-----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, EXmB0WZChoUtkyEBtRq8p7E2C5494mgyqpkftUsnY+P8hhk8Xj+T0jDn2MXfA7Z/ xFnvA6b2hj1tqj+oCfRBtg== 0000912057-01-008001.txt : 20010326 0000912057-01-008001.hdr.sgml : 20010326 ACCESSION NUMBER: 0000912057-01-008001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXWELL TECHNOLOGIES INC CENTRAL INDEX KEY: 0000319815 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 952390133 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-15477 FILM NUMBER: 1576886 BUSINESS ADDRESS: STREET 1: 9275 SKYPARK COURT STREET 2: SUITE 400 CITY: SAN DIEGO STATE: CA ZIP: 92123 BUSINESS PHONE: 8582795100 MAIL ADDRESS: STREET 1: 9244 BALBOA AVENUE STREET 2: . CITY: SAN DIEGO STATE: CA ZIP: 92123 FORMER COMPANY: FORMER CONFORMED NAME: MAXWELL LABORATORIES INC /DE/ DATE OF NAME CHANGE: 19920703 10-K 1 a2042380z10-k.txt 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 0-10964 MAXWELL TECHNOLOGIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-2390133 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 9244 BALBOA AVENUE SAN DIEGO, CALIFORNIA 92123 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (858) 279-5100 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK, PAR VALUE $.10 PER SHARE NAME OF EACH EXCHANGE ON WHICH REGISTERED: NASDAQ NATIONAL MARKET ("NASDAQ") SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES /X/ NO / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of the Common Stock of the Registrant held by non-affiliates of the Registrant on February 28, 2001, based on the closing price at which the Common Stock was sold on Nasdaq as of February 28, 2001, was $164,822,786. The number of shares of the Registrant's Common Stock outstanding as of February 28, 2001 was 9,935,122 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for the 2001 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A (including the Appendix thereto) are incorporated by reference in Part III of this Report. ================================================================================ MAXWELL TECHNOLOGIES, INC. INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
PAGE -------- PART I Item 1. Business................................................................................. 1 Item 2. Properties............................................................................... 25 Item 3. Legal Proceedings........................................................................ 25 Item 4. Submission of Matters to a Vote of Security Holders...................................... 25 Item 4.1 Executive Officers of the Registrant .................................................... 26 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................... 27 Item 6. Selected Financial Data.................................................................. 28 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 29 Item 7a. Quantitative and Qualitative Disclosures about Market Risk............................... 44 Item 8. Financial Statements..................................................................... 45 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..... 70 PART III Item 10. Directors and Executive Officers of the Registrant....................................... 70 Item 11. Executive Compensation................................................................... 70 Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 70 Item 13. Certain Relationships and Related Transactions........................................... 70 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................... 70
PART I UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES IN THIS ANNUAL REPORT ON FORM 10-K TO "MAXWELL," THE "COMPANY," "WE," "US," AND "OUR" REFER TO MAXWELL TECHNOLOGIES, INC. AND ITS SUBSIDIARIES; ALL REFERENCES TO "ELECTRONIC COMPONENTS GROUP" REFER TO OUR SUBSIDIARY, MAXWELL ELECTRONIC COMPONENTS GROUP, INC.; ALL REFERENCES TO "I-BUS/PHOENIX" REFER TO OUR SUBSIDIARY, I-BUS/PHOENIX, INC., AND ITS SUBSIDIARIES; AND ALL REFERENCES TO "PUREPULSE" REFER TO OUR SUBSIDIARY, PUREPULSE TECHNOLOGIES, INC. THIS FORM 10-K MAY CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. SUCH FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN ANY FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" HEREIN. DISCUSSIONS CONTAINING SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN THE MATERIAL SET FORTH UNDER "ITEM 1. BUSINESS," AND "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AS WELL AS WITHIN THIS FORM 10-K GENERALLY. ITEM 1. BUSINESS OVERVIEW Maxwell develops, manufactures and markets high reliability electronic components and power and computing systems for use in the transportation, telecommunications, consumer and industrial electronics, medical and aerospace industries. Products include PowerCache-Registered Trademark- ultracapacitors, electromagnetic interference filters for implantable medical devices, radiation-shielded microelectronics and custom power and computing systems for original equipment manufacturers, or OEMs. INDUSTRY We have focused our business on the following areas: - power delivery components; - high reliability specialized electronic components for medical, space and military applications; and - high availability, customized, applied computing and power systems. POWER DELIVERY New power hungry electronic products such as digital cameras and wireless communications devices, and increasing demand for electric power in motor vehicles to assist vehicle acceleration and to operate on-board electronic systems, are creating significant markets for energy storage and high power delivery. In many applications, power demand varies widely from moment to moment. Typically, peak power demand is much greater than the average power requirement. For example, automobiles require much more power to accelerate from a stop than to maintain a constant speed. In other applications, such as in a digital camera, more power is needed to operate the flash than to store images in memory. Engineers generally address peak power needs by designing the primary energy source, such as an engine or a battery system, to the size needed to provide for peak demands, even if those demands occur for only a few seconds. Building an entire system based on peak power needs, rather than designing for the average power requirement, is costly and inefficient. Such systems can be significantly improved by storing electrical energy generated from a primary energy source such as an engine or battery and then delivering that energy in controlled high power bursts only when high power is required. Such high power delivery provides electrical systems with dynamic power range to meet peak power demands for periods of time ranging from fractions of a second to several minutes. This enables new system functions, reduces system size and cost and improves performance. 1 Many markets and applications can benefit from high power delivery components that: - store large amounts of electrical energy; - are in a small, lightweight package; - operate reliably at extreme temperatures; - can discharge and recharge in less than a second or provide power as required for up to several minutes; - deliver high power; - require low maintenance; and - have minimal environmental issues associated with disposal. Following are some of the currently identified markets and applications for high power delivery components:
