such shares will be voted for the other nominee and for such substitute nominee as may be selected by the Board of Directors. Set forth below is certain information regarding the nominees for director and the other directors of the Company who will continue in office for terms extending beyond the Meeting. NOMINEES FOR ELECTION AS DIRECTORS PERIOD SERVED AS A DIRECTOR, POSITIONS AND OTHER RELATIONSHIPS WITH THE COMPANY, AND BUSINESS NAME AND AGE EXPERIENCE ------------ --------------------------------- Kenneth F. Potashner, 39 Mr. Potashner has served Maxwell as (Class I) Director, Chief Executive Officer and President since April of 1996. From 1991 through 1994 he was Vice President, Product Engineering, for Quantum Corporation. From 1994 to April of 1996, he served as Executive Vice President, Operations, of Conner Peripherals. Henry F. Owsley, 41 Mr. Owsley is a founding partner (Class I) of Gordian Group, L.P., a financial advisory and merchant banking firm formed in 1988. He has served as a director of the Company since 1991. 4 PERIOD SERVED AS A DIRECTOR, POSITIONS AND OTHER RELATIONSHIPS WITH THE COMPANY, AND BUSINESS NAME AND AGE EXPERIENCE ------------ --------------------------------- DIRECTORS CONTINUING IN OFFICE Lewis J. Colby, Jr., 62 Dr. Colby has been a director of (Class II) the Company since December, 1983. He was a 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. Donn A. Starry, 71 General Starry, U.S. Army, Retired, has (Class II) been a director of the Company since July, 1988, and was named Chairman of the Board in October, 1995. General Starry retired from the Army in 1983 and joined Ford Aerospace Corporation. He served briefly as Vice President-Mission Analysis and Technical Affairs and then for three years as Vice President/General Manager of the Space Missions Group. From January 1, 1987 until his retirement from industry in 1990, he served as an Executive Vice President and Special Assistant to the Chief Executive Officer of BDM International. A two term member of the Defense Science Board, he continues to consult with industry and government on tactical, operational and strategic issues. Alan C. Kolb, 67 Dr. Kolb has been a director of the (Class III) Company since 1970. He also served as a director from July, 1965 to October, 1967. Dr. Kolb served as Chief Executive Officer of the Company from 1970 to 1996. 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. Karl M. Samuelian, 64 Mr. Samuelian has been a director of (Class III) 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 1996 and said firm has been retained in the current fiscal year. 5 PERIOD SERVED AS A DIRECTOR, POSITIONS AND OTHER RELATIONSHIPS WITH THE COMPANY, AND BUSINESS NAME AND AGE EXPERIENCE ------------ --------------------------------- Thomas B. Hayward, 72 Thomas B. Hayward, U.S. Navy (Retired), (Class III) 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 is a director of Litton Industries. He was appointed a director of the Company in October, 1987. BOARD OF DIRECTORS MEETINGS AND COMMITTEES The Board of Directors of the Company held a total of twelve regular and special meetings during fiscal 1996. All directors attended at least 75% of the aggregate of (a) the total number of meetings of the Board of Directors and (b) the total number of meetings of all committees of the Board on which he served. The Company has an audit committee, the function of which is to assist the Board of Directors in fulfilling its responsibilities with respect to corporate accounting, auditing and reporting practices. In performing such function, the audit committee maintains a direct line of communication with the Company's independent auditors. The audit committee held two meetings during fiscal 1996. Its current members are Messrs. Gueymard, Hayward, Colby, Owsley and Weil. The Company also has a Compensation Committee which authorizes and reviews officers' compensation. This committee held one meeting during fiscal 1996, and its current members are Messrs. Samuelian, Gueymard, Hayward, Weil, Colby, Starry, and Owsley. The Company has no nominating committee. COMPENSATION OF DIRECTORS Each director of the Company (other than Mr. Potashner who receives no compensation other than that received in his capacity as an officer of the Company) receives compensation of $2,268 per quarter and $810 per Board and Committee meeting attended ($405 per Board or Committee telephonic meeting in which such director participates). As Chairman of the Board and head of the committee of the Board in charge of selecting a new President and Chief Executive Officer, General Starry received a total of $190,000 in consulting fees during fiscal 1996, consisting of $15,000 per month for the months of October, 1995 through March, 1996, and a success fee of $100,000. During such six-month period, General Starry received no other compensation as a director. DIRECTOR OPTION PLAN. The Company maintains the Maxwell Technologies, Inc. Director Stock Option Plan (the "Director Option Plan") which authorizes the granting of options to purchase a maximum of 132,300 shares of the Company's Common Stock to non-employee directors of the Company and its subsidiaries through the tenth anniversary of adoption of the Plan in 1989. Persons who are non-employee incumbent directors (or directors emeritus) of the Company are the only persons eligible to participate in the Director Option Plan. An amendment to the Director Option Plan is being submitted for approval by the shareholders at the Meeting. Please see "Proposal to Amend the Company's Director Stock Option Plan" for a discussion of such amendment and a summary of the terms of the Director Option Plan. 6 DIRECTOR STOCK PURCHASE PLAN. The Company maintains the Maxwell Technologies, Inc., 1994 Director Stock Purchase Plan (the "Director Purchase Plan"), under which directors, other than those who are full-time employees of the Company, have the opportunity to purchase directly from the Company shares of Common Stock at 100% of the public trading price of the shares. A maximum of 50,000 shares have been authorized for purchases by directors under the plan. The Director Purchase Plan is administered by the Board of Directors and authorizes purchases by eligible directors, in accordance with the terms and conditions of the plan, from and after January 1, 1995, the effective date of the plan, until the earlier of ten years thereafter or the issuance of all shares authorized for purchase. All incumbent directors who are not employed by the Company on a full-time basis are eligible to purchase stock under the plan. The purchase price of shares purchased under the plan is the closing price of the stock on the public trading market on the day on which the Company receives the director's request for purchase. In the event that directors seek to purchase in the aggregate more shares than are then available for purchase under the plan, the Company will reduce the number of shares to be purchased by the directors in proportion to the number originally requested. Shares purchased under the plan will be issued directly by the Company and will be without restriction as to trading, except such restrictions as are applicable generally to directors of public companies under the securities laws. As of the date of this Proxy Statement, a total of 26,087 shares have been purchased under the Director Purchase Plan. PROPOSAL TO APPROVE AN AMENDMENT TO THE COMPANY'S 1995 STOCK OPTION PLAN The Board of Directors has adopted, subject to shareholder approval, an amendment to the Maxwell Technologies, Inc. 1995 Stock Option Plan (the "1995 Plan") which authorizes an increase of 150,000 shares in the number of shares of the Company's Common Stock authorized for the granting of options to purchase shares of the Company's Common Stock to key employees of the Company and its subsidiaries, including officers and directors who are also employees. This increase would bring the total number of shares authorized under the 1995 Plan to 400,000. The Board of Directors of the Company believes that the Company's ability to grant stock options to key employees assists the Company in attracting and retaining key employees by affording them an opportunity to acquire a proprietary interest in the Company. In particular, the Company has, during fiscal 1996, undergone a significant change in senior management, including a new chief executive officer and several new corporate officers and operating unit presidents. These changes were effected to pursue the Board's goal of significantly accelerating the commercialization of the Company's technologies. Options under the 1995 Plan were granted to these new management hires as well as other key employees of the Company. As a result of the foregoing, there were no shares remaining for the grant of options under the 1995 Plan on October 22, 1996, the date on which the Board of Directors adopted the proposed amendment. The ability to grant options to key employees and new hires is viewed as critical by the Board to enable it and management to continue the expansion of the Company's operations into large and competitive commercial markets. TERMS AND CONDITIONS OF THE PLAN The 1995 Plan authorizes the granting during the period commencing on October 24, 1995, the date of adoption of the 1995 Plan by the Board of Directors of the Company, and concluding on the tenth anniversary thereof, of stock options to purchase in the aggregate 250,000 shares of the Company's Common Stock. As of the date of this Proxy Statement, options to purchase all 250,000 shares have been 7 granted under the 1995 Plan. The 1995 Plan provides the flexibility for the grant of options intended to qualify as "incentive stock options" under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and options which do not so qualify, referred to as "non-qualified stock options." The 1995 Plan is administered by the Board of Directors of the Company or, at the discretion of the Board, by a Stock Option Committee appointed by the Board (the "Committee"). The Board of Directors of the Company has delegated the authority to administer the 1995 Plan to the Committee. Subject to the provisions of the 1995 Plan, the Committee has the authority to determine the employees to whom and the times at which options are granted, the price and terms of and the number of shares covered by each option, and with respect to each option granted under the 1995 Plan, whether it is intended to be an incentive stock option or a non-qualified stock option. There are no limitations as to the minimum or maximum number of shares of Common Stock that may be optioned to any one eligible individual. However, the number of shares as to which incentive stock options may become exercisable by any one individual for any calendar year is limited to a dollar value of $100,000 (measured by the fair market value of the shares on the date of grant). Any options becoming exercisable in excess of such limit in any calendar year will be non-qualified stock options. The purchase price of shares with respect to which an option is granted under the 1995 Plan and the terms covering payment of such purchase price are determined by the Committee in its sole discretion, but such price may not be less than 100% of the fair market value of the shares on the date the option is granted, as such fair market value is determined in good faith. In the event, however, that an incentive stock option is granted to an employee who, at the time the option is granted, owns stock representing more than ten percent of the total combined voting power of all classes of stock of the Company or any subsidiary, the purchase price of shares with respect to which such option is granted must be at least 110% of the fair market value of the shares on the date of grant. Options granted under the 1995 Plan are exercisable in such increments and at such times as the Committee shall specify, provided that no incentive stock option may be exercised after the expiration of ten years from the date of grant, or five years from the date of grant with respect to options granted to an employee who owns more than 10% of the outstanding shares of the Company's stock. No non-qualified stock option may be exercised more than eleven years after the date of grant. Shares covered by the unexercised portion of any terminated or expired option may again be subject of further options under the 1995 Plan. Upon any exercise of an option granted under the 1995 Plan, the purchase price of the shares purchased upon such exercise shall be paid in full (i) in cash, (ii) by delivery to the Company of shares of its Common Stock having a fair market value equal to the purchase price or (iii) by a combination of cash and stock. The fair market value of shares of the Company's Common Stock delivered in full or partial payment of the exercise price of an option will be determined by the Committee as of the date of exercise in the same manner by which the fair market value of shares of the Company's Common Stock is determined on the date of grant of an option. The Company will receive no consideration upon the grant of any option under the 1995 Plan. Cash proceeds received by the Company from the sale of Common Stock pursuant to the exercise of options granted under the 1995 Plan will constitute general funds of the Company which may be used for general corporate purposes. Under the 1995 Plan, if an optionee's employment with the Company is terminated for any reason, the number of shares purchasable under any option granted thereunder held by such optionee is limited to the number of shares which are purchasable by him at the date of such termination. If termination of employment occurs for any reason other than such optionee's death, the option will expire unless exercised by him within sixty days after the date of such termination. If termination of employment 8 occurs by reason of death, the option will expire unless exercised by the optionee's successor within one year after the date of death. Options granted under the 1995 Plan are exercisable only by the optionee during his lifetime and are not transferable except by will or the laws of descent and distribution. In the event of any change in the Common Stock by reason of recapitalization, reclassification, stock split-up, combination of shares, stock dividend, or like capital adjustment, the 1995 Plan provides that the Board of Directors shall make appropriate adjustments in the aggregate number, class and kind of shares available for option grants under the 1995 Plan or subject to outstanding options thereunder and also make appropriate adjustments in the per share exercise price of outstanding options. In the event of the merger, consolidation or other reorganization of the Company, or in the event of any dissolution or liquidation of the Company, the 1995 Plan provides that the Board of Directors shall elect either to (i) appropriately adjust the number, class, kind and exercise price of shares subject to all outstanding options thereunder and shares which may become subject to options granted thereafter, or (ii) terminate the 1995 Plan and any options theretofore granted thereunder, subject to the right of optionees under the 1995 Plan to exercise, in whole or in part (including the portions of options which may not otherwise have been exercisable due to any insufficient passage of time), their options during a period of not less than thirty days following notification by the Company of the event causing such termination. The 1995 Plan may be amended, suspended or terminated by the Board of Directors of the Company at any time, except that no amendment, suspension or termination may affect, without his consent, any right or obligation of an optionee under an option theretofore granted to him, and except that no amendment made without shareholder approval shall (i) increase the maximum number of shares for which options may be granted (except pursuant to adjustments of the types described above), (ii) change the provisions relating to the expiration dates of options, (iii) change the provisions relating to the establishment of the option price (except pursuant to adjustments of the types described above), or (iv) change the expiration date of Plan. No options may be granted under the 1995 Plan after its termination on October 24, 2005. FEDERAL INCOME TAX CONSEQUENCES INCENTIVE STOCK OPTIONS. No federal income tax consequences result from the grant of an incentive stock option, and generally the exercise of an incentive stock option will not result in the recognition of income by an optionee. If an optionee satisfies certain holding period requirements for shares acquired upon the exercise of an incentive stock option, the full amount of his gain upon the sale of such shares (measured by the difference between the amount of his proceeds of sale less the exercise price) will normally be treated as long-term capital gain. The Company will not be entitled to any deduction under such circumstances. NON-QUALIFIED OPTIONS. No federal income tax consequences result from the grant of a non-qualified stock option. Generally, an optionee will recognize ordinary income upon exercise of a non-qualified stock option in an amount equal to the difference between the fair market value on the date of exercise of the shares acquired upon exercise of the option and the aggregate exercise price for such shares. The Company will