MARKET APPLICATIONS -------------------------------------------- --------------------------------------------------------------- Automotive/transportation - Energy storage and peak power to assist acceleration and to recapture energy from braking in hybrid internal combustion/electric buses, trucks and automobiles; energy storage and on demand power for on-board electrical systems. - Peak power, energy storage and braking energy recapture for new electric braking systems for locomotives and railroad cars. Battery enhancement - Energy storage and on-demand peak power for consumer electronic devices such as digital cameras, toys, wireless communications devices, scanners and remote transmitters. Alternative energy generation - Starting power, peak load buffering and energy storage to optimize performance of alternative energy generation systems, such as fuel cells and microturbines. Uninterruptible power supply systems power. - Supplement or replace battery Industrial electronics - Low cost, low maintenance replacement for mechanical drives in actuators and hydraulic devices.
Any other application that requires the storage of energy and the discharge of highly variable amounts of power is a potential market for power delivery components. We expect that components designed to meet these power delivery requirements will capture an increasingly larger and more important segment of the energy storage market. EMI FILTERING OF IMPLANTABLE MEDICAL DEVICES Electromagnetic interference, or EMI, generated by cellular phones, security systems, microwave ovens, embedded computing systems and other electronic devices can disrupt the safe operation of pacemakers and other implantable medical devices. EMI can enter implantable devices via wire feedthrough sensors that carry signals from the body into the device, causing malfunctions. 2 In 2000, safety issues associated with EMI from cellular telephones prompted the Association for the Advancement of Medical Instrumentation, or AAMI, and the United States Food and Drug Administration, or FDA, to adopt standards requiring manufacturers of cardiac pacemakers and implantable defibrillators to demonstrate that their products are immune to EMI. Devices that do not demonstrate immunity to strong electromagnetic fields must carry a warning related to the use of cellular telephones. Similar standards are being considered by regulatory authorities in Europe and other jurisdictions. Manufacturers of implantable devices need small, high reliability components that block EMI from entering implantable devices via feedthrough sensors without interfering with signals from the body. Expertise in power electronics, EMI filtering and materials science, particularly in ceramics, is necessary to produce filters that provide the required immunity to EMI from cellular telephones and other frequently encountered devices, allowing implantable device manufacturers to comply with the new standards. Current North American sales of filtered and unfiltered feedthroughs are estimated at $50 million annually, with a historic yearly growth rate of approximately 20 percent. We expect this market to expand significantly as the medical implantable device industry introduces new products such as congestive heart failure devices, devices to control tremors associated with neurological disorders such as Parkinson's disease and epilepsy, and hearing augmentation devices. We believe that the portion of this market represented by filtered feedthrough sales will increase as a result of recent regulatory developments in the U.S. and other jurisdictions. RADIATION-SHIELDED MICROELECTRONICS Manufacturers of satellites and other spacecraft and military vehicles require on-board microelectronics that meet specific functional requirements and will operate reliably in environments in which they may encounter radiation. In the past, microelectronics for these special applications used radiation-hardened silicon. The supply of radiation-hardened silicon is diminishing because there are fewer fabricators of specialty silicon. As a result, demand for off-the-shelf silicon, protected in radiation-shielded packages, is growing. Radiation-shielded off-the-shelf silicon provides higher functionality at lower costs than radiation-hardened silicon. The ability to provide radiation-shielded silicon requires expertise in power electronics, custom integrated circuit design, silicon selection, radiation shielding and high quality assurance testing. Current worldwide sales of radiation-shielded microelectronics for the satellite market are estimated at more than $500 million annually, with a historic yearly growth rate of approximately nine percent. An additional large market is emerging for the replacement of radiation-hardened microelectronics in military vehicles with commercial off-the-shelf microelectronics protected in radiation-shielded packages. This market is emerging as the service life of military vehicles, such as armored vehicles, ships and aircraft, extends beyond the operational life of on-board electronics. The market is driven by the lack of availability of radiation-hardened silicon and the desire to upgrade on-board electronics with modern microprocessors produced with commercial silicon, which is not radiation-hardened. APPLIED COMPUTING AND POWER QUALITY SYSTEMS High reliability applied computing systems and power quality systems are required to support larger systems for telecommunications, Internet infrastructure, broadcasting and industrial automation. Many such systems are responsible for mission critical applications that require "five nines", or 99.999% availability. This high availability equates to approximately five minutes of down time per year for a system operating 24 hours a day, seven days a week. Applied computing systems provide a platform to perform specific functions within a larger system made by an OEM. OEMs generally focus their efforts on overall system design and integration, including application-specific software and network support and service. OEMs frequently outsource the design and manufacture of the applied computing and power products that will be part of the larger system being supplied by the OEM to the end customer. 