be entitled to an income tax deduction equal to the amount of ordinary income recognized by an optionee as a result of the exercise of a non-qualified stock option. The preceding discussion under the heading "Federal Income Tax Consequences" is based on federal tax laws and regulations as in effect on the date of this Proxy Statement and does not purport to be a complete description of the federal income tax aspects of the 1995 Plan. 9 VOTE REQUIRED FOR APPROVAL Approval of the proposed amendment to the 1995 Plan by the shareholders of the Company will require the affirmative vote of a majority of the shares of Common Stock present and represented at the Meeting. THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF THE PROPOSED AMENDMENT TO THE COMPANY'S 1995 STOCK OPTION PLAN. PROPOSAL TO AMEND THE COMPANY'S DIRECTOR STOCK OPTION PLAN The Board of Directors has adopted, subject to shareholder approval, an amendment to the Maxwell Technologies, Inc. Director Stock Option Plan (the "Director Option Plan") which removes the provision requiring a director who is terminating his membership on the Board of Directors to exercise vested options previously granted under the Director Option Plan within sixty (60) days of such termination or the options will expire. After this amendment, former directors will continue to hold and have the right to exercise vested options for the balance of the stated term of such options. Options in which a director is not vested at the time he leaves the Board will be forfeited as currently provided in the Director Option Plan. The Board of Directors believes that the Director Option Plan provides an important incentive to attract qualified individuals to serve as members of the Board. In particular, the Company has, during fiscal 1996, undergone a significant change in management and a reorganization of its operating businesses to accelerate the commercialization of its technologies. Likewise, the Board is undergoing a review of its own membership with a goal of matching the skills and experience of the directors to the orientation of the Company towards large commercial markets for its products and services. Removing the 60 day requirement will facilitate changes in the membership of the Board from time to time to assure the close coordination of Board skills and experience with the Company's operations and business strategy. TERMS AND CONDITIONS OF THE PLAN The Director Option Plan authorizes the granting during the period commencing on August 17, 1989, the date of its adoption by the Board of Directors of the Company, and concluding on the tenth anniversary thereof, of stock options to purchase an aggregate of 132,300 shares of the Company's Common Stock. Persons who are incumbent directors (or directors emeritus) of the Company who are not at the time employees of the Company or any subsidiary of the Company are the only persons eligible to participate in the Director Option Plan. As of the date of this Proxy Statement options to purchase a total of 62,310 shares are outstanding under the Director Option Plan, and 66,837 shares are available for future grant. The Director Option Plan is administered by the Board of Directors of the Company which has the authority, subject to the terms of the Director Option Plan, to prescribe, amend and rescind rules and regulations pertaining to the Plan and the administration thereof. There are no limitations as to the maximum or minimum number of shares that may be optioned to any one individual; however, the Director Option Plan by its terms prescribes an initial grant of options thereunder to purchase 3,000 shares of Common Stock to each of the Company's non-employee directors on the date of adoption of the Plan by the Board of Directors. The Director Option Plan further provides that each non-employee director will automatically receive annual grants of options to purchase 1,000 shares of the Company's Common Stock on the first business day following the scheduled organizational meeting of the Board of Directors of the Company (which is the first meeting of the Board following the Company's Annual Meeting of Shareholders), provided that any eligible director on the date of any such annual grant who 10 was not a member of the Board of Directors on the date of the preceding grant of options under the Director Option Plan and who was not an employee of the Company at any time after the date of such preceding grant will receive an initial grant of options to purchase 3,000 shares of the Company's Common Stock. The purchase price of shares covered by an option granted under the Director Option Plan is the fair market value (as defined in the Plan) of the Company's Common Stock on the date of grant of the option. Generally, fair market value is defined as the mean between the closing bid and asked quotations for such stock on the date of grant. Each option granted under the Director Option Plan becomes exercisable in full on the first anniversary of the date on which it was granted, provided that no such option may be exercised after the expiration of ten years from the date of grant. Shares covered by the unexercised portion of any terminated or expired option may again be the subject of further options under the Director Option Plan. Upon any exercise of an option granted under the Director Option Plan, the purchase price of the shares purchased upon such exercise shall be paid in full (i) in cash, (ii) by delivery to the Company of shares of its Common Stock having a fair market value equal to the purchase price or (iii) by a combination of cash and stock. The fair market value of shares of the Company's Common Stock delivered in full or partial payment of exercise price of an option will be determined by the Board of Directors as of the date of exercise in the same manner by which the fair market value of shares of the Company's Common Stock is determined on the date of grant of an option. The Company receives no consideration upon the grant of any option under the Director Option Plan. Cash proceeds received by the Company from the sale of Common Stock pursuant to the exercise of options granted under the Director Option Plan will constitute general funds of the Company which may be used for general corporate purposes. Under the Director Option Plan, if an optionee's service as a director of the Company is terminated for any reason, the number of shares purchasable under any options granted thereunder held by such optionee is limited to the number of shares which are purchasable by him at the date of such termination. If termination of his services as a director occurs by reason of his death, the option will expire unless exercised by the optionee's successor within one year after the date of death. Options granted under the Director Option Plan are exercisable only by the optionee during his lifetime and are not transferable except by will or the laws of descent and distribution. In the event of any change in the Common Stock by reason of recapitalization, reclassification, stock splitup, combination of shares, stock dividend, or like capital adjustment, the Director Option Plan provides that the Board of Directors shall make appropriate adjustments in the aggregate number, class and kind of shares available for option grants under the Director Option Plan or subject to outstanding options thereunder and also make appropriate adjustments in the per share exercise price of outstanding options. In the event of the merger, consolidation or other reorganization of the Company, or in the event of any dissolution or liquidation of the Company, the Director Option Plan provides that the Board of Directors shall elect either to (i) appropriately adjust the number, class, kind and exercise price of shares subject to all outstanding options thereunder and shares which may become subject to options granted thereafter, or (ii) terminate the Director Option Plan and any options theretofore granted thereunder, subject to the right of optionees under the Director Option Plan to exercise, in whole or in part (including the portion of options which may not otherwise have been exercisable due to any insufficient passage of time), their options during a period of not less than thirty days following notification by the Company of the event causing such termination. 11 The Director Option Plan may be amended, suspended or terminated by the Board of Directors of the Company at any time, except that no amendment of the Plan may, without shareholder approval, change the number of shares subject to the Plan (except pursuant to adjustments of the types described above), change the designation of the class of directors eligible to receive options or materially increase the benefits accruing to participants under the Plan. The Board of Directors of the Company also has the right to modify, extend or renew outstanding options granted under the Director Option Plan or to authorize the grant of new options in substitution therefor, provided that no such action may affect, without his consent, any right or obligation of an optionee under an option previously granted to him and except that no such power shall be exercised in a manner which would adversely affect the qualification of the Director Option Plan or any other stock related plan of the Company under Rule 16b-3 under the Securities Exchange Act of 1934. No options may be granted under the Director Option Plan after its termination on August 16, 1999. FEDERAL TAX CONSEQUENCES Options granted under the Director Option Plan will not constitute "incentive stock options" as defined in the Internal Revenue Code of 1986, as amended, but rather will constitute "nonstatutory" options. No federal income tax consequences result from the grant of a nonstatutory stock option. Generally, an optionee will recognize ordinary income upon exercise of a nonstatutory stock option in an amount equal to the difference between the fair market value on the date of exercise of the shares acquired upon exercise of the option and the aggregate exercise price for such shares. The Company will be entitled to an income tax deduction equal to the amount of ordinary income recognized by an optionee as a result of the exercise of a nonstatutory stock option. The preceding discussion under the heading "Federal Income Tax Consequences" is based on federal tax laws and regulations as in effect on the date of this Proxy Statement and does not purport to be a complete description of the federal income tax aspects of the Director Option Plan. VOTE REQUIRED FOR APPROVAL Approval of the proposed Amendment to the Director Option Plan by the shareholders of the Company will require the affirmative vote of a majority of the shares of Common Stock present and represented at the Meeting. THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF THE PROPOSED AMENDMENT TO THE COMPANY'S DIRECTOR STOCK OPTION PLAN. 12 EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following table sets forth as to each person serving as Chief Executive Officer during fiscal 1996, each of the other four most highly compensated executive officers of the Company at July 31, 1996 who earned more than $100,000 in the fiscal year then ended, and two former executive officers who would have been among the four most highly compensated executive officers except that they ceased serving as such prior to the end of fiscal 1996, information concerning compensation for services rendered in all capacities to the Company and its subsidiary, PurePulse Technologies, Inc. ("PurePulse"), during each of the fiscal years ended July 31, 1996, 1995 and 1994 in which such individuals served as an executive officer. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ----------------------------------- STOCK OPTION GRANTS ANNUAL COMPENSATION (1) (NO. OF SHARES) ------------------------------- RESTRICTED ------------------- ALL OTHER NAME AND POSITION YEAR SALARY BONUS OTHER(2)(3) STOCK AWARD(4) COMPANY PUREPULSE COMPENSATION (5) - ----------------- ---- ------- ----- ----------- -------------- -------- ---------- ---------------- Kenneth F. Potashner (6) 1996 $93,847 $100,000 -0- $645,105 88,980 3,000 $ 44,000 Chief Executive Officer, President, Chief Operating Officer, and Director Alan C. Kolb (7) 1996 256,506 -0- $55,861 -0- 11,500 404,440 Director and Former 1995 274,806 -0- 49,731 -0- 20,000 1,200 4,500 Chief Executive 1994 292,015 -0- 13,266 -0- -0- 27,393 Officer Kedar D. Pyatt(7) 1996 171,602 -0- -0- -0- -0- 4,500 Former Sr. Vice 1995 171,602 -0- -0- -0- 5,000 4,182 President 1994 181,746 -0- 5,393 -0- -0- 10,039 Richard E. Smith (6) 1996 167,400 -0- -0- -0- -0- 3,411 Vice President 1995 128,963 -0- -0- -0- 25,000 -0- Richard C. Eppel (6) 1996 164,000 9,806 -0- -0- 25,000 4,500 Vice President Sean M. Maloy (7) 1996 159,065 -0- -0- -0- 10,500 45,392 Former Executive 1995 174,602 -0- -0- -0- 20,000 600 4,409 Vice President 1994 183,974 -0- -0- -0- -0- 13,865 Donald M. Roberts 1996 150,010 -0- -0- -0- 5,000 346 General Counsel, 1995 150,010 -0- -0- -0- -0- -0- and Secretary 1994 46,734 -0- -0- -0- 5,000 -0- Eduardo M. Waisman 1996 141,400 -0- -0- -0- 5,000 4,242 Vice President 1995 141,400 -0- -0- -0- 15,000 4,242 1994 113,175 -0- -0- -0- -0- 5,554
- --------------- (1) Amounts shown include cash compensation earned and received by executive officers and former executive officers as well as amounts earned but deferred at the election of those officers under the Company's Savings Plan. (2) Represents the amounts paid to Dr. Kolb during fiscal years 1996, 1995 and 1994 and to Dr. Pyatt during fiscal year 1994 to defray income taxes payable by them in connection with the receipt of certain supplemental retirement annuities. (3) Does 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 13 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 1996. (4) Mr. Potashner was awarded 88,980 shares of restricted stock with a fiscal year-end value, measured in terms of the closing price of the Company's Common Stock on July 31, 1996, of $1,156,740. The stock vests 25% after one year, and 1/48 per month thereafter. Mr. Potashner will be considered the owner of the shares for purposes of voting and receiving dividends. (5) The amounts shown in this column for fiscal 1996 consist of matching contributions made by the Company under its Savings Plan, and for Mr. Potashner and Mr. Maloy, $44,000 and $41,358, respectively, received under consulting arrangements, and for Dr. Kolb $400,000 pursuant to the conclusion of his three-year employment contract. (6) Mr. Smith was appointed an executive officer during fiscal 1995, and Mr. Potashner and Mr. Eppel during fiscal 1996. (7) Dr. Kolb was the Chief Executive Officer of the Company through April 26, 1996, and Dr. Pyatt and Mr. Maloy ceased serving as executive officers during fiscal 1996. OPTION GRANTS IN LAST FISCAL YEAR The following table shows information on grants of stock options pursuant to the Company's 1995 and 1985 Stock Option Plans and the PurePulse Technologies, Inc. 1994 Stock Option Plan ("PurePulse Option Plan") to those individuals named in the foregoing Summary Compensation Table who received such grants in fiscal 1996. Pursuant to the Securities and Exchange Commission rules, the table also shows the value of the options granted at the end of the five- or ten-year option terms if the stock price were to appreciate annually by 5% and 10% respectively. There is no assurance that the stock price will appreciate at the rates shown in the table.
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 GRANTED (1) FY 1996 (2) (PER SHARE) DATE 5% 10% ---- ----------- ------------- ----------- ---------- -------- ---------- Kenneth F. Potashner Company 88,980 28.54% $7.13 03-27-06 $398,990 $1,011,110 PurePulse 3,000 44.78% $28.00 07-06-06 $52,830 $133,870 Alan C. Kolb 11,500 3.69% $7.25 08-13-00 $23,040 $50,900 Richard C. Eppel 25,000 8.02% $7.50 08-15-00 $51,810 $114,470 Sean M. Maloy 10,500 3.37% $7.25 08-13-00 $21,030 $46,470 Donald M. Roberts 5,000 1.60% $10.00 05-09-01 $13,820 $30,530 Eduardo M. Waisman 5,000 1.60% $7.25 08-13-00 $10,020 $22,130
- --------------- (1) Such options were all granted under either the Company's 1995 or 1985 Stock Option Plan or, with respect to Mr. Potashner, the PurePulse Option Plan. The purchase price of shares covered by such stock options may not be less than the fair market value of the underlying common stock at the date of grant. The term of each such option is five years with the exception of Mr. Potashner's options, which have ten year terms. The increments in which the options are exercisable are determined by the committee which administers the Plans. 14 (2) Total options include options covering 7,000 shares granted to directors under the Company's Director Stock Option Plan. FISCAL YEAR END OPTION VALUES Shown below is information on each of the eight named executive officers and former executive officers of the Company with respect to the value of stock options exercised by them during fiscal 1996, measured in terms of the closing price of the Company's Common Stock on the date of exercise, and with respect to the value of unexercised options to purchase the Company's Common Stock held by them and granted in fiscal 1996 and prior years under the Company's 1995 or 1985 Stock Option Plans, measured in terms of the closing price of the Company's Common Stock on July 31, 1996, the last day of the Company's fiscal year 1996.