3 To satisfy both functional and high availability requirements, power and computing solutions generally require customization. Also, as time-to-market is critical for many such applications, rapid design and production capabilities are required of suppliers providing these systems. Therefore, the proliferation of complex electronics applications has created attractive markets for specialized applied computer manufacturers and power product manufacturers who possess the engineering and manufacturing know-how and experience to provide design intensive, custom solutions. In 2000, the market for applied computing systems incorporating ISA/PCI (industry standard architecture/peripheral components interconnect) and cPCI (compact peripheral components interconnect) architectures is estimated to have been approximately $1 billion. The market for such systems is estimated to grow to approximately $2.5 billion by 2004, with cPCI being the fastest growing industry standard architecture. In 2000, the market for uninterruptible power supplies, or UPS, and power protection and power quality products of three kilovolts and lower, which is the power range most appropriate to support applied computing requirements, is estimated to have been approximately $2.8 billion, growing to approximately $4.5 billion by 2004. MAXWELL'S SOLUTIONS Our solutions apply our expertise and proprietary technology in power and computing at both the component level and the systems level for specialized, high value applications where high reliability and high availability are required by the customer. We intend to be a leading supplier of power and computing components and systems for such specialized, high-value applications. ULTRACAPACITORS We are a leader in commercialized ultracapacitor technology. Ultracapacitors are ideally suited for applications that require repeated bursts of electric power for fractions of a second up to several minutes. With no moving parts, ultracapacitors provide a simple, highly reliable solution to buffer short term mismatches between power available and power required. Unlike batteries, capacitors can be recharged from any power source as quickly as they are discharged, and they operate reliably for up to 10 years through hundreds of thousands of discharge/recharge cycles with minimal degradation of performance. Traditional capacitors discharge power too rapidly to be suitable for many power delivery applications. Ultracapacitors have greater energy storage capability than traditional capacitors and can discharge power over time periods ranging from fractions of a second to several minutes. Used in tandem with batteries, ultracapacitors can provide bursts of power to meet power demand peaks, enhance performance and significantly extend battery life. When alternative sources of recharge energy are available, ultracapacitors can replace batteries entirely. We offer our proprietary PowerCache ultracapacitors in several form factors, ranging from five-farad postage stamp size cells to 2,500-farad large cells that measure 2" x 2" x 6". We are able to supply these cells in volumes and at price points that are opening numerous market opportunities for ultracapacitors to satisfy power delivery requirements. For example, in December 2000 we entered into a supply agreement with General Motors Corporation to supply our large cell ultracapacitors for incorporation into the power trains of hybrid diesel electric buses and trucks produced by GM's Allison Transmission division. We are redesigning our large cell ultracapacitors to double power density and dramatically reduce cost. The new design incorporates proprietary technology in a form factor suitable for high speed automated manufacturing. The goal of this initiative is to penetrate cost sensitive applications in high volume markets (millions of cells per year by 2004). EMI FILTERED FEEDTHROUGHS We design, manufacture and market proprietary ceramic filter capacitors that protect implantable medical devices such as cardiac pacemakers and implantable defibrillators from EMI. We integrate our filters with wire feedthrough sensors to make filtered feedthroughs. Our EMI filtered feedthroughs permit manufacturers of implantable medical devices to satisfy new FDA test standards for EMI. Our EMI filter technology and its use to block EMI from interfering with implantable medical devices are protected extensively by patents in the U.S. and in many foreign jurisdictions. 4 We currently supply EMI filtered feedthroughs for pacemakers and defibrillators to manufacturers of implantable medical devices, including Guidant Corporation and the Pacesetter division of St. Jude Medical, Inc. In the future, we expect to supply filtered feedthroughs for new types of implantable devices to control conditions such as congestive heart failure, tremors associated with neurological disorders such as Parkinson's disease and epilepsy, and to augment hearing. RADIATION-SHIELDED MICROELECTRONICS We design, manufacture and market radiation-shielded microelectronics, including integrated circuits, power modules and single board computers, primarily for the satellite and spacecraft market. We engineer customized microelectronics together with highly adaptable, proprietary packaging and shielding techniques to allow OEMs to use powerful, low cost, commercial off-the-shelf components protected with the required level of radiation shielding for the environment in which they are to be deployed. We are a supplier of radiation-shielded microelectronics in volumes that have opened market opportunities in the satellite and spacecraft market. We also are seeking to penetrate the military electronics replacement market. APPLIED COMPUTING AND POWER QUALITY SYSTEMS We design, manufacture and market a diverse line of application-ready computing platforms and single board computers based on advanced, industry standard electromechanical architectures. OEMs integrate our products into larger systems for telecommunications, Internet infrastructure, broadcasting and industrial automation. Our engineering and design capabilities allow quick-turn customization of boards, systems, and enclosures for customer specific applications. In 2001, we are introducing several new computing products that support multiple operating systems such as Windows, Windows NT, Windows 2000, Solaris VX Works and Linux and provide redundant, high availability computing for mission critical applications requiring 99.999% availability. We believe that power technology, such as uninterruptible power, is a requirement for providing high reliability applied computing systems. In addition to the discrete power quality products we now offer, we have computing products in development and scheduled for introduction by year end that will incorporate power protection capabilities within the computer chassis. These built-in power protection features will include up to 10 seconds of "ride-through" protection for brief power fluctuations in some designs and up to 10 minutes of backup power in other designs. These products will incorporate our PowerCache ultracapacitors, either alone or in combination with batteries. We recently introduced rack-mount UPS products, and we are developing redundant DC to AC power inverters as part of high reliability integrated power and computing solutions for our applied computing OEM customers. Our extensive design and integration experience and capabilities shorten time-to-market for OEMs and allow them to outsource these functions to us. This permits them to concentrate on differentiating, value-added capabilities they bring to an overall system or network application. STRATEGY Our strategy is to apply our expertise and proprietary technology in power and computing at both the component level and the systems level to develop, manufacture and market products with specialized, high value applications where high reliability and high availability are necessary for customer value. BE A RELIABLE, LOW-COST, HIGH-VOLUME SUPPLIER OF TECHNOLOGICALLY ADVANCED, PROPRIETARY PRODUCTS We have expanded and now are automating some of our manufacturing capabilities to meet anticipated demand and reduce per unit manufacturing costs. We invested more than $11 million in 2000 to build and outfit state-of-the-art production facilities, including information technology infrastructure, and implement new manufacturing and business processes and systems to increase production capacity and improve efficiency and product quality. We are now able to produce commercial quantities of all of our products. 5 EXPAND ADDRESSABLE MARKET FOR ULTRACAPACITORS We will pursue new applications for our PowerCache ultracapacitors. We will use our new low-cost, high-volume manufacturing capabilities to increase volumes and achieve competitive price points for our components. We believe this will open new market opportunities for our ultracapacitors to become industry standard components for power delivery, displacing competing component products. REFINE AND IMPROVE OUR PROPRIETARY TECHNOLOGIES We will continue our 35-year history of developing proprietary technologies. Our product development efforts will focus both on enhancing existing products and developing technologically advanced products to meet customer demands. New products will be designed to meet our identified market opportunities, capitalizing on existing design-in wins and targeting OEMs' next generation products. We also will continue to enhance our existing proprietary technologies to make our products more reliable, more functional and less expensive to manufacture in order to meet the performance, form factor and pricing demands of our customers. CONTINUE TO DEVELOP LEADING EDGE POWER AND COMPUTING SYSTEMS We are positioned to capitalize on increasing demand for high availability power and computing products across a range of applications, and from growing acceptance of the cPCI architecture. We will provide enhanced solutions for our customers by integrating our proprietary power quality technologies into our computing systems. We provide customers with quick turn, customized solutions and we will continue to develop stylized modular components to increase efficiency and allow faster response time to meet customer application requirements. EXPAND AND IMPROVE INTERNATIONAL OPERATIONS TO MARKET AND SELL OUR PRODUCTS We intend to pursue international markets as key avenues for growth and increase the percentage of our sales generated in international markets. In 2000, our international sales accounted for 25.2% of total sales, as compared to 24.7% of total sales in 1999. As part of our plan to pursue international markets, we will expand and improve our manufacturing, assembly, distribution, marketing and sales operations in England, France and Germany to increase our sales penetration in Europe. We believe we are in a position to capitalize on market opportunities and enhance brand recognition in local markets through our local presence in Europe. Increased local assembly and marketing will allow us to avoid import tariffs and access local private or public sector financing if opportunities to expand our operations arise. We also intend to develop distribution, marketing and sales operations in Asia to increase sales in the Asia-Pacific region. PRODUCTS AND CUSTOMERS We sell our electronic components products to OEMs serving numerous markets, including transportation, consumer and industrial electronics, medical and aerospace. We sell our applied computing products primarily to OEMs serving the telecommunications and Internet infrastructure, broadcast and industrial automation markets. We sell power distribution and power quality products mainly to OEMs serving the medical and industrial markets. Following are descriptions of our key products and the markets they address. ELECTRONIC COMPONENTS GROUP ULTRACAPACITORS Our Electronic Components Group designs, manufactures and markets PowerCache ultracapacitors. Capacitors are passive electronic components that store and discharge electricity. Our PowerCache ultracapacitors store high quantities of electrical energy in a high density electric field through a proprietary carbon-based material that has large surface area (more than three thousand square meters per gram of carbon) to permit high electrical storage density in a small package. As a result, our products have two to four times greater power density than competing ultracapacitors or supercapacitors. 