SHARES ACQUIRED NUMBER OF UNEXERCISED VALUE OF UNEXERCISED ON EXERCISE VALUE OPTIONS HELD AT IN-THE-MONEY OPTIONS AT NAME (NUMBER OF SHARES) REALIZED ($) JULY 31, 1996 (1) JULY 31, 1996 (1) ---- ------------------ ------------ --------------------------- -------------------------- EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ----------- ------------- ----------- ------------- Kenneth F. Potashner -0- -0- -0- 88,980 -0- $ 522,313 Alan C. Kolb -0- -0- 53,576 -0- $ 225,984 $ -0- Kedar D. Pyatt -0- -0- 3,180 3,920 $ 12,097 $ 20,212 Richard E. Smith -0- -0- 7,500 17,500 $ 41,250 $ 96,250 Richard C. Eppel -0- -0- 3,360 25,840 $ 7,694 $ 139,424 Sean M. Maloy 6,289 $7,328 37,350 -0- $ 184,456 $ -0- Donald M. Roberts -0- -0- 3,000 7,000 $ 16,500 $ 26,000 Eduardo M. Waisman -0- -0- 8,700 16,550 $ 34,368 $ 88,904
(1) Does not include options held by Mr. Potashner to purchase 3,000 shares under the PurePulse Option Plan, none of which are currently exercisable, or options held by Dr. Kolb and Mr. Maloy under the PurePulse Option Plan to purchase 1,200 shares and 600 shares, respectively, all of which are currently exercisable. No public market for these shares exists, and accordingly, no value in excess of exercise price has been attributed to those options. - --------------- The following Shareholder Return Performance Graph and the Report of the Compensation Committee and Stock Option Committee on Executive Compensation included in this Proxy Statement shall not be deemed to be incorporated by reference by any general statement incorporating by reference this Proxy Statement into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates the Performance Graph or the Compensation Committee/Stock Option Committee Report by reference therein, and shall not be deemed soliciting material or otherwise deemed filed under either of such Acts. SHAREHOLDER RETURN PERFORMANCE PRESENTATION Set forth below is a line graph comparing the five year cumulative total return to shareholders on the Company's Common Stock with the five year cumulative total return on the NASDAQ and a peer group of comparable companies identified therein. 15 COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG MAXWELL TECHNOLOGIES, INC., NASDAQ, AND INDUSTRY PEER GROUP YEAR ENDING JULY 31, 1991-1996 [GRAPH]
CRSP TOTAL RETURNS INDEX FOR: 07/31/91 07/31/92 07/30/93 07/29/94 07/31/95 07/31/96 - ----------------------------- -------- -------- -------- -------- -------- -------- Maxwell Technologies, Inc. 100.0 81.8 106.3 70.8 66.5 111.6 Nasdaq Stock Market (US & Foreign) 100.0 117.1 143.2 147.0 204.1 221.2 Self-Determined Peer Group 100.0 86.2 118.9 126.5 211.3 153.0
Companies in the Self-Determined Peer Group CALIFORNIA MICROWAVE INC COHERENT INC CUBIC CORP ILC TECHNOLOGY INC KAMAN CORP TITAN CORP WATKINS JOHNSON CO Notes: A. The lines represent monthly index levels derived from compounded daily returns that include all dividends. B. The indexes are reweighted daily, using the market capitalization on the previous trading day. C. If the monthly interval, based on the fiscal year-end, is not a trading day, the preceeding trading day is used. D. The index level for all series was set to $100.0 on 07/31/91. ASSUMES $100 INVESTED 7/31/91 IN MAXWELL TECHNOLOGIES, INC. COMMON STOCK, NASDAQ, AND INDUSTRY PEER GROUP (DIVIDENDS REINVESTED) INDUSTRY PEER GROUP INCLUDES: CALIFORNIA MICROWAVE, COHERENT, INC., CUBIC CORPORATION, ILC TECHNOLOGY, INC., KAMAN CORPORATION CLA, TITAN CORPORATION, AND WATKINS-JOHNSON REPORT OF THE COMPENSATION COMMITTEE AND STOCK OPTION COMMITTEE ON EXECUTIVE COMPENSATION As described in more detail below, the Company's executive compensation consists of three principal components--base salary and annual incentive compensation as determined by the Compensation Committee of the Board of Directors and stock option awards as determined by the Stock Option Committee of the Board of Directors. A formal Compensation Committee of the Board of Directors of the Company was established during fiscal year 1993 and is comprised of all directors other than Dr. Kolb and Mr. Potashner. The compensation policies of the Company are designed to set its executive compensation, including salary and short-term and long-term incentive programs, at a level consistent with amounts paid to executive officers of companies of similar size and marketplace orientation. In this regard, from time to time over the last approximately ten years, the Company has retained the services of a nationally recognized consulting firm specializing in executive compensation issues to perform market analyses of competitive compensation practices for selected executive officers. The compensation policies of the Company are also designed to link executive officer compensation to the Company's performance in 16 the short-term and long-term, to reward individual achievement and to attract and retain qualified executives. The Company's executive compensation consists of three principal components: (1) BASE SALARY. Base salary is intended to be set at a level consistent with amounts paid to executive officers of companies of comparable size and business areas and generally reflective of the performance of the Company and the individual. Salaries for executive officers are reviewed on an annual basis. No salary increases were instituted for the executive officers in fiscal 1996. Base salary (and annual incentive bonus compensation) for the Company's Chief Executive Officer is set forth in Mr. Potashner's employment agreement discussed below. (2) ANNUAL INCENTIVE COMPENSATION. In view of the uncertainty regarding financial targets for fiscal 1996, no bonus plan was established for fiscal 1996. For fiscal 1996 Mr. Potashner received a bonus of $100,000 as provided for under his employment agreement and Richard Eppel received a $9,800 bonus under a bonus plan applicable to the I-Bus division. No other bonuses were awarded in fiscal 1996 to executive officers. For fiscal 1997, the Compensation Committee adopted a bonus plan for executive officers (other than the Chief Executive Officer) under which all or a portion of a target bonus (not to exceed 50% of annual salary) will be paid depending on earnings per share performance compared to a range of targets for the Company for fiscal 1997. (3) LONG TERM INCENTIVE COMPENSATION/STOCK OPTIONS. The Company's long- term incentive program consists of a stock option program pursuant to which the Chief Executive Officer and other executive officers (as well as other key employees) are periodically granted stock options at the then fair market value of the Company's Common Stock. In addition, the Company adopted a program in early fiscal 1997 for the award of stock options to such individuals in the Company's operating subsidiaries. These option programs are designed to reward and retain executive officers over the long-term and to link the value of the incentive to increases in the value of the subsidiaries and in the Company's stock price over time, benefiting shareholders as a whole. Options in Company Common Stock granted to the executive officers identified in the Summary Compensation Table during fiscal 1996 are set forth in the table above under the caption "Option Grants in Last Fiscal Year." Dated: December 4, 1996. COMPENSATION COMMITTEE Lewis J. Colby, Jr. Adolphe G. Gueymard Thomas B. Hayward Henry F. Owsley Karl M. Samuelian Donn A. Starry John W. Weil STOCK OPTION COMMITTEE Lewis J. Colby, Jr. Donn A. Starry John W. Weil 17 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During fiscal 1996, the Compensation Committee of the Board of Directors was comprised of directors Colby, Gueymard, Hayward, Starry, Samuelian, Weil and Owsley. The same directors continue to serve on the Compensation Committee at the present time. Mr. Samuelian served as Secretary of the Company until June, 1996, and is a shareholder in the law firm of Parker, Milliken, Clark, O'Hara & Samuelian, A Professional Corporation. The Company retained the firm of Parker, Milliken, Clark, O'Hara & Samuelian, A Professional Corporation, to provide legal services during fiscal 1996 and said firm has been retained in the current fiscal year. EMPLOYMENT CONTRACTS , TERMINATION OF EMPLOYMENT AND CHANGE-IN- CONTROL ARRANGEMENTS EMPLOYMENT AGREEMENT. In March, 1996, the Company entered into a Chief Executive Officer 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 is for a term ending July 31, 1998, 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 chief operating officer. The Contract provides for a base salary of $400,000 per year, reviewed annually, with an annual bonus opportunity of up to 100% of base salary (subject to a minimum bonus of $200,000 for fiscal 1997) to be determined by the Board of Directors. Mr. Potashner also received 88,980 shares of restricted stock under the Contract and options under the Company's 1995 Stock Option Plan for a like number of shares. Both the restricted shares and the options are subject to a four-year vesting schedule. Under the Contract, Mr. Potashner will be immediately vested in the restricted shares and stock options, shall receive a payment of two-years salary plus target bonus, and shall continue for one year to receive benefits comparable to those being received, in the event that a "change in control" occurs and either his compensation or responsibilities are reduced or the Company's headquarters are moved more than 30 miles. A "change in 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 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 shall occur with respect to the restricted shares or stock options. CONSULTING AND SEVERANCE ARRANGEMENTS. In connection with the relinquishment by Dr. Kolb of the offices of President and Chief Executive Officer of the Company in April, 1996 and the expiration of his employment agreement with the Company at the end of fiscal 1996, the Company paid him a lump sum separation payment of $400,000, amended Dr. Kolb's existing stock options to become fully vested and entered into a consulting agreement with him on August 1, 1996. Under the consulting agreement, Dr. Kolb has agreed to consult with the Company for a substantial portion of his time and will be paid $10,000 per month, with a bonus opportunity of up to 100% of base consideration at the discretion of the Company's Chief Executive Officer. The consulting agreement has a three-year term and the scope and consideration are subject to periodic reviews by the Chief Executive Officer. During fiscal 1996, Sean Maloy relinquished his position as Executive Vice President-Operations and Chief Operating Officer and terminated employment with the Company. In connection 18 therewith, the Company entered into an agreement with Mr. Maloy under which the Company is paying Mr. Maloy approximately $13,750 per month, and Mr. Maloy is providing consulting services to the Company's Chief Executive Officer. This arrangement is scheduled to expire in October, 1997. The Company also agreed to amend Mr. Maloy's existing stock options to cause them to be 100% vested and to remain in effect for their natural terms notwithstanding Mr. Maloy's cessation of employment. RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS Ernst & Young LLP, certified public accountants ("E&Y"), were the Company's auditors in fiscal 1996. The Company has engaged E&Y as its auditors for the current fiscal year; provided, however, that if E&Y shall decline to act or otherwise become incapable of acting, or if its engagement is otherwise terminated by the Board of Directors (none of which events are currently anticipated), the Board of Directors will appoint other auditors for the fiscal year. Representatives of E&Y will be present at the meeting with an opportunity to make a statement if they desire to do so and such representatives will be available to respond to appropriate questions from shareholders in attendance. SHAREHOLDER PROPOSALS Shareholders may present proposals for inclusion in the proxy statement and form of proxy to be used in connection with the 1997 Annual Meeting of Shareholders of the Company, provided such proposals are received by the Company no later than July 7, 1997 and are otherwise in compliance with applicable laws and regulations. OTHER BUSINESS The Board of Directors does not intend to present any other business at the meeting and knows of no other matters which will be presented at the meeting. By Order of the Board of Directors Donald M. Roberts Secretary Dated: December 4, 1996 YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING. IF YOU DO NOT EXPECT TO ATTEND THE MEETING, PLEASE MARK, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE AS SOON AS POSSIBLE. 19 APPENDIX A MAXWELL TECHNOLOGIES, INC. FISCAL YEAR 1996 FINANCIAL INFORMATION MAXWELL TECHNOLOGIES, INC. INDEX TO APPENDIX A Page ---- Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. A-2 Five-Year Selected Financial Data....................................... A-7 Consolidated Balance Sheet at July 31, 1996 and 1995.................... A-8 Consolidated Statement of Income for the Years Ended July 31, 1996, 1995 and 1994......................................................... A-9 Consolidated Statement of Shareholders' Equity for the Three Years Ended July 31, 1996................................................... A-10 Consolidated Statement of Cash Flows for the Years Ended July 31, 1996, 1995 and 1994......................................... A-11 Notes to Consolidated Financial Statements.............................. A-12 Report of Ernst & Young LLP, Independent Auditors....................... A-24 A-1 MAXWELL TECHNOLOGIES INC., AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Fiscal year 1996 was a signal year for the Company. Several major events are highlighted in this opening section of the discussion of results of operations. First, Dr. Alan C. Kolb, President and Chief Executive Officer of the Company, turned these duties over to Kenneth F. Potashner in April 1996. Dr. Kolb, CEO of Maxwell since 1970, became a consultant to the Company effective August 1st. Mr. Potashner comes to Maxwell from Conner Peripherals, where he served as Executive Vice President and General Manager of Disk Drive Operations, a $2.5 billion business in California's Silicon Valley. He brings to Maxwell a track record of aggressive time-to-market improvements, new product commercialization and enhanced profitability and growth. In January, the Company re-positioned its Sierra Capacitor/Filter division from a largely military and space-based product orientation to a commercial focus emphasizing the division's new medical products. The medical products are for filtering unwanted electromagnetic signals which could otherwise interfere with the operation of implantable defibrillator/pacemakers. The result of this restructure at Sierra was five profitable months for the division in the last two quarters of the year - after several years of quarterly losses - and a record beginning-of-year backlog going into fiscal 1997. Also in January, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. Statement No. 