6 PowerCache ultracapacitors provide peak and dynamic power for applications that require periodic bursts of power, whether for an internal combustion/electric hybrid drive train, a fuel cell system or a battery pack for industrial or consumer electronics. Ultracapacitors can be charged from any primary energy source, such as a battery, engine, fuel cell or electrical outlet, and deliver high power on demand. Virtually any device with peak power demands greater than its average power requirement is a candidate for our ultracapacitors as part of its power delivery system. ULTRACAPACITOR APPLICATION MODEL [GRAPHIC] Although batteries currently are the prevailing energy storage device, ultracapacitors have significant performance advantages over batteries, including: - delivery of up to 10 times the power; - lower weight for storage of comparable electrical energy; - deeper discharge and faster recharge; - more reliable operation in extreme temperatures (-40 degrees C to +75 degrees C); and - up to 10 times the useful life. Our PowerCache ultracapacitors can be linked together in modules or banks to meet the energy storage and peak power requirements of applications ranging from hybrid internal combustion/electric buses, trucks and automobiles to fuel cells, actuators, toys and hand-held consumer electronic devices. We are pursuing opportunities to incorporate our ultracapacitors into hybrid diesel/electric and gasoline/electric power trains that either are being commercialized now for buses and large trucks or are in development for sport utility vehicles, light trucks and automobiles. The hybrid internal combustion/electric power train depicted below shows how electrical energy will be generated and stored in vehicles and supplied to the power train. The hybrid power train has a large alternator connected to the crankshaft that generates electricity when the alternator engages the crank shaft to help brake the vehicle or when the engine is running. The electricity produced by the alternator is stored in a power pack containing approximately 300 to 500 PowerCache ultracapacitors for buses or large trucks and 18 to 20 ultracapacitors for automobiles, light trucks or sport utility vehicles. The electrical energy stored in the ultracapacitors is then sent back through the alternator to turn the crankshaft to accelerate the vehicle. The power pack also powers on-board electrical systems, such as power steering, braking, locks, seats, air conditioning, mobile communications and audio systems. 7 HYBRID INTERNAL COMBUSTION/ELECTRIC POWER TRAIN [GRAPHIC] - power pack drives crankshaft motor to assist initial acceleration; - power pack starts internal combustion engine to provide cruising power; - crankshaft alternator charges the power pack; - control electronics manage power storage and usage; - power pack powers electrical system, operating steering, braking, heating, air conditioning, mobile communications, stereo, etc.; and - alternator engages the crankshaft to assist braking, generate energy and store it in the power pack. Hybrid power train designs such as the one depicted above are part of the future plans of all of the major automotive companies as the industry seeks to improve fuel economy, reduce emissions and graduate from 12-volt electrical systems to 42-volt systems. The dramatic increase in electrical demand in modern automobiles for features such as power steering, air conditioning, global positioning and audio systems has initiated the redesign of electrical systems to 42 volts. All of the major automotive companies have announced plans to introduce 42-volt systems and hybrid power trains in automobiles beginning in 2004 or 2005. All of the 42-volt hybrid power train systems require an energy storage system that can recapture energy from braking, satisfy peak power requirements, operate reliably in extreme temperatures, last the life of the vehicle and require low maintenance. We believe that ultracapacitors uniquely satisfy all of these requirements and have the opportunity to become an industry standard energy storage and power delivery device for such systems. In December 2000, we entered into a supply agreement with General Motors Corporation to supply our large cell ultracapacitors for incorporation into the power trains of hybrid diesel/electric buses and trucks produced by GM's Allison Transmission division. Allison has reported that by supplementing the primary diesel engine with an ultracapacitor-powered electric motor that assists initial acceleration and recaptures and reuses braking energy, fuel efficiency of buses and trucks can be increased by more than 50 percent, particulate emissions reduced by approximately 90 percent and nitrogen oxide emissions reduced by more than 50 percent, as compared to conventional diesel power trains. 8 Allison selected our PowerCache ultracapacitors over conventional and advanced batteries because our ultracapacitors: - last up to 10 times as long; - weigh up to 2000 pounds less per vehicle; - operate reliably at extreme temperatures (-40 degrees C to +75 degrees C); - recapture more energy from vehicle braking systems; - deliver up to 10 times the power; - require lower maintenance; and - reduce environmental issues associated with disposal. Our small cell ultracapacitors have been designed into, or are being considered for, consumer electronics such as toys and digital cameras, industrial electronics such as actuators, remote transmitting devices and bar code scanners, and transportation electronics such as electric brakes for trains and safety features for automobiles. We anticipate that several of the end products into which our ultracapacitors have been designed will go into production in 2001. We currently are installing an automated production line for small cell ultracapacitors to position us to meet anticipated demand in 2001. EMI FILTERED FEEDTHROUGHS Our Electronic Components Group also integrates our proprietary ceramic capacitor filters with wire feedthroughs that we source from third party suppliers to make filtered feedthroughs that protect implantable medical devices, such as cardiac pacemakers and implantable defibrillators, from EMI. EMI produced by cellular telephones, microwave ovens and other electronic equipment can enter implantable devices via wire feedthrough sensors that carry signals from the body, causing the devices to malfunction. We design and produce integrated filtered feedthrough components that meet implantable device manufacturers' specifications for various types of implantable devices. As diagramed below, our EMI filters prevent EMI from entering the pacemaker or other implantable device via feedthrough wires. FILTERED FEEDTHROUGH PACEMAKER [GRAPHIC] [GRAPHIC] We are a leading manufacturer of EMI filtered feedthroughs that permit manufacturers of implantable medical devices to satisfy AAMI and FDA testing standards for immunity to EMI. Our current OEM customers for filtered feedthroughs include Guidant Corporation and the Pacesetter division of St. Jude Medical, Inc. 9 Our EMI filter technology and its use to block EMI from interfering with implantable medical devices are protected extensively by patents, and additional patent applications are pending in the U.S. and in many foreign jurisdictions. RADIATION-SHIELDED MICROELECTRONICS Our Electronic Components Group also designs, manufactures and markets radiation-shielded microelectronics, including integrated circuits, power modules and single board computers, primarily for the satellite and spacecraft market. We engineer customized microelectronics together with highly adaptable proprietary packaging and shielding techniques to allow OEMs to use powerful, low cost, commercial off-the-shelf components, protected with the required level of radiation shielding for the orbit or environment in which they are to be used. We supply microelectronics to multiple satellite and space vehicle manufacturers, including Lockheed Martin Corporation and The Boeing Corporation. We also are pursuing opportunities for the replacement of original microelectronics in military battlefield vehicles, aircraft and ships, which represents a large potential market for our radiation-shielded microelectronics. I-BUS/PHOENIX POWER AND COMPUTING SYSTEMS I-Bus/Phoenix designs, develops and manufactures high availability custom computing systems and power quality products. Combining our computing systems and power quality and reliability expertise allows us to offer superior high availability computing products and innovative power quality solutions. Our current product offerings include applied computing systems, power distribution systems and power conditioning units. We sell our products mainly to OEMs serving the telecommunications and Internet infrastructure, industrial automation, broadcasting and medical imaging markets. As part of our restructuring in 2000, we expanded I-Bus/Phoenix's engineering and product development capabilities. We also acquired Gateworks Corporation, a CPU engineering and board design company. As a result of adding these board design capabilities and increasing our investment in engineering and product development, we are scheduled to introduce several new products this year. Incorporating our competencies in the latest system architecture, including cPCI, our computing systems will offer additional flexibility and reliability to end users. For example, to promote high availability, these new systems are designed to allow key components to be "hot-swapped," meaning that they can be replaced without shutting down the system. We view power reliability as an enabling technology for high availability computing. Accordingly, we have computing products in development and scheduled for introduction in late 2001 that will incorporate power protection features built into the computer chassis itself to provide up to 10 seconds of ride-through power with certain designs and up to 10 minutes of backup power with other designs. Such embedded power solutions will incorporate our PowerCache ultracapacitors, either alone or in combination with hot-swappable batteries. We recently introduced UPS products designed to fit into computer server racks to facilitate integration of power reliability features to support high availability computing systems for our OEM customers. We also are developing redundant DC to AC power inverters to bring additional power reliability features to integrated applied computing system solutions. Our extensive design and integration experience and resources can shorten time-to-market for OEMs and allow them to outsource these functions entirely to us so that they can concentrate on the differentiating value-added capabilities they bring to the overall system application. I-Bus/Phoenix also designs, develops and manufactures power conditioning and power distribution units for medical imaging equipment and power protection and power conditioning systems for other industrial applications. At present, many of our power quality products are based on our customers' designs. We are developing improved power quality products based on our own designs that intend to improve performance and reduce cost for our customers while also permitting us to expand sales and improve product line gross margins. 10 The following table describes new power and computing products scheduled for introduction in 2001.
NEW PRODUCTS/KEY FEATURES MARKET APPLICATIONS ------------------------------------------ ----------------------------------------------- cPCI systems - hot-swappable and/or Telecommunications redundant cluster systems Central office ISA/PCI systems Application service providers - Windows/Pentium base Voice over Internet protocols - Solaris/Sparc base Internet service providers - Redundant power input module for Computer telephony cPCI Broadcast DC to DC converter with ride-through power Embedded computers - Embedded in the CPU board High availability servers - 10 second ride-through via board- Medical equipment mounted PowerCache ultracapacitors Digital signal processing systems - Power fail output Alarm modules - Regulated DC output Embedded UPS Embedded computers - Embedded in the server chassis High availability servers - Hot-swappable battery backup Ride-through to system quiescence Ride-through/bridge to alternate power source High frequency power conditioner Industrial equipment - AC to AC operation Broadcast industry equipment - Transient surge suppression Medical equipment - Rack-mountable Semiconductor fabrication - Electrical frequency conversion - AC voltage regulation Rack-mount UPS High availability servers - Thin chassis design Industrial process equipment - Standard and extended backup times Telecom equipment - Power management software Emergency ride-through power
We supply applied computing systems or power systems to many leading OEMs, including Motorola, Inc., Compagnie Finciere Alcatel, Deutsche Telekom AG, Rockwell International Corporation, the GE Medical Systems division of the General Electric Company, Toshiba Corporation and Siemens AG. MANUFACTURING We manufacture our electronic components products principally at facilities located in San Diego, California, and Carson City, Nevada. Our power and computing systems are produced at facilities in San Diego, California, Havant and Uckfield, England, Sophia, France and Munich, Germany. During the year ended December 31, 2000, we restructured our operations, divesting certain non-core businesses and consolidating our core businesses into the commercial business units described above. We also invested more than $11 million in 2000 to build and outfit state-of-the-art production facilities, including information technology infrastructure, and implement new manufacturing and business processes and systems to increase our production capacity and improve efficiency and product quality. We completed this restructuring in October 2000. We believe that Maxwell now has ample production capacity to meet current demand for our products and any near term increase in demand. 