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. The adoption of Statement No. 121 resulted in a write-down of assets for the Company, as described below. In June, Maxwell sold its chemical analytical services business. This group performed sample analysis, primarily for the U.S. Environmental Protection Agency and the Department of Energy. The environmental chemistry laboratory, while profitable in years past, incurred substantial losses in fiscal 1996, and the operation did not possess a strong synergy or strategic relevance to the core business areas on which the Company is focusing. Also in June, the Company announced a plan of reorganization. Under the leadership of Mr. Potashner, the Company's operations were re-cast into five distinct business units, effective August 1, 1996. These business units align Maxwell's capabilities into strategic product and market-focused groups in order to foster technology synergy, sharpen production and customer service, and position the Company to more rapidly achieve product-to-market goals. As a further reflection of its new direction, with an emphasis on commercial productization rather than funded research, the Company changed its corporate name from Maxwell Laboratories to Maxwell Technologies shortly after the 1996 fiscal year-end. These significant actions taken in 1996, as outlined above, resulted in the Company taking write-offs totaling approximately $14.4 million primarily during the second and third quarters of the fiscal year. The $14.4 million also included a reserve for net deferred income tax assets, certain environmental, contract and inventory reserves, and charges for facilities consolidations. Management believes that the actions and charges taken have positioned Maxwell to better pursue its strategic business objectives, and to operate as a leaner, more tightly focused company. A-2 In order to align management's discussion of business segment sales and cost of sales with the new internal management focus described above, the Company's segments have been re-defined as follows. - - Commercial and Industrial PC Products segment, operated through the I-Bus business unit: Design and manufacture of custom and standard PC solutions for original equipment manufacturers. - - Technology Programs and Systems segment, operated through the Federal Division: Scientific research, computer simulation and analysis, design, development and integration of major pulsed power systems, and operation and maintenance of test facilities, primarily for the U.S. Government Department of Defense. - - Information Products and Services, operated through the Information Systems business unit: State-of-the-art software products and services for management information and integrated justice information systems, as well as educational products and applications for the Internet and for wide-area and local-area networks. - - Power Conversion Products, operated through the Energy Products and PurePulse Technologies business units: Design, development and manufacture of component parts and subsystems that condition and/or exploit electrical energy, primarily in the form of pulsed-power. Sales for fiscal year 1996 increased to $80.9 million, or 8% over the $75.0 million of fiscal 1995. Sales in fiscal 1994 were $85.5 million, and included approximately $13.5 million more in sales to the U.S. Government, primarily the Department of Defense, than in 1995 or 1996. The following table depicts sales and cost of sales by business segment for the years ended July 31, 1996, 1995, and 1994. For purposes of this table, the chemical analytical services business and the Brobeck division, which were sold and shut-down in fiscal years 1996 and 1994, respectively, are included with Technology Programs and Systems. SALES ----- 1996 1995 1994 ---- ---- ---- Commercial and Industrial $ 26,131 $ 23,319 $ 18,967 PC Products Technology Programs & Systems 30,198 31,064 46,625 Information Products & Services 8,134 5,414 3,586 Power Conversion Products 16,448 15,207 16,285 -------- -------- -------- $ 80,911 $ 75,004 $ 85,463 -------- -------- -------- -------- -------- -------- COST OF SALES ------------- % OF % OF % OF 1996 SALES 1995 SALES 1994 SALES ---- ----- ---- ----- ---- ----- Commercial and Industrial $ 18,498 70.8% $ 15,565 66.7% $ 13,155 69.4% PC Products Technology Programs & Systems 24,539 81.3% 24,832 79.9% 38,300 82.1% Information Products & Services 10,295 126.6% 4,773 88.2% 2,860 79.8% Power Conversion Products 12,561 76.4% 11,277 74.2% 14,240 87.4% -------- -------- -------- $ 65,893 81.4% $ 56,447 75.3% $ 68,555 80.2% -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- A-3 Commercial and Industrial PC Products sales continue to increase under I-Bus' strategy of being positioned as the supplier of choice for OEMs in its target markets. I-Bus' sales and marketing plans focus on large design-in wins; however, such large programs generally have greater competition and therefore lower profit margins and this has affected cost of sales as a percent of sales in 1996. Another factor affecting the cost of sales percentage in fiscal 1996 as compared to 1995 was an increased write-off of obsolete materials due to the introduction of new products and phase-out of older ones. A portion of the decrease in the cost of sales percentage from 1994 to 1995 is due to the impact of sales growth given the fixed nature of certain of the overhead costs. The $1 million decrease in Technology Programs and Systems sales in 1996 from 1995 is comprised of a $3 million decrease in the recently sold Chemistry group's sales, partially offset by increased sales primarily in two program areas. One program is an on-base operations and maintenance contract in support of Defense research involving the Company's pulsed-power area of expertise, and the other is for the analysis, supervision and support of Air Force research in the area of advanced sensors. As previously mentioned, 1996 and 1995 included approximately $13.5 million less in Government work than was realized in 1994, primarily due to cutbacks in Defense spending. While we believe we are at a level of Defense work which could remain a stable core, the level of future Defense cutbacks and the impact on the Company is not predictable and, therefore, previously reported results are not necessarily indicative of those to be expected in the future. While cost of sales as a percent of sales is generally consistent from year to year, fiscal 1996 reflects improved recovery of overhead costs in the Defense business which was offset by losses incurred by the Chemistry group, and 1994 reflects the carrying costs of the Brobeck division prior to its shut down. Information Products and Services sales during fiscal year 1996 consist primarily of the following: the Business Systems group's sales of its JAMIS accounting and MIS software package, and three large multi-year contracts, two for integrated justice information systems in the State of Florida, and one for the network component of a Child Support Enforcement System in South Carolina. Business Systems sales have been near the $2 million mark in all three years. The increase in sales over the three-year period, therefore, reflects the ramp-up of work in 1994 on two of the large contracts which were won in that year, with such ramp-up continuing into 1995. In 1996, the award and commencement of work on the third large contract further increased the level of sales. The increase in cost of sales as a percent of sales in 1996 is due to current year charges taken in the second quarter to reflect anticipated performance on the ultimate completion of the software contracts, and the write-down of certain capitalized software. A portion of the increase in the cost of sales percentage over the three year period is due to reduced profit margins associated with entry into new commercial software markets. All three of the multi-year contracts mentioned above are scheduled for completion in fiscal year 1997. The Information Systems unit is pursuing funding for add-ons and enhancements to these software projects, and has bid on additional large justice information systems, but the ultimate realization of such new business and its impact on the Company is not currently predictable. The 1996 sales increase over 1995 in Energy Products and Subsystems is primarily attributable to greater sales of disk resistors for enhancing the life of medical x-ray equipment, shipments in the third and fourth quarters of Sierra's new medical product, and an increase in funded R&D and prototype system sales at PurePulse. These increases were partially offset by a decrease in funded capacitor R&D. The sales decrease in 1995 from 1994 is primarily attributable to reduced sales of electronic circuit components and disk resistors. The higher cost of sales as a percent of sales in fiscal 1994 is primarily due to a $2 million charge on an overseas contract for customized capacitors which was terminated shortly after July 31, 1994. Internally funded research and development expenses were $5.08 million in fiscal 1996, a negligible change from the $5.04 million of the prior year. In 1994 these expenses were $4.79 million, with the lower amount primarily due to lesser expenditures on commercial software initiatives and PC-based product development. Such expenditures have been increased in the two more recent fiscal years A-4 in support of the Company's information technology focus area. As a percent of total Company sales, internal research and development expenditures for fiscal 1996, 1995, and 1994 were 6.3%, 6.7% and 5.6%, respectively. Selling, administrative and general expenses in fiscal year 1996 were $15.56 million, or 19.2% of sales. However, approximately $1.5 million of the nearly $14.5 million in 1996 reserves and write-offs outlined above are included in these expenses. Excluding those special charges, selling, administrative and general expenses for the current year are about $14 million, or 17.5% of sales, compared with $13.64 and $14.07 million, or 18.2% and 16.5% of sales, for fiscal years 1995 and 1994, respectively. Excluding the 1996 special charges, administrative expenses are nearly unchanged in the current year as compared to 1995, and in 1995 administrative costs were $1.1 million less than in 1994. This decrease was primarily the result of cost cutting measures implemented in the last part of 1994, as well as one-time costs incurred in 1994 associated with reducing the labor force. Both 1996 and 1995 have seen increases in sales and marketing expenses, primarily at the I-Bus operation. I-Bus revenues have grown significantly over this period, and the increase in marketing expenses has been required to support such growth. Other-net represents income of $398,000 in 1996, compared to $848,000 in 1995 and $589,000 in 1994. Other-net includes interest income of $128,000, $358,000 and $164,000 in fiscal 1996, 1995 and 1994, respectively. The greater interest income in 1995 was primarily attributable to interest earned on various tax refunds and receivables in that year. Other-net is also lower in 1996 due to completing the amortization into income of amounts contributed by minority shareholders upon the organization of PurePulse Technologies over such shareholders' proportionate share of PurePulse's equity. This amortization began prior to 1994 and was completed in April 1996. Thus, 1996 other-net includes $379,000 of such income, compared to $508,000 in each of fiscal years 1995 and 1994. The Company incurred a loss in the current year, and cannot carry that loss back to recover taxes paid in prior years. Therefore, no income tax benefit is provided on the current year loss. In addition, a charge of $1,140,000 was taken in January 1996 to reserve the net deferred tax assets of the parent Company, and $156,000 of income tax expense was recorded at PurePulse Technologies, a 76.5% owned subsidiary which must file a separate income tax return. Income tax expense was incurred at an effective rate of 3.6% in 1995, while recoverable income taxes were recorded at an effective rate of 39.0% in 1994. The 3.6% rate in 1995 primarily reflects the tax-free status of the amortized PurePulse gain, which had a much more significant effect on the tax rate in 1995 due to the smaller amount of overall pre-tax dollars in that year. INFLATION AND CHANGES IN PRICES A substantial portion of the Company's business with agencies of the U.S. 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. Generally, the Company has been able to increase prices to offset its inflation-related increased costs. LIQUIDITY AND CAPITAL RESOURCES Primarily as a result of one-time reserves and accruals and certain customer advances received prior to year end, current liabilities have increased to $18.0 million. The balance sheet remains strong, however, with very little long-term debt, working capital of $7.3 million, and a current ratio of 1.4:1 at July 31, 1996. In addition, the Company has available a $5 million bank line of credit, which is secured by the personal property of the Company. The Company does not currently have plans to fund any significant capital addition projects in the new fiscal year, and in addition, subsequent to year-end placed for sale land and a building adjacent to the Company's headquarters facility in San Diego. Approximately 80% of the property slated for A-5 sale is currently leased to an unrelated party, and the balance is occupied by the Company. Management believes that funds on hand and those generated by future operations and available through its bank line of credit will be sufficient to finance working capital requirements for the foreseeable future. NOTE ON FORWARD-LOOKING INFORMATION To the extent that the above discussion goes beyond historical information and indicates results or developments which the Company plans or expects to achieve, these forward-looking statements are identified by the use of terms such as "expected", "anticipates", "plans" and the like. Readers are cautioned that such future results are uncertain and could be affected by a variety of factors that could cause actual results to differ from those expected. Readers are referred to item 1 of the Company's Annual Report on Form 10-K for fiscal 1996 for a discussion of certain of those factors. A-6 MAXWELL TECHNOLOGIES, INC., AND SUBSIDIARY FIVE-YEAR SELECTED FINANCIAL DATA
YEAR ENDED JULY 31 --------------------------------------------------------------------- 1996 1995 1994 1993 1992 --------- -------- -------- -------- -------- (In thousands except per share amounts & ratios) Sales. . . . . . . . . . . . . . . . . . . . $ 80,911 $ 75,004 $ 85,463 $ 86,902 $ 90,159 Costs and expenses . . . . . . . . . . . . . 92,172 74,588 88,098 85,149 96,851 --------- -------- -------- -------- -------- Income (loss) before income taxes, minority interest and loss from cumulative effect of change in accounting principle. . . . . (11,261) 416 (2,635) 1,753 (6,692) Provision for income taxes . . . . . . . . . 1,296 15 (1,028) 683 (2,745) Minority interest in net income of subsidiary . . . . . . . . . . . . . . . . 50 86 80 48 30 Loss from cumulative effect of change in accounting principle . . . . . . . . . . . 2,569 -- -- -- -- --------- -------- -------- -------- -------- Net income (loss). . . . . . . . . . . . . . $ (15,176) $ 315 $ (1,687) $ 1,022 $ (3,977) --------- -------- -------- -------- -------- --------- -------- -------- -------- -------- Earnings (loss) per share: Primary. . . . . . . . . . . . . . . . . . $ (5.53) $ .12 $ (.63) $ .38 $ (1.50) Fully diluted. . . . . . . . . . . . . . . $ (5.53) $ .12 $ (.63) $ .37 $ (1.50) Before loss from cumulative effect of change in accounting principle . . . . . $ (4.59) Cash dividends per share . . . . . . . . . . $ .40 Total assets . . . . . . . . . . . . . . . . $ 40,724 $ 52,370 $ 54,322 $ 55,086 $ 59,925 Working capital. . . . . . . . . . . . . . . $ 7,288 $ 17,855 $ 18,091 $ 20,142 $ 18,410 Working capital ratio. . . . . . . . . . . . 1.40:1 2.37:1 2.31:1 2.49:1 2.02:1 Long-term debt . . . . . . . . . . . . . . . $ 1,018 $ 1,928 $ 2,797 $ 1,515 $ 2,538 Shareholders' equity at year-end . . . . . . $ 20,745 $ 35,364 $ 34,960 $ 36,645 $ 35,456 Shares outstanding at year-end . . . . . . . 2,844 2,689 2,675 2,675 2,656 Book value per share at year-end. . . . . . $ 7.29 $ 13.15 $ 13.07 $ 13.70 $ 13.35
A-7 MAXWELL TECHNOLOGIES, INC., AND SUBSIDIARY CONSOLIDATED BALANCE SHEET
ASSETS JULY 31 1996 1995 (In thousands) Current Assets Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 1,465 $ 4,053 Accounts receivable: Trade and other, less allowance for doubtful accounts of $440 in 1996 and $545 in 1995 . . . . . . . . . . . . 8,656 9,589 Long-term contracts - Note 2. . . . . . . . . . . . . . . . 6,917 6,441 -------- -------- 15,573 16,030 Inventories and inventoried costs relating to long-term contracts - Note 12. . . . . . . . . . . . . . . . 6,808 7,239 Recoverable income taxes . . . . . . . . . . . . . . . . . . . 740 861 Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . 548 572 Deferred income taxes . . . . . . . . . . . . . . . . . . . . 161 2,090 -------- -------- Total Current Assets. . . . . . . . . . . . . . . . . . . . 25,295 30,845 Property, Plant and Equipment, net of accumulated depreciation and amortization - Note 12. . . . . . . . . . . . 14,809 20,315 Deposits and Other . . . . . . . . . . . . . . . . . . . . . . . 620 1,210 -------- -------- $ 40,724 $ 52,370 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable - Note 12 . . . . . . . . . . . . . . . . . . $ 14,231 $ 9,400 Accrued employee compensation. . . . . . . . . . . . . . . . . 2,866 2,681 Current portion of long-term debt. . . . . . . . . . . . . . . 910 909 -------- -------- Total Current Liabilities . . . . . . . . . . . . . . . . . 18,007 12,990 Long-Term Debt - Note 3. . . . . . . . . . . . . . . . . . . . . 1,018 1,928 Deferred Income Taxes. . . . . . . . . . . . . . . . . . . . . . -- 805 Minority Interest and Additional Amounts Contributed . . . . . . 954 1,283 Commitments & Contingencies - Notes 6 & 10 Shareholders' Equity - Note 4 Common Stock, $.10 par value Authorized 5,000,000 shares Issued and outstanding: 1996 - 2,843,563 shares; 1995 - 2,689,185 shares. . . . . . . . . . . . . . . . . 284 269 Additional paid-in capital . . . . . . . . . . . . . . . . . . 20,036 18,889 Deferred compensation. . . . . . . . . . . . . . . . . . . . . (605) -- Retained earnings . . . . . . . . . . . . . . . . . . . . . . 1,030 16,206 -------- -------- 20,745 35,364 -------- -------- $ 40,724 $ 52,370 -------- -------- -------- --------
See accompanying notes. A-8 MAXWELL TECHNOLOGIES, INC., AND SUBSIDIARY CONSOLIDATED STATEMENT OF INCOME YEAR ENDED JULY 31 ---------------------------------- 1996 1995 1994 -------- -------- -------- (In thousands except per share amounts) Sales. . . . . . . . . . . . . . . . . $ 80,911 $75,004 $ 85,463 Costs and expenses: Cost of sales. . . . . . . . . . . . 65,893 56,447 68,555 Selling, administrative and general expenses . . . . . . . . . . . . . 15,564 13,636 14,068 Research and development expenses. . 5,081 5,038 4,794 Restructure and asset impairment losses - Note 9. . . . . . . . . . 5,703 -- -- Loss on closing of Brobeck division. -- -- 1,018 Interest expense . . . . . . . . . . . 329 315 252 Other-net - Note 12. . . . . . . . . . (398) (848) (589) --------- -------- -------- 92,172 74,588 88,098 --------- -------- -------- Income (loss) before income taxes, minority interest and loss from cumulative effect of change in accounting principle . . . . . . . . (11,261) 416 (2,635) Provision for income taxes - Note 5. . 1,296 15 (1,028) Minority interest in net income of subsidiary . . . . . . . . . . . . . 50 86 80 Loss from cumulative effect of change in accounting principle - Note 9 . . 2,569 -- -- --------- ------- -------- Net income (loss). . . . . . . . . . $ (15,176) $ 315 $ (1,687) --------- ------- -------- --------- ------- -------- Earnings (loss) per share: Primary. . . . . . . . . . . . . . . $ (5.53) $ .12 $ (.63) --------- ------- -------- --------- ------- -------- Fully Diluted. . . . . . . . . . . . $ (5.53) $ .12 $ (.63) --------- ------- -------- --------- ------- -------- Before loss from cumulative effect of change in accounting principle. . . . . . . . . . . . . $ (4.59) --------- --------- See accompanying notes. A-9 MAXWELL TECHNOLOGIES, INC., AND SUBSIDIARY CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED JULY 31, 1996 --------------------------------------------------- COMMON ADDITIONAL DEFERRED RETAINED STOCK PAID-IN CAPITAL COMPENSATION EARNINGS ------- --------------- ------------ --------- (In thousands) Balance at August 1, 1993. . . . . . . . . . . . . . . . . . . . $ 255 $ 17,443 $ -- $ 18,947 Issuance of 580 shares under stock option plans including related tax benefit . . . . . . . . . . . . . . . 4 Issuance of 127,185 shares due to 5 percent stock dividend. . 12 1,355 (1,369) Net loss for the year . . . . . . . . . . . . . . . . . . . . (1,687) ------ -------- ------ -------- Balance at July 31, 1994 . . . . . . . . . . . . . . . . . . . . 267 18,802 -- 15,891 Issuance of 14,212 shares under stock purchase plans. . . . . 2 87 Net income for the year . . . . . . . . . . . . . . . . . . . 315 ------ -------- ------ -------- Balance at July 31, 1995 . . . . . . . . . . . . . . . . . . . . 269 18,889 -- 16,206 Issuance of 18,842 shares under stock option plans. . . . . . 2 154 Issuance of 46,556 shares under stock purchase plans. . . . . 4 357 Deferred compensation related to issuance of 88,980 shares. . 9 636 (645) Amortization of deferred compensation . . . . . . . . . . . . 40 Net loss for the year . . . . . . . . . . . . . . . . . . . . (15,176) ------ -------- ------ -------- Balance at July 31, 1996 . . . . . . . . . . . . . . . . . . . . $ 284 $ 20,036 $ (605) $ 1,030 ------ -------- ------ -------- ------ -------- ------ --------
See accompanying notes. A-10 MAXWELL TECHNOLOGIES, INC., AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED JULY 31 --------------------------------------- 1996 1995 1994 --------- -------- -------- (In thousands) Operating Activities Net income (loss). . . . . . . . . . . . . . . . . . . . . . . $(15,176) $ 315 $(1,687) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . 2,128 2,907 3,275 Restructure and asset impairment losses. . . . . . . . . . . . 5,960 -- -- Loss from cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . . . . 2,569 -- -- Provision for losses on accounts receivable . . . . . . . . . 105 45 310 Loss on sales of property and equipment . . . . . . . . . . . 118 122 154 Deferred income taxes . . . . . . . . . . . . . . . . . . . . 1,124 820 (970) Minority interest in net income of subsidiary . . . . . . . . 50 86 80 Deferred compensation . . . . . . . . . . . . . . . . . . . . 40 -- -- Changes in operating assets and liabilities: Accounts receivable . . . . . . . . . . . . . . . . . . . . 252 (52) 266 Inventories . . . . . . . . . . . . . . . . . . . . . . . . (469) 369 876 Prepaid expenses and other. . . . . . . . . . . . . . . . . 614 150 (225) Accounts payable. . . . . . . . . . . . . . . . . . . . . . 2,153 (525) 1,152 Accrued employee compensation . . . . . . . . . . . . . . . 185 (255) (812) Income taxes payable/recoverable. . . . . . . . . . . . . . 121 (797) 914 -------- ------- ------- Net Cash Provided by (Used in) Operating Activities. . . . . . . . . . . . . . . . . . (226) 3,185 3,333 Investing Activities Purchases of property, plant and equipment . . . . . . . . . . (1,976) (2,951) (4,662) Proceeds from sales of property and equipment. . . . . . . . . 6 80 26 -------- ------- ------- Net Cash Used in Investing Activities . . . . . . . . . . (1,970) (2,871) (4,636) Financing Activities Proceeds from long-term borrowing. . . . . . . . . . . . . . . -- -- 2,500 Principal payments on long-term debt . . . . . . . . . . . . . (909) (929) (1,271) Proceeds from issuance of Common Stock . . . . . . . . . . . . 517 89 4 Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . -- -- (2) -------- ------- ------- Net Cash Provided by (Used in) Financing Activities. . . . . . . . . . . . . . . . . . . . . . . (392) (840) 1,231 -------- ------- ------- Decrease in Cash and Cash Equivalents . . . . . . . . . . (2,588) (526) (72) Cash and cash equivalents at beginning of year . . . . . . . . 4,053 4,579 4,651 -------- ------- ------- Cash and Cash Equivalents at End of Year. . . . . . . . . $ 1,465 $ 4,053 $ 4,579 -------- ------- ------- -------- ------- -------
See accompanying notes. A-11 MAXWELL TECHNOLOGIES, INC., AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION AND MINORITY INTEREST AMOUNTS The consolidated financial statements include the accounts of Maxwell Technologies, Inc., and its majority-owned subsidiary, PurePulse Technologies, Inc. All significant intercompany transactions and account balances are eliminated in consolidation. 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 under the straight-line method in amounts sufficient to amortize the cost of the depreciable assets over their estimated useful lives. Depreciation and amortization of property, plant and equipment amounted to $2,507,000 in 1996, $3,415,000 in 1995, and $3,783,000 in 1994. REVENUE RECOGNITION Sales include costs as incurred and fees as earned on cost-plus-fee contracts, as well as costs incurred and estimated profits on long-term fixed-price contracts. Such estimated profits have been computed by applying the various percentages of completion of the contracts to the estimated ultimate profits. Revenues from the sale of manufactured products are recorded when the products are shipped. Provisions are made on a current basis to fully recognize any anticipated losses on contracts. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain of the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. EARNINGS (LOSS) PER SHARE The computation of earnings (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 average number of Common and Common equivalent shares outstanding was 2,747,000 in 1996, 2,678,000 in 1995, and 2,675,000 in 1994. Earnings (loss) per share was unchanged on a fully-diluted basis in all three years. CASH EQUIVALENTS The company classifies all highly liquid investments with a maturity of three months or less when purchased as cash equivalents. A-12 MAXWELL TECHNOLOGIES, INC., AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK-BASED COMPENSATION Effective August 1, 1996, the company will adopt FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. As allowed under Statement 123, the company plans to elect to continue accounting for stock option grants in accordance with Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and related interpretations. If the company so elects, when stock options are granted with an exercise price equal to the fair market value of the shares on the date of grant, no compensation expense will be recorded, and therefore the company does not believe the adoption of Statement 123 will have a material effect on its financial position or results of operations. NOTE 2 - ACCOUNTS RECEIVABLE The following tabulation shows the component elements of accounts receivable from long-term contracts at July 31, 1996 and 1995. 1996 1995 ---- ---- (In thousands) U.S. Government: Amounts billed . . . . . . . . . . . . . . $ 2,832 $ 2,331 Amounts unbilled . . . . . . . . . . . . . 427 1,005 Retainage due upon completion of contracts 312 434 Commercial customers: Amounts billed . . . . . . . . . . . . . . 988 657 Amounts unbilled . . . . . . . . . . . . . 2,358 2,014 -------- ------- $ 6,917 $ 6,441 -------- ------- -------- ------- 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 retention balances and unbilled receivables at July 31, 1996, are expected to become due and payable within the next year. NOTE 3 - LONG-TERM DEBT AND CREDIT AGREEMENTS Long-term debt at July 31 consists of the following: 1996 1995 ---- ---- (In thousands) Variable rate note payable to a bank, due $42,000 monthly plus interest. . . . . . . . . . . . . $ 1,292 $ 1,792 7.75% fixed rate note payable to a bank, due $100,000 quarterly plus interest . . . . . 400 800 10.0% fixed rate promissory note, due $3,000 monthly. . . . . . . . . . . . . . . . . . . . 236 245 ------- ------- 1,928 2,837 Less current portion . . . . . . . . . . . . . . 910 909 ------- ------- $ 1,018 $ 1,928 ------- ------- ------- ------- The variable rate note bears interest at the bank's prime rate plus 1/2%, and at July 31, 1996, this rate was 8.75%. Both bank notes are unsecured, and contain certain restrictive covenants relating to net-worth, net-worth-ratio and quarterly operating results. The consideration of future cash dividends, if any, could be limited by certain of these bank covenants. A-13 MAXWELL TECHNOLOGIES, INC., AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 - LONG-TERM DEBT AND CREDIT AGREEMENTS (CONTINUED) Maturities of long-term debt for each of the five years ending July 31, 2001 are: 1997 - $910,000; 1998 - $512,000; 1999 - $305,000; 2000 - - $14,000; and 2001 - $16,000. Under an annual revolving bank line of credit agreement, the company may borrow up to $5 million at the bank's prime rate plus 1 1/8%. The line of credit is secured by the personal property of the company. At July 31, 1996, there were no outstanding borrowings under this credit arrangement. NOTE 4 - STOCK PLANS STOCK OPTION PLANS In December 1995, the company adopted the 1995 Stock Option Plan under which 250,000 shares of Common Stock were reserved for future grant. This Plan and the company's 1989 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. In addition to the company's stock-based compensation plans, certain officers and key employees may also participate in stock-based compensation plans of the company's majority-owned subsidiary. The following table summarizes company stock option activity for the three years ended July 31, 1996. NUMBER PRICE OF SHARES PER SHARE --------- --------- Outstanding at August 1, 1993. . . . . . . . . . . 408,251 $ 7.70 to $ 13.15 Granted . . . . . . . . . . . . . . . . . . . . 17,600 $ 7.50 to $ 10.24 Exercised . . . . . . . . . . . . . . . . . . . (580) $ 7.70 Expired or forfeited . . . . . . . . . . . . . (39,392) $ 7.70 to $ 12.92 ------- ----------------- Outstanding at July 31, 1994 . . . . . . . . . . . 385,879 $ 7.50 to $ 13.15 Granted . . . . . . . . . . . . . . . . . . . . 112,000 $ 7.50 to $ 8.00 Exercised . . . . . . . . . . . . . . . . . . . -- Expired or forfeited. . . . . . . . . . . . . .(139,007) $ 7.70 to $ 12.92 ------- ----------------- Outstanding at July 31, 1995 . . . . . . . . . . . 358,872 $ 7.50 to $ 13.15 Granted . . . . . . . . . . . . . . . . . . . . 311,800 $ 7.13 to $ 14.50 Exercised . . . . . . . . . . . . . . . . . . . (18,842) $ 7.50 to $ 10.71 Expired or forfeited . . . . . . . . . . . . . (53,817) $ 7.25 to $ 11.33 ------- ----------------- Outstanding at July 31, 1996 . . . . . . . . . . . 598,013 $ 7.13 to $ 14.50 ------- ----------------- ------- ----------------- The average price of all options outstanding at July 31, 1996, is $9.12 per share; the outstanding options expire at various dates through March 2006. At July 31, 1996, options for 258,000 shares of Common Stock are exercisable at $7.25 to $13.15 per share and 124,000 shares are available for future grant. A-14 MAXWELL TECHNOLOGIES, INC., AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 - STOCK PLANS (CONTINUED) STOCK PURCHASE PLANS In December 1994, the company established an 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 1995, 46,556 and 14,212 shares were issued under the two plans for an aggregate of $361,000 and $89,000, respectively. At July 31, 1996, 189,232 shares are reserved for future purchases. 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 $32.50 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 shareholders. In addition, the company may redeem the Rights at a price of $.01 per Right, subject to certain restrictions. DEFERRED COMPENSATION In 1996, 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 a four-year period, and had a value at the date of grant of approximately $645,000. That value, net of accumulated amortization, is 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 period, and such amortization totaled $40,000 in 1996. A-15 MAXWELL TECHNOLOGIES, INC., AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 - INCOME TAXES Income taxes (credit) are as follows for the years ended July 31, 1996, 1995, and 1994: 1996 1995 1994 ---- ---- ---- (In thousands) Federal: Current. . . . . . . . . . . . . . . $ 128 $ (634) $ 15 Deferred . . . . . . . . . . . . . . 814 604 (935) ------- ------ -------- 942 (30) (920) State: Current. . . . . . . . . . . . . . . 44 (171) (73) Deferred . . . . . . . . . . . . . . 310 216 (35) ------- ------ -------- 354 45 (108) ------- ------ -------- $ 1,296 $ 15 $ (1,028) ------- ------ -------- ------- ------ -------- 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 at July 31 are as follows: 1996 1995 1994 ---- ---- ---- (In thousands) Deferred tax assets: Environmental and restructure reserves $ 1,606 $ 495 $ 534 Uniform capitalization, contract and inventory-related reserves . . . . . 1,542 723 1,578 Asset write-downs under FASB Stmt. No. 121. . . . . . . . . . . . . . . 1,062 -- -- Accrued vacation . . . . . . . . . . . 506 551 619 Other. . . . . . . . . . . . . . . . . 426 239 337 Allowance for doubtful accounts. . . . 259 217 213 NOL carryforwards. . . . . . . . . . . 2,500 300 200 Valuation allowance. . . . . . . . . . (7,015) (300) (200) ------- ------- ------- Total deferred tax assets. . . . . . $ 886 $ 2,225 $ 3,281 ------- ------- ------- ------- ------- ------- Deferred tax liabilities: Tax over book depreciation . . . . . . $ 617 $ 802 $ 1,023 Deferred contract income recognition . 108 134 148 Other. . . . . . . . . . . . . . . . . -- 4 5 ------- ------- ------- Total deferred tax liabilities . . . $ 725 $ 940 $ 1,176 ------- ------- ------- ------- ------- ------- Net deferred tax assets. . . . . . . $ 161 $ 1,285 $ 2,105 ------- ------- ------- ------- ------- ------- As the company cannot carry losses back to prior years, and has a current year loss, a valuation allowance is provided on the net operating loss carryforwards and net deferred income tax assets of the parent company. Income tax expense in the current year is to provide for the valuation allowance on beginning of year net deferred tax assets, and to provide for income tax expense at the PurePulse Technologies subsidiary, which must file a separate tax return. A-16 MAXWELL TECHNOLOGIES, INC., AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 - INCOME TAXES (CONTINUED) As of July 31, 1996, the Company has net operating loss carryforwards for federal and state income tax purposes of approximately $1,900,000 and $600,000, 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: 1996 1995 1994 ---- ---- ---- Statutory federal income tax rate. . . . (34.0)% 34.0% (34.0)% State income taxes, net of federal tax benefit. . . . . . . . . . . . . . (6.0) 7.3 (2.7) Amortization of minority interest. . . . (1.1) (41.5) (6.6) Change in valuation allowance and other items . . . . . . . . . . . . . 52.6 3.8 4.3 ------- ------ -------- Effective income tax rate . . . . . . . 11.5% 3.6% (39.0)% ------- ------ -------- ------- ------ -------- NOTE 6 - LEASES Rental expense amounted to $1,992,000, $2,110,000, and $2,343,000 in 1996, 1995, and 1994, respectively, and was incurred primarily for building rental. Future minimum rental commitments as of July 31, 1996, are as follows (in thousands): 1997. . . . . . . . . . . . . . . . . . . . . $ 1,453 1998. . . . . . . . . . . . . . . . . . . . . 1,416 1999. . . . . . . . . . . . . . . . . . . . . 1,218 2000. . . . . . . . . . . . . . . . . . . . . 1,002 2001. . . . . . . . . . . . . . . . . . . . . 884 Thereafter. . . . . . . . . . . . . . . . . . 3,135 ------- $ 9,108 ------- ------- 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 PLANS RETIREMENT PLAN Substantially all employees are covered under the company's defined contribution retirement plan. Prior to 1994, company contributions under the plan were based on 5% of defined compensation for covered employees. Effective January 1, 1994, the company suspended contributions to the plan. There were no contributions made during the years ended July 31, 1996 and 1995; contributions aggregated $550,000 in the year ended July 31, 1994. SAVINGS PLAN Substantially all employees are eligible to elect coverage under a contributory employee savings plan which provides for company matching contributions based on one-half of employee contributions up to certain plan limits. The company's matching contributions under this plan totaled $541,000, $568,000, and $611,000 for the years ended July 31, 1996, 1995, and 1994, respectively. A-17 MAXWELL TECHNOLOGIES, INC., AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 - RELATED PARTY TRANSACTIONS Mr. Karl M. Samuelian, a member of the Board of Directors of the company, is a shareholder in the law firm of Parker, Milliken, Clark, O'Hara & Samuelian, A Professional Corporation, Outside General Counsel to the company. During the years ended July 31, 1996, 1995, and 1994, the company incurred legal fees for services amounting to $32,000, $66,000, and $328,000 respectively, to Parker, Milliken, Clark, O'Hara & Samuelian. NOTE 9 - IMPAIRMENT LOSSES, RESTRUCTURING AND OTHER CHARGES In 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 the year. 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 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. In 1994, a $1 million charge was recorded in the second quarter due to the closing of the Brobeck division, and $2 million of charges were provided in the fourth quarter to recognize anticipated losses on contracts, primarily an overseas contract for customized capacitors which was terminated shortly after July 31, 1994, and to provide for inventory and work force reduction costs. A-18 MAXWELL TECHNOLOGIES, INC., AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 - ENVIRONMENTAL MATTER 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, and that first phase response costs of approximately $7.9 million have been incurred at the site by the DTSC. In 1992, the company and approximately 40 other potentially responsible parties signed a consent order with the State of California. The parties which signed the consent order have agreed to reimburse the State for $4 million of the $7.9 million aforementioned response costs incurred, and to pay for certain on-going and future site investigations and interim response actions outlined in the consent order. The currently estimated cost of such on-going activities is $9.4 million, and the company's share of that cost, as allocated by the parties to the consent order, is currently estimated at approximately 7.0%. The eventual cost of all removal and remediation activities, for which the company and the other potentially responsible parties will share in additional reimbursements to the State, and including the $9.4 million referred to above, is currently estimated to be in the range of $15 - $20 million. About half of such amount will consist of maintenance and monitoring 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 11 - BUSINESS SEGMENTS For purposes of analyzing and understanding the financial statements, the company's operations have been classified into the following business segments: COMMERCIAL AND INDUSTRIAL PC PRODUCTS: Through its I-Bus business unit, the company designs and manufactures custom and standard PC controllers and enclosures for original equipment manufacturers, primarily in the telephony and communications markets. TECHNOLOGY PROGRAMS AND SYSTEMS: Through its Federal Division, the company performs scientific research, computer simulation and analysis, develops and deploys major pulsed power systems, and operates and maintains research and test facilities, primarily for the U.S. Government Department of Defense. INFORMATION PRODUCTS AND SERVICES: Through its Information Systems business unit, the company provides state-of-the-art software solutions for both state and local and commercial applications, as well as services and applications for the Internet and for wide-area and local-area networks. POWER CONVERSION PRODUCTS: Through its Energy Products and PurePulse Technologies business units, the company designs, develops and manufactures component parts and subsystems that condition and/or exploit electrical energy, primarily in the form of pulsed-power, for commercial markets such as medical/pharmaceutical, transportation and food. A-19 MAXWELL TECHNOLOGIES, INC., AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 - BUSINESS SEGMENTS (CONTINUED) Business segment financial data for the three years ended July 31 is as follows:
1996 1995 1994 ---- ---- ---- (In thousands) Sales: Commercial and Industrial PC Products . . . . . . . . . . . $ 26,131 $ 23,319 $ 18,967 Technology Programs and Systems . . . . . . . . . . . . . . 30,198 31,064 46,625 Information Products and Services . . . . . . . . . . . . . 8,134 5,414 3,586 Power Conversion Products . . . . . . . . . . . . . . . . . 16,448 15,207 16,285 --------- -------- -------- Consolidated total . . . . . . . . . . . . . . . . . . $ 80,911 $ 75,004 $ 85,463 --------- -------- -------- --------- -------- -------- Operating profit (loss): Commercial and Industrial PC Products . . . . . . . . . . . $ 1,078 $ 2,287 $ 1,411 Technology Programs and Systems . . . . . . . . . . . . . . 2,131 1,550 2,334 Information Products and Services . . . . . . . . . . . . . (3,680) (1,097) (307) Power Conversion Products . . . . . . . . . . . . . . . . . (752) (561) (2,701) --------- -------- -------- Total operating profit (loss). . . . . . . . . . . . . (1,223) 2,179 737 Corporate expenses and revenues . . . . . . . . . . . . . . (9,709) (1,448) (3,120) Interest expense . . . . . . . . . . . . . . . . . . . . . (329) (315) (252) --------- -------- -------- Income (loss) before income taxes, minority interest and cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . . $ (11,261) $ 416 $ (2,635) --------- -------- -------- --------- -------- -------- Identifiable assets: Commercial and Industrial PC Products . . . . . . . . . . . $ 9,166 $ 8,000 $ 7,053 Technology Programs and Systems . . . . . . . . . . . . . . 7,586 12,640 15,235 Information Products and Services . . . . . . . . . . . . . 3,136 3,893 1,862 Power Conversion Products . . . . . . . . . . . . . . . . . 11,253 13,932 16,761 Corporate . . . . . . . . . . . . . . . . . . . . . . . . . 9,583 13,905 13,411 --------- -------- -------- Consolidated total . . . . . . . . . . . . . . . . . . $ 40,724 $ 52,370 $ 54,322 --------- -------- -------- --------- -------- -------- Depreciation and amortization: Commercial and Industrial PC Products . . . . . . . . . . . $ 316 $ 260 $ 215 Technology Programs and Systems . . . . . . . . . . . . . . 994 1,563 1,953 Information Products and Services . . . . . . . . . . . . . 162 61 49 Power Conversion Products . . . . . . . . . . . . . . . . . 763 1,138 1,185 Corporate . . . . . . . . . . . . . . . . . . . . . . . . . 272 393 381 --------- -------- -------- Consolidated total . . . . . . . . . . . . . . . . . . $ 2,507 $ 3,415 $ 3,783 --------- -------- -------- --------- -------- -------- Capital expenditures: Commercial and Industrial PC Products . . . . . . . . . . . $ 529 $ 337 $ 342 Technology Programs and Systems . . . . . . . . . . . . . . 240 1,034 2,871 Information Products and Services . . . . . . . . . . . . . 482 435 230 Power Conversion Products . . . . . . . . . . . . . . . . . 670 1,078 763 Corporate . . . . . . . . . . . . . . . . . . . . . . . . . 55 67 456 --------- -------- -------- Consolidated total . . . . . . . . . . . . . . . . . . $ 1,976 $ 2,951 $ 4,662 --------- -------- -------- --------- -------- --------
A-20 MAXWELL TECHNOLOGIES, INC., AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 - BUSINESS SEGMENTS (CONTINUED) Certain fiscal year 1995 and 1994 segment information has been reclassified to conform to current year reporting. The effect of the reclassification is primarily to break those amounts previously reported as commercial, industrial and scientific products into more distinct categories, and to reflect land and buildings as corporate assets. 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 1996 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, and in 1994 include a $1 million loss on closing the Brobeck division. Identifiable assets by segment include the assets directly identified with those segments. Corporate assets consist primarily of cash and cash equivalents, deferred income taxes and facilities and land. Sales under U.S. Government contracts and subcontracts are primarily in the Technology Programs and Systems business segment, and aggregated $32,622,000, $32,120,000, and $45,971,000 in 1996, 1995, and 1994, respectively. Export sales amounted to $7,555,000, $7,318,000, and $9,784,000 in 1996, 1995, and 1994, respectively, principally to countries in Europe and the Pacific Rim. NOTE 12 - SUPPLEMENTARY FINANCIAL INFORMATION Inventories and inventoried costs relating to long-term contracts are classified as follows at July 31, 1996 and 1995: 1996 1995 ---- ---- (In thousands) Finished goods . . . . . . . . . . . . . . . . . $ 714 $ 1,181 Costs under long-term contracts. . . . . . . . . 226 81 Work in process. . . . . . . . . . . . . . . . . 1,610 2,211 Raw materials and purchased parts. . . . . . . . 4,258 3,766 ------- ------- $ 6,808 $ 7,239 ------- ------- ------- ------- Property, plant and equipment consist of the following at July 31, 1996 and 1995: 1996 1995 ---- ---- (In thousands) Land and land improvements . . . . . . . . . . . $ 3,470 $ 3,780 Buildings and building improvements. . . . . . . 7,448 11,182 Machinery and equipment. . . . . . . . . . . . . 23,267 30,006 Office furniture and equipment . . . . . . . . . 7,249 6,777 Leasehold improvements . . . . . . . . . . . . . 3,347 3,517 -------- -------- 44,781 55,262 Less allowances for depreciation and amortization . . . . . . . . . . . . . . . . . 30,192 35,633 -------- -------- 14,589 19,629 Construction in progress . . . . . . . . . . . . 220 686 -------- -------- $ 14,809 $ 20,315 -------- -------- -------- -------- A-21 MAXWELL TECHNOLOGIES, INC., AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12 - SUPPLEMENTARY FINANCIAL INFORMATION (CONTINUED) Accounts payable consist of the following at July 31, 1996 and 1995: 1996 1995 ---- ---- (In thousands) Accounts payable and accrued expenses. . . . . . $ 11,388 $ 7,705 Environmental and related reserves . . . . . . . 1,850 1,380 Customer advances. . . . . . . . . . . . . . . . 993 315 -------- -------- $ 14,231 $ 9,400 -------- -------- -------- -------- Included in Other-net is the amortization into income over a three-year period of amounts contributed by minority shareholders upon the organization of PurePulse Technologies over such shareholders' proportionate share of PurePulse Technologies' equity. These amounts were fully amortized at the end of the third quarter of fiscal 1996, and amounted to $379,000 in 1996 and $508,000 in each of 1995 and 1994. Also included in Other-net is interest income of $128,000, $358,000, and $164,000 during the years ended July 31, 1996, 1995, and 1994, 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 U.S. 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 U.S. Government, as well as contract and product sales to non-government customers in various industries. The company performs on-going credit evaluations of selected non-government customers and generally requires no collateral. Supplemental disclosure of cash flow information consists of the following for the three years ended July 31, 1996: 1996 1995 1994 ---- ---- ---- (In thousands) Cash paid (refunded) for: Interest . . . . . . . . . . . . . . . . $ 329 $ 315 $ 252 Income taxes . . . . . . . . . . . . . . $ 152 $ (11) $ (998) Non-cash activities: Issuance of Common Stock in connection with deferred compensation agreement . . . . . . . . . . . . . $ 645 -- -- A-22 MAXWELL TECHNOLOGIES, INC., AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13 - QUARTERLY RESULTS OF OPERATIONS AND STOCK INFORMATION (UNAUDITED) The following is a summary of the quarterly results of operations and Common Stock price ranges for the years ended July 31, 1996 and 1995:
THREE MONTHS ENDED ------------------------------------------------------ OCTOBER 31 JANUARY 31 APRIL 30 JULY 31 ---------- ---------- -------- ------- (In thousands except per share amounts) 1996 Sales. . . . . . . . . . . . . . . . . . $19,172 $19,340 $20,331 $22,068 Gross profit . . . . . . . . . . . . . . 4,308 1,343 4,217 5,150 Net income (loss). . . . . . . . . . . . (2,327) (8,179) (4,823) 153 Earnings (loss) per share: Primary. . . . . . . . . . . . . . . . (.86) (3.01) (1.76) .05 Fully diluted. . . . . . . . . . . . . (.86) (3.01) (1.76) .05 Common Stock price range:. . . . . . . . High . . . . . . . . . . . . . . . . . 10 7/8 11 10 1/4 15 1/4 Low. . . . . . . . . . . . . . . . . . 7 1/4 8 1/8 6 3/4 9 3/8 1995 Sales. . . . . . . . . . . . . . . . . . $17,918 $17,630 $17,468 $21,988 Gross profit . . . . . . . . . . . . . . 4,972 4,584 3,785 5,216 Net income (loss). . . . . . . . . . . . 323 237 (464) 219 Earnings (loss) per share: Primary. . . . . . . . . . . . . . . . .12 .09 (.17) .08 Fully diluted. . . . . . . . . . . . . .12 .09 (.17) .08 Common Stock price range: High . . . . . . . . . . . . . . . . . 9 8 1/4 9 9 Low. . . . . . . . . . . . . . . . . . 7 6 3/4 6 1/2 6 5/8
Note 9 of the financial statements contains a description of items which occurred in the first three quarters of fiscal year 1996, and the second and fourth quarters of fiscal year 1994, contributing to losses in those quarters. In the fourth quarter of fiscal year 1996, the company sold its chemical analytical services business, and reversed the excess amount, totaling $682,000, of the reserve that had been previously provided for a termination of that business. The company's Common Stock is traded in the NASDAQ National Market System under the symbol MXWL. High and low stock prices reflect closing quotations. The closing price for the company's stock on October 22, 1996, was $28.25. As of October 1, 1996, there were 492 record holders of the company's Common Stock. The company declared no dividends in fiscal years 1996 or 1995, but distributed a 5% stock dividend during the second quarter of fiscal year 1994 and has on occasion paid cash dividends within the last five fiscal years. The Board of Directors may consider future year-end cash dividends depending on the company's cash and other requirements at such time. A-23 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Shareholders Maxwell Technologies, Inc. We have audited the accompanying consolidated balance sheet of Maxwell Technologies, Inc., and subsidiary as of July 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended July 31, 1996. 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 subsidiary at July 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended July 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note 9 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 ERNST & YOUNG LLP San Diego, California September 27, 1996 A-24 Appendix B Maxwell Technologies, Inc. 1996 Summary Annual Report MAXWELL TECHNOLOGIES Improving the Quality of Life 1996 Summary Annual Report 1996 SUMMARY ANNUAL REPORT ABOUT THE COMPANY Maxwell Technologies develops, manufactures, and markets products and services involving purification systems, information technologies, and power conversion systems and components. The Company's advanced technology solutions are used in food processing and packaging, health care, OEM PC manufacturing, transportation, mining, and information technology markets, as well as federal and local government applications. In 1996 the Company was reorganized into five business units, each addressing distinctly different markets: - PurePulse Technologies - Energy Products - I-Bus - Information Systems - Federal Division The breakdown for fiscal 1996 revenues is as follows: [Pie-Chart appears here] Federal Division -- $30.2 million PurePulse -- $5.0 million Energy Products -- $11.5 million Information Systems -- $8.1 million I-Bus -- $26.1 million ABOUT THE COVER Maxwell Technologies' many industry-leading technologies range from pulsed power to software solutions for complex problems. Important applications, as depicted on the cover, incorporate pulsed light for purifying water used in restaurants for beverages; ultracapacitors for extending the driving range of electric and hybrid/electric vehicles; and Web sites for providing real-time traffic reporting on the Internet. Note on forward-looking information: In order to provide the most meaningful picture of the Company, certain information in this annual report is forward-looking in the sense that it goes beyond historical information and indicates results or developments which the Company plans or expects to achieve. These statements are identified by the use of terms such as "expected", "anticipates", "plans" and the like. Readers are cautioned that such future results are uncertain and could be affected by a variety of factors that could cause actual results to differ from those expected. Readers are referred to item 1 of the Company's Annual Report on Form 10-K for fiscal 1996 for a discussion of certain of those factors. RECENT DEVELOPMENTS BUILDING BLOCKS FOR THE FUTURE Following the close of our fiscal 1996 year, Maxwell Technologies announced three business developments that we believe effectively underscore the direction of the Company as we enter 1997. On August 26, we issued a news release on the establishment of a Maxwell and Yahoo! Inc. co-branded Internet-based, real-time traffic service in major U.S. metropolitan areas. Maxwell Technologies conceptualized and designed the world's first Internet-based traffic information service, and our arrangement with Yahoo! will help to extend our capabilities in this area on a national scale. This is a prime example of our continuing effort to develop strategic alliances with nationally and internationally recognized firms. In mid-September, the U.S. Food & Drug Administration (FDA) cleared the use of our PureBright(R) technology for killing bacteria on food. We had previously received FDA clearance for our CoolPure(TM) system for the cool preservation of liquid foods. Together, these two processes form the basis for our advanced family of products for sterilizing medical and pharmaceutical items, purifying water and air, and increasing the shelf-life and safety of food. Finally, at the end of September--which has gratifyingly turned out to be one of the most productive periods of corporate developments in the Company's history-- we announced that a major international automobile manufacturer had signed an agreement worth $4.5 million to evaluate our ultracapacitor for use in electric and hybrid/electric vehicles. We are hopeful that this initial phase, which is scheduled to last five months, will result in subsequent program phases that will lead to the commercialization and use of Maxwell's ultracapacitors in electric and hybrid/electric vehicles around the world. 1 To Our Shareholders: This letter to Maxwell Technologies' shareholders begins with a special message from Donn Starry, Chairman of the Board of Maxwell Technologies. Maxwell Technologies is pleased to announce to our shareholders that Kenneth Potashner joined the Company as President and Chief Executive Officer, effective April 26, 1996. He comes to Maxwell from Conner Peripherals, a Silicon Valley company, where he was Executive Vice President and General Manager of operations for a $3.5-billion disk drive business. He brings to Maxwell Technologies a reputation for leadership and a record of success in bringing new products to market quickly. At Maxwell Technologies, Ken Potashner will have broad authority, as President and CEO, to exercise his leadership skills to enable the Company to become a dominant force in markets where Maxwell has patented or unique technologies and services to offer. A new sense of direction is evident in the Company. With renewed dedication by our employees, and a new management structure, we have every reason to expect a steady increase in sales and earnings. The Board of Directors is delighted to join with Ken in building a new and growing Maxwell Technologies. Donn A. Starry, Chairman Maxwell Technologies enters fiscal 1997 with a strengthened senior management team, a streamlined business model and organization, and significant market opportunities. We are pursuing those opportunities with a strong sense of urgency and are enthusiastic about the Company's current positioning. We have set aggressive goals for ourselves for this fiscal year and are taking the necessary actions to achieve them. The new business model and organization is designed to provide distinct financial and operational accountability to each of our five business units. As part of our strategic plan, we will strive to enhance shareholder value by achieving a leadership position in those markets in which we compete. We are concentrating on improving the efficiencies of businesses we believe can dominate their markets, and are exiting from businesses where market leadership is unlikely. We will continue to invest aggressively in areas where we believe we can contribute value to our customer base, and explore additional applications for our rich technology platforms. We have also begun establishing partnerships with key customers in several of our businesses to bring our products to market as quickly as possible. We expect these actions to positively impact our ongoing financial performance in both the short term and long run. 2 FINANCIAL OVERVIEW Over $14 million in charges taken during the year were related to efforts begun three years ago to reposition the Company from being primarily a defense contractor to becoming a high-value-added provider of commercial high-technology products and services. The charges were primarily for asset write-offs and restructurings that produced a leaner, more cost-efficient organization. We believe in the long-term positive results of these actions. For the year ended July 31, 1996, total sales rose 8% to $80,911,000 from $75,004,000 in 1995. After restructuring and other charges of $14.4 million, the company had a net loss of $15,176,000, or $5.53 a share, compared to a net profit of $315,000, or $0.12 a share, last year. Commercial sales in 1996 were 60% of total sales, up from 57% a year ago. A RENEWED SENSE OF URGENCY Management's goal for Maxwell Technologies is to realize the value inherent in the Company's extensive high-technology applications, its leadership in pulsed- power and information technology, and its relationships with major strategic partners around the world. The new management team believes there are significant opportunities to accelerate sales for its technology applications in large and growing commercial markets, and has developed plans to do so. Additionally, the new organization will enable Maxwell to enhance its competitiveness in the federal sector in addition to realizing its commercial objectives. NEW FOCUS Two examples of our commitment toward streamlining the corporate organization are the restructuring of our Sierra Capacitor/Filter operation around commercial medical products, and the sale of our Chemical Analytical Services Laboratory, which did not blend with our core technology businesses. Both of these actions, along with the overall restructuring of Maxwell into five business units with distinct markets, have improved our effectiveness and profitability as we enter fiscal 1997. NEW COMPANY NAME The name Maxwell Laboratories has been changed to Maxwell Technologies, in keeping with our new business orientation. The new name reflects the fact that the Company has moved substantially beyond its previous focus on science and engineering and is 3 now taking technology out of the laboratory, productizing it, and becoming a global provider of products and services. Today, the name Maxwell Technologies is most appropriate. 1996 HIGHLIGHTS Several significant operational developments during the past year underscored the positive direction in which Maxwell Technologies is headed. PurePulse Technologies continues to make significant progress. A project was initiated with a major international restaurant chain to develop and commercialize a compact PureBright(R) system for in-restaurant water treatment use. We also began work on a commercialization project for both PureBright and CoolPure(TM) systems with a major international food company, and systems were ordered for pilot line testing. Two PureBright systems were sold for pilot line installations for medical/pharmaceutical applications. In addition, we signed an OEM agreement-- and the first PureBright system for this application was ordered--with Automatic Liquid Packaging of Woodstock, IL, a preeminent manufacturer of packaging equipment for pharmaceutical products. Our Energy Products business unit achieved a major milestone with the repeatable fabrication of reliable, high-performance Ultracapacitor production prototypes for use in electric and hybrid/electric vehicles. This resulted in several large corporations purchasing prototypes for testing and evaluation. I-Bus' progress during the past year was characterized by new product introductions and major OEM design-ins. Among the new products are the Hammerhead--the first passive backplane CPU board based on Intel's Pentium(TM) Pro processor--a new line of power sequenced passive backplanes, and a new family of fault-tolerant computers. I-Bus also won design-in commitments from 14 new OEMs, each representing over $500,000 in future business. In Information Systems, the Internet Technology group expanded its real-time traffic information business with coverage of the Atlanta area during the Olympic games, and the launching of real-time traffic status reporting on a national basis in conjunction with a major partner, Yahoo!. Information Systems also successfully completed the second phase of an Integrated Justice Information System (IJIS) for Sarasota (Florida) County and initiated implementation of another IJIS system for the Florida Association of Court Clerks. In the federal government-related portion of our business, Maxwell Technologies received a $3 million contract 4 for the development of an electronics flight package for the MightySat space experiment, and a multi-million dollar order from the Los Alamos National Laboratory for high-voltage power supplies. We also demonstrated, in a real underground mining environment, a safer, cheaper technology for continuous mining that utilizes the Company's proprietary Electro-Blast technology. OUTLOOK Our annual report this year is built around two interrelated themes: that going into 1997, Maxwell Technologies is significantly different than we were a year ago, and that we are a highly valuable company. Our new focus is based on three key objectives: - - To limit our participation to those markets where our competitive advantage gives us the greatest likelihood of producing significant sales and profitability. - - To take a leadership position in those markets. - - To position the company to compete on a global basis. Finally, we believe it is important for shareholders to be able to measure management's performance. We are therefore pleased to share with you some of our goals for fiscal 1997 that should help to make this possible: - - Establishing partnering relationships in key areas - - Achieving quarter-to-quarter profitability - - Implementing plans for giving visibility to Maxwell's true worth - - Enhancing shareholder value. We thank you for your support. [Donn A. Starry's picture appears here] Donn A. Starry Chairman of the Board [Kenneth F. Potashner's picture appears here] Kenneth F. Potashner President, Chief Executive Officer and Chief Operating Officer 5 MAXWELL TECHNOLOGIES [Picture appears here] PUREPULSE TECHNOLOGIES -- Purification [Picture appears here] ENERGY PRODUCTS -- Pulsed Power [Picture appears here] I-BUS -- PC Components [Picture appears here] INFORMATION SYSTEMS -- Internet Services [Picture appears here] FEDERAL DIVISION -- Testing and Analysis 6 RESTRUCTURING A CHANGING COMPANY In the 1980s and early 1990s, Maxwell Technologies was a highly sophisticated engineering and scientific company known for its expertise in solving problems related to the nation's national security needs. Much of the leading-edge technology originally developed for government defense purposes is still with us, but with new missions. Our engineering and scientific skills are more sophisticated than ever. But now, the Company's applications of new technology are in large and growing commercial fields such as food and packaging, health care, transportation, mining, electronics, and information transmittal and processing. The same technologies that allowed us to respond to the government's call are helping us solve commercial problems worldwide. ORGANIZED FOR FOCUS AND SYNERGY In order to be more responsive to our customers and more cost-effective in servicing their needs, Maxwell Technologies has been reorganized into five operating units. The new structure was designed to enable us to become a global player and position us for competitive leadership in large and growing markets in which the need for our technologies has been identified. The mechanics of the restructuring are only part of the change underway at Maxwell Technologies. Our business units are also changing the way they do business. As we move from being a company with an R&D orientation to becoming one with a high-volume manufacturing orientation serving broad markets, we have forced ourselves to become more competitive. Our operations are thus moving in the following directions: - - looking at global markets - - reducing the cost structure - - making investments to upgrade skills, primarily in marketing and manufacturing - - getting products and services to market faster A sense of the value inherent in Maxwell Technologies can perhaps best be seen from a review of our five operating units. 7 PUREPULSE TECHNOLOGIES [Full-page picture appears here] Maxwell's PureBright(R) water treatment system will allow restaurants to serve their customers safer and better-tasting water, hot and cold beverages, and ice cubes. 8 IMPROVING THE QUALITY OF LIFE Maxwell's PurePulse Technologies business unit has developed two proprietary sterilization and preservation processes that can be applied to a wide variety of products in a number of markets. PureBright(R), a pulsed-light sterilization technology, is an economical, effective, chemical-free,rapid, on-line process for killing microorganisms. CoolPure(TM), a pulsed-electrical field technology, kills microorganisms in liquid food at moderate temperatures without changing the color, flavor, or texture of the food itself. Applications for these processes include: 1. sterilization of medical/pharmaceutical products and packaging, 2. sterilization of packaging for foods, 3. purification of water and air, 4. treatment of solid foods to reduce microbial contamination and extend shelf life, and 5. cool preservation of liquid foods. PRODUCTS THAT SERVE A GLOBAL NEED Markets for PurePulse products and services are large and worldwide, with major opportunities in Europe and Asia as well as in the U.S. and Canada. All told, a billion dollar cumulative market can be addressed by the products of PurePulse Technologies in the next several years. BUILDING ON INNOVATIVE ACHIEVEMENTS Technology and marketing achievements include the following: - - FDA clearance of CoolPure technology for cool preservation of liquid foods. - - FDA clearance of PureBright for food use. Similar approvals being sought in Canada and Europe. - - Regulatory approvals for medical and pharmaceutical sterilization being pursued in cooperation with medical/pharmaceutical manufacturers. - - Medical manufacturers, food processors, and packaging equipment manufacturers now purchasing PureBright pilot lines for development and testing purposes. - - Deliveries of several CoolPure beta site test systems anticipated in FY 1997. - - Serial production and sales of significant PureBright systems for food packaging, water purification, and other applications expected to begin in early 1998. [Picture appears here] Medical Applications: sterilization of disposable contact lenses, packaged medical/pharmaceutical products, IV bags, etc. [Picture appears here] Water Treatment: in-restaurant use, bottled water, medical and dental applications, and drinking water. [Picture appears here] Food Treatment: produce, baked goods, juices, sauces, liquid eggs, meat, poultry, etc. 9 ENERGY PRODUCTS [Full-page picture appears here] Maxwell ultracapacitors will provide high-power acceleration for electric and hybrid/electric vehicles and recover energy during regenerative braking. Photo Courtesy of: Aerovironment 10 CHANGING THE WAY SYSTEMS WORK For more than 30 years, the name Maxwell has been synonymous with the design, development, and manufacture of innovative capacitors and power supplies for unique customer applications. Hundreds of millions of dollars of product development investment over the past three decades have given Maxwell an extensive technology base and unique proprietary processes. LARGE MARKETS,CHALLENGING APPLICATIONS Energy Products is strategically positioned to capitalize on emerging markets that require high-performance, high-reliability components and subassemblies. In the transportation area, Maxwell Technologies' ultracapacitors have the highest energy density and power density of any existing power booster. They can be used in conjunction with batteries or by themselves, and are ideally suited for use in either electric or hybrid/electric vehicles. LOOKING AHEAD: MARKETS AND OPPORTUNITIES Energy Products is aggressively capitalizing on its unique products in the commercial marketplace. Maxwell Technologies' ultracapacitors of various sizes are already being evaluated by customers in the automobile, clean-power systems, and communications industries. Electric and hybrid/electric vehicles, as well as uninterruptible power supply applications, are major near-term opportunities for ultracapacitors. Hand-held electronics and portable power tools represent the next generation market. Driving the development work on ultracapacitors are potential markets - such as transportation, power electronics, and power quality -- well in excess of $100 million each. [Picture appears here] Medical: filter-capacitors for implantable defibrillators and pacemakers, power-surge protectors for extending the life of X-ray tubes, power supplies for medical lasers, and main discharge capacitors for the worldwide external defibrillator market. [Picture appears here] Industrial: power supplies, capacitors and other components used in advanced laser systems. Applications include semiconductor processing, micromachining, and materials processing. [Picture appears here] Power Quality: Maxwell ultracapacitors will enable automated factories and data processing facilities to "ride through" temporary power disturbances, with major cost savings per occurrence. 11 I-BUS [Full-page picture appears here] I-Bus SFTA (Scalable Fault Tolerant Architecture) platforms are used in central office switch-rooms for mission-critical applications. 12 CREATING THE STRATEGIC PARTNERING ENVIRONMENT Original equipment manufacturers (OEMs) of automated equipment are increasingly turning to external suppliers in their search for cost-effective ways of addressing the needs of their marketplace. Maxwell Technologies' I-Bus operation specializes in the design and manufacture of customized computing products and services tailored to the needs of OEMs. CUSTOMIZED PRODUCTS FOR INNOVATIVE APPLICATIONS As a result of its ability to provide a wide range of PC products, and by focusing on extensive customer support and service, I-Bus has developed close strategic relationships with major clients. MOVING FORWARD IN GROWTH MARKETS Large target markets for I-Bus products and services provide substantial opportunities for continued growth. I-Bus currently serves over 400 customers worldwide, with a large portion of its business coming from major OEM relationships. I-Bus product applications include: - - Voice Mail Systems - - Interactive Voice Response Systems - - Medical Equipment Systems - - Document Processing Systems - - Radio Station Control Systems - - In-Flight Entertainment Systems - - Industrial/Manufacturing Control Systems [Picture appears here] Computer Telephony: voice mail, interactive voice response, call center automation, call-generating test equipment. [Picture appears here] Fault-Tolerant Computer Applications: cost-effective computing platforms for high-end, mission-critical applications. [Picture appears here] International Sales: first international sales office opened in London, in October 1996; substantial growth expected from international sales. 13 INFORMATION SYSTEMS [Full-page picture appears here] Maxwell's robust traffic codes allow commuters and travelers in major metropolitan areas such as Los Angeles to access comprehensive, real-time traffic status on Internet Web sites. Photo Courtesy of: Pierre Kopp 14 ENHANCING THE WAY WE COMMUNICATE Maxwell Technologies provides a wide range of network design, support, and implementation services aimed at enabling and improving corporate, institutional, and state and local government intranet and networking capabilities. Through its Network Services (MNS) operations, Maxwell Technologies has successfully expanded and managed large networks, including the statewide University of Georgia system and the Child Support Enforcement network for the State of South Carolina. MNS services range from the support of private networks that service thousands of users, to corporate intranet services. Network integration and management markets are estimated to be $300 billion, growing at 30% annually. VENDOR OF CHOICE Maxwell has become a nationally recognized vendor of choice for the applications required to drive the strategy of Intelligent Traffic Systems that the government and industry plan for the remainder of this decade and into the next century. CONNECTIVITY: RESPONDING TO TOMORROW'S MARKET NEEDS TODAY Maxwell Technologies' Information Systems subsidiary combines the Company's exceptional computer software experience, talent, and resources to create new business opportunities in several large and growing information technology markets. In the world of Internet technology, Maxwell is a nationally recognized leader in creating innovative real-time traffic applications on the World Wide Web. Real-time traffic information provided on the Web is now available in five cities and is expected to be expanded nationally. [Picture appears here] Business Systems: Maxwell's JAMIS Open is believed to be the most advanced project cost, billing, and accounting system available to commercial and government contractors. [Picture appears here] Educational Software Products: two multimedia CD-ROM products have been completed -- Physics for the Computer Age and Algebra 1 Multimedia Applications. These products are to be distributed by Glencoe McGraw-Hill. [Picture appears here] Criminal Justice Information Systems: $100 million market exists for client-server CJIS solutions for state and local governments. Contracts in Florida totaling $8 million are nearing completion. 15 FEDERAL DIVISION [Full-page picture appears here] Maxwell helped design and manufacture the particle detector used in the Wake Shield disk satellite, which generates an ultra-vacuum environment in space for growing thin semiconductor film. Photo Courtesy of: NASA 16 SOLVING COMPLEX PROBLEMS For more than 30 years, Maxwell Technologies has been a valuable contributor to America's defense, environmental, and space programs, as well as to commercial ventures. Drawing on its unique resources in applied sciences and pulsed power operations and systems, the Company has compiled a long record of success in providing analysis, hardware, and software solutions. The expertise developed over three decades continues to meet the needs of major customers today and forms the basis for expansion into related technologies and additional business with both current and new customers. TOOLS FOR GROWTH The new competitive focus on efficiency and federal market synergy provides growing opportunities for the Federal Division to use its extensive capabilities to solve its customers' needs. CREATING GROWTH OPPORTUNITIES In the face of declining defense funding, the Federal Division is aggressively seeking new market opportunities. Key achievements include the development of pulsed-power-driven energy release devices for mining and tunneling, creation of software tools for linking real-time calculations of complex systems in space environments, R&D linked to counter-proliferation and counter-terrorism, and development of sensor technology and space experiments. [Picture appears here] Pulsed Power Technology: Electro-Blast is a non-toxic, more productive alternative to dynamite in hard rock mining applications. [Picture appears here] Advanced Software Products: developing scientific and engineering software to perform satellite design and analysis, seismic event analysis, earthquake ground motion simulations, and networked scientific information systems. [Picture appears here] Space Technology: integrating and managing advanced space programs. Developing, integrating, and testing advanced aerospace technologies. Photo Courtesy of: Rockwell International 17 Five-Year Selected Financial Data (In thousands except per share amounts & ratios)
YEAR ENDED JULY 31 --------------------------------------------------------------------- 1996 1995 1994 1993 1992 Sales. . . . . . . . . . . . . . . . . . . . $ 80,911 $ 75,004 $ 85,463 $ 86,902 $ 90,159 Costs and expenses . . . . . . . . . . . . . 92,172 74,588 88,098 85,149 96,851 --------- -------- -------- -------- -------- Income (loss) before income taxes, minority interest and loss from cumulative effect of change in accounting principle. . . . . (11,261) 416 (2,635) 1,753 (6,692) Provision for income taxes . . . . . . . . . 1,296 15 (1,028) 683 (2,745) Minority interest in net income of subsidiary . . . . . . . . . . . . . . . . 50 86 80 48 30 Loss from cumulative effect of change in accounting principle . . . . . . . . . . . 2,569 -- -- -- -- --------- -------- -------- -------- -------- Net income (loss). . . . . . . . . . . . . . $ (15,176) $ 315 $ (1,687) $ 1,022 $ (3,977) --------- -------- -------- -------- -------- --------- -------- -------- -------- -------- Earnings (loss) per share: Primary. . . . . . . . . . . . . . . . . . $ (5.53) $ .12 $ (.63) $ .38 $ (1.50) Fully diluted. . . . . . . . . . . . . . . $ (5.53) $ .12 $ (.63) $ .37 $ (1.50) Before loss from cumulative effect of change in accounting principle . . . . . $ (4.59) Cash dividends per share . . . . . . . . . . $ .40 Total assets . . . . . . . . . . . . . . . . $ 40,724 $ 52,370 $ 54,322 $ 55,086 $ 59,925 Working capital. . . . . . . . . . . . . . . $ 7,288 $ 17,855 $ 18,091 $ 20,142 $ 18,410 Working capital ratio. . . . . . . . . . . . 1.40:1 2.37:1 2.31:1 2.49:1 2.02:1 Long-term debt . . . . . . . . . . . . . . . $ 1,018 $ 1,928 $ 2,797 $ 1,515 $ 2,538 Shareholders' equity at year-end . . . . . . $ 20,745 $ 35,364 $ 34,960 $ 36,645 $ 35,456 Shares outstanding at year-end . . . . . . . 2,844 2,689 2,675 2,675 2,656 Book value per share at year-end. . . . . . $ 7.29 $ 13.15 $ 13.07 $ 13.70 $ 13.35
Maxwell Technologies, Inc., and Subsidiary 18 Consolidated Balance Sheet (In thousands)
ASSETS JULY 31 1996 1995 Current Assets Cash and cash equivalents $ 1,465 $ 4,053 Accounts receivable: Trade and other, less allowance for doubtful accounts of $440 in 1996 and $545 in 1995 8,656 9,589 Long-term contracts 6,917 6,441 -------- -------- 15,573 16,030 Inventories and inventoried costs relating to long-term contracts - 6,808 7,239 Recoverable income taxes 740 861 Prepaid expenses 548 572 Deferred income taxes 161 2,090 -------- -------- Total Current Assets 25,295 30,845 Property, Plant and Equipment, net of accumulated depreciation and amortization 14,809 20,315 Deposits and Other 620 1,210 -------- -------- $ 40,724 $ 52,370 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 14,231 $ 9,400 Accrued employee compensation 2,866 2,681 Current portion of long-term debt 910 909 -------- -------- Total Current Liabilities 18,007 12,990 Long-Term Debt 1,018 1,928 Deferred Income Taxes -- 805 Minority Interest and Additional Amounts Contributed 954 1,283 Shareholders' Equity Common Stock, $.10 par value Authorized 5,000,000 shares Issued and outstanding: 1996 - 2,843,563 shares; 1995 - 2,689,185 shares 284 269 Additional paid-in capital 20,036 18,889 Deferred compensation (605) -- Retained earnings 1,030 16,206 -------- -------- 20,745 35,364 -------- -------- $ 40,724 $ 52,370 -------- -------- -------- --------
Maxwell Technoligies, Inc., and Subsidiary 19 Consolidated Statement of Income (In thousands except per share amounts) YEAR ENDED JULY 31 ---------------------------------- 1996 1995 1994 Sales $ 80,911 $75,004 $ 85,463 Costs and expenses: Cost of sales 65,893 56,447 68,555 Selling, administrative and general expenses 15,564 13,636 14,068 Research and development expenses 5,081 5,038 4,794 Restructure and asset impairment losses 5,703 -- -- Loss on closing of Brobeck division -- -- 1,018 Interest expense 329 315 252 Other-net (398) (848) (589) --------- -------- -------- 92,172 74,588 88,098 --------- -------- -------- Income (loss) before income taxes, minority interest and loss from cumulative effect of change in accounting principle (11,261) 416 (2,635) Provision for income taxes 1,296 15 (1,028) Minority interest in net income of subsidiary 50 86 80 Loss from cumulative effect of change in accounting principle 2,569 -- -- --------- ------- -------- Net income (loss) $ (15,176) $ 315 $ (1,687) --------- ------- -------- --------- ------- -------- Earnings (loss) per share: Primary $ (5.53) $ .12 $ (.63) --------- ------- -------- --------- ------- -------- Fully diluted $ (5.53) $ .12 $ (.63) --------- ------- -------- --------- ------- -------- Before loss from cumulative effect of change in accounting principle $ (4.59) --------- --------- Maxwell Technoligies, Inc., and Subsidiary Report of Ernst & Young LLP, Independent Auditors Board of Directors and Shareholders Maxwell Technologies, Inc. We have audited, in accordance with generally accepted auditing standards, the consolidated balance sheets of Maxwell Technologies, Inc., and subsidiary at July 31, 1996 and 1995 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended July 31, 1996 (not presented separately herein) and in our report dated September 27, 1996, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated financial statements is fairly stated in all material respects in relation to the consolidated financial statements from which it has been derived. /s/Ernst & Young LLP San Diego, California September 27, 1996 20 Officers and Directors Kenneth F. Potashner President, Chief Executive Officer and Chief Operating Officer, Director General Donn A. Starry, USA (Ret.)/1/ Chairman of the Board, Director Gary J. Davidson Vice President-Finance and Administration, Chief Financial Officer and Treasurer Donald M. Roberts General Counsel and Secretary Richard C. Eppel Vice President Kelly T. Hickel Vice President Thomas L. Horgan Vice President Gregg L. McKee, Jr. Vice President Walter P. Robertson Vice President Richard E. Smith Vice President Lewis J. Colby, Jr., Ph.D./2/ Director, Retired Senior Vice President- Technology, Allied-Signal, Inc., Morristown, New Jersey Adolphe G. Gueymard/2/ Director, Oil and Gas Investments, Houston, Texas Admiral Thomas B. Hayward, USN (Ret.)/2/ Director, President and Chief Executive Officer, Thomas B. Hayward Associates, Honolulu, Hawaii, an Asia-Pacific consulting firm Alan C. Kolb, Ph.D./1/ Director, Consultant and former Chief Executive Officer of the Company Henry F. Owsley/2/ Director, Founding Partner, The Gordian Group, New York, New York Karl M. Samuelian/1/ Chairman of the Executive Committee, Director, Shareholder in the law firm of Parker, Milliken, Clark, O'Hara & Samuelian, Los Angeles, California John W. Weil, Ph.D./2/ Director, President, Weil Associates, Inc., Consultants for Technology Appraisal, Bloomfield Hills, Michigan Auditors Ernst & Young LLP, San Diego, California Transfer Agent and Registrar Chase Mellon Shareholder Services, Stock Transfer Department 85 Challenger Road, Ridgefield Park, New Jersey 07660 (800) 522-6645 Corporate Offices 8888 Balboa Avenue, San Diego, California 92123-1506 (619) 279-5100 Form 10-K The Company's Form 10-K annual report is available to shareholders on written request directed to the Vice President-Finance and Administration, at the Company's corporate offices. Stock Information Maxwell Common Stock is traded over the counter and is quoted in the NASDAQ National Market System. The trading symbol is MXWL. 1996 Annual Meeting The 1996 Annual Meeting of Shareholders will be held at 10:00 a.m. on Wednesday, January 22, 1997, at the La Jolla Marriott, 4240 La Jolla Village Drive, La Jolla, California 92037. November 26, 1996, is the record date for determining the shareholders entitled to vote at this meeting. /1/ Member of the Executive Committee /2/ Member of the Audit Committee Maxwell Technologies 8888 Balboa Avenue San Diego California 92123-1506 (619) 279-5100 http: //www.maxwell.com EX-23 12 EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Maxwell Technologies, Inc. of our report dated September 27, 1996, appended to the Proxy Statement for the 1996 Annual Meeting of Shareholders of Maxwell Technologies, Inc. We also consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 2-91483, 33-88634, 33-88636, 33-88638, 333-07835 and 333-07831) pertaining to the 1985 Stock Option Plan, 1989 Director Stock Option Plan, 1994 Director Stock Purchase Plan, 1994 Employee Stock Purchase Plan, Restricted Stock Incentive Plan, and the 1995 Stock Option Plan of Maxwell Technologies, Inc. of our report dated September 27, 1996, with respect to the consolidated financial statements incorporated herein by reference. ERNST & YOUNG LLP San Diego, California October 28, 1996 EX-27 13 EXHIBIT 27 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME AS FILED IN ITEM 8 ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JUL-31-1996 JUL-31-1996 1,465 0 15,573 0 6,808 25,295 44,781 30,192 40,724 18,007 1,018 0 0 284 20,461 40,724 80,911 80,911 65,893 65,893 5,081 0 329 (11,261) 1,296 (12,557) 0 0 (2,569) (15,176) (5.53) (5.53)
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