11 We consolidated our ultracapacitor and radiation-shielded microelectronics manufacturing operations into a new 46,000 square foot facility in San Diego in September 2000. New manufacturing lines for our EMI filtered feedthrough manufacturing operations were completed at our 25,000 square foot facility in Carson City, Nevada, in October 2000. Our power and computing systems manufacturing operations moved into an expanded and refurbished 84,000 square foot facility in San Diego in October 2000. A new 20,000 square foot production and warehousing facility planned in Tangmere, England, will replace our existing Havant facility and provide a distribution center for products and materials for the I-Bus/Phoenix operations in France and Germany. All of our new production facilities have been designed with flexible overhead power grids and modular manufacturing cells and equipment that allow factory operations to be reconfigured rapidly at minimal expense. We believe that our manufacturing facilities and resources give us sufficient capacity to meet near term demand for all of our products. ULTRACAPACITORS We currently are installing automated production machinery to make our small cell ultracapacitors. Together with Ismeca, Inc., a leading manufacturer of high speed automated manufacturing equipment, we designed, built, integrated and tested this equipment over the course of the past year. This automated production line is expected to give us production capacity of approximately 50,000 small cells per day. In 1999, we could produce only approximately 50 small cells per day. In 2000, with some mechanized assistance, we were able to increase production of small cells to up to 5,000 cells per day. We have also increased the production capacity for our large cell ultracapacitors from approximately 100 cells per day in early 2000, to more than 400 cells per day currently, with improved yield. We are currently redesigning our large cells to incorporate lower cost materials and facilitate high-speed automated manufacturing. In addition to significantly reducing material cost, the new design will reduce the number of components required to make a finished cell and reduce the number of manufacturing process steps to a fraction of those required for our current design. Our objective with all of our ultracapacitor products is to be the most reliable supplier of these products for customer applications that require high power density in small packages for burst mode power delivery. In 1998, we entered into a collaborative agreement with EPCOS AG, formerly Siemens Matsushita Components GmbH, a joint venture of Siemens AG and Matsushita Electrical Industries. The agreement provides for the sharing of PowerCache ultracapacitor technology and ongoing manufacturing developments by both parties and the nonexclusive licensing right for EPCOS to manufacture products based on PowerCache ultracapacitor technology and sell them worldwide except in the United States, Canada and Mexico. We received initial license fees and are entitled to ongoing royalties under the agreement. EMI FILTERED FEEDTHROUGHS In 2000, we redesigned a major portion of our facility in Carson City, Nevada to manufacture EMI filtered feedthroughs for the implantable medical device market. Our production capacity for EMI filtered feedthroughs has increased from approximately 500 per week at the beginning of 2000 to our current weekly capacity of approximately 2,000. Our factory design will allow us to continue to increase capacity to match demand and position us to be the largest, most reliable supplier of EMI filtered feedthroughs for the implantable medical device market. RADIATION-SHIELDED MICROELECTRONICS In 2000, we reengineered our production processes for radiation-shielded microelectronics, resulting in dramatic improvement in cycle time to produce and test microelectronics and a significant increase in yield of components that comply with customer-required quality and performance standards. We believe we now have top tier manufacturing capabilities for highly reliable, radiation-shielded power and computing microelectronics for the space and military electronics replacement markets. 12 POWER AND COMPUTING SYSTEMS We assemble applied computing products at our San Diego, California, Havant, England, Sophia, France, and Munich, Germany facilities. We manufacture sheet metal enclosures for the systems we sell in Europe and some that we sell in the U.S. at our Uckfield, England facility. We rely on third party suppliers for the fabrication and assembly of printed circuit boards and major subassemblies. We assemble and test power quality products at our San Diego production facility. We manufacture harnesses and transformers for power quality products and contract with third party suppliers for sheet metal and printed circuit boards. SUPPLIERS We generally purchase components and materials, such as electronic components, dielectric materials and enclosures of metal and plastic, from a number of suppliers. For certain products, we rely on a limited number of suppliers or a single supplier. Our applied computing business relies on single qualified suppliers for some of its critical components, primarily CPU boards and some power supplies. The EMI filtered feedthroughs we produce rely primarily on one domestic source for wire feedthrough casings to which we attach our EMI filters. Although we believe there are alternative sources for components and materials currently obtained from a single source, there can be no assurance that we will be able to identify and qualify alternative suppliers in a timely manner. We seek to reduce our dependence on sole and limited source suppliers. MARKETING AND SALES Across all our product lines, we market and sell components and systems for integration by OEMs into larger systems and other end products through both direct and indirect sales organizations in North America, Europe and Asia. As the introduction of emerging technologies requires customer acceptance of new and different technical approaches, and many of our OEM customers have rigorous vendor qualification processes, the initial sale for our products can take weeks or months. Our principal marketing strategy is to cultivate long-term customer relationships by becoming a preferred supplier with an opportunity to compete for multiple supply agreements and follow-on contracts with our key OEM customers. As these design-in sales tend to be technical and engineering intensive, we organize customer specific teams composed of sales, engineering, research and development and other technical personnel to work closely with our customers across multiple disciplines to satisfy their requirements for form, fit, function, environment and mechanics. As time-to-market often is the primary consideration in our customers' decisions to outsource components or systems and in their selection of a vendor, the initial sale and design-in process frequently evolves into ongoing account management to ensure on time delivery and responsive technical support and problem solving. Our business units conduct marketing programs intended to position and promote their products, including trade shows, seminars, advertising, public relations, distribution of product literature and websites on the Internet. We maintain a central marketing communications group to support our marketing programs. The group designs and develops marketing materials, negotiates advertising media purchases, writes and places product news releases and manages our marketing websites. COMPETITION Each of our business operations has competitors, many of whom have longer operating histories, significantly greater financial, technical, marketing and other resources, greater name recognition, and a larger installed base of customers. In some of the target markets for our emerging technologies, we face competition from products utilizing alternative technologies. 13 ULTRACAPACITORS Although a number of companies are developing capacitor technology, we have two principal competitors in ultracapacitor or supercapacitor products: Panasonic, a division of Matsushita Electric Industries, Ltd.; and Ness Corporation, a privately held company. The key competitive factors are price, performance (energy stored and power delivered per unit volume), form factor, operational lifetime and breadth of product offerings. Our PowerCache ultracapacitors have two to four times greater power density and longer operational life than competing, commercially available ultracapacitors and supercapacitors. We believe that we also compete favorably with respect to the other competitive factors identified above. Ultracapacitors also compete with other technologies, including high power batteries, in power quality and automobile load-leveling applications, with flywheels in power quality and automotive applications (including as a power source for electric vehicles) and with superconducting magnetic energy storage in power quality. EMI FILTERED FEEDTHROUGHS Our primary competitor in the EMI filter capacitor business is AVX Filter, a subsidiary of Kyocera Corporation. Competitive factors in this market include price, consistent availability, breadth of electromagnetic spectrum filtered and component reliability. We believe that we compete favorably with respect to each of these factors. Our EMI filter technology and its use to block EMI from interfering with implantable medical devices are protected extensively by patents, including additional patent applications, in the U.S. and in many foreign jurisdictions. RADIATION-SHIELDED MICROELECTRONICS Our radiation-shielded monolithic integrated circuits (ICs), application specific integrated circuits (ASICs), processors and single board computers compete with the products of traditional radiation-hardened IC suppliers such as Honeywell Corporation and Lockheed Martin Corporation. We also have competition from commercial suppliers with product lines that have favorable radiation tolerance characteristics, such as Temic Instruments B.V. in Europe and National Semiconductor and Analog Devices Inc. Our proprietary radiation shielding technology enables us to provide flexible, low cost radiation protection solutions utilizing the most advanced commercial off-the-shelf electronic circuits. In that market segment, we compete with high reliability packaging houses such as Austin Semiconductor, Inc., White Microelectronics, Inc. and Teledyne Microelectronics, a unit of Teledyne Technologies, Inc. for monolithic and multichip modules. POWER AND COMPUTING SYSTEMS Our primary competitors in the applied computing markets include RadiSys Corporation, SBS Technologies, Inc., Diversified Technology, Inc., American Advantech Corp., ICS Advent, Teknor Applicom, a Kontron company, and Trenton Technology, Inc., among others, resulting in a highly fragmented market in which no one entrant is dominant. Motorola Inc. and the Force Computer division of Solectron Corporation have entered the cPCI market, and represent strong competition in the applied computing market based on cPCI architecture. Competitive factors in this market include price, custom design expertise, functionality, fault tolerance and time-to-market. We believe we compete favorably with respect to each of these factors. The markets for our power quality products are highly fragmented, with no single dominant participant. In the medical and industrial markets in which our product offerings are concentrated, we compete with several participants, including Liebert Corporation, OnLine Power, Inc., Teal Electronics Corporation and Controlled Power Corporation. We believe we compete favorably in these markets on price, quality and functionality. RESEARCH AND DEVELOPMENT We maintain active research and development programs to improve existing products and to develop new products. For the year ended December 31, 2000, research and development expenditures totaled approximately $8.7 million, as compared to $6.4 million, $6.8 million and $5.8 million in the year ended December 31, 1999, and in the fiscal years ended July 31, 1999 and 1998, respectively. We intend to increase our investment in research and development in calendar year 2001 over prior years. 14 In general, our product development focuses on: - enhancing existing products and developing technologically advanced products; - developing new products to meet identified market opportunities; and - making our products more reliable, more compact and less expensive to manufacture to meet the performance, form factor and pricing demands of our customers. Most of the current research, development and engineering activity of the Electronic Components Group is focused on material sciences, including electrically conducting and dielectric materials, ceramics and radiation tolerant silicon and ceramic composites, to improve performance, reliability, ease of manufacture and cost of our electronic components. Efforts also are focused on product design for high volume manufacturing. We currently are reengineering our large cell ultracapacitors to double power density and dramatically reduce cost. The new design consists of proprietary technology in a low cost, high capacity package. The new large cell design also incorporates a form factor and assembly process suited for high-speed automated manufacturing. The goal of this initiative is to penetrate cost sensitive applications at very high volumes (millions of cells per year beginning in 2004). The initiative involves product design, reduced material cost and automated manufacturing. I-Bus/Phoenix's research, development and engineering efforts are focused on joint projects with OEM customers, resulting in customer computing and power system level products tailored to customer requirements. We invest our resources in the research and development of technology building blocks such as: - CPU board design and applied modules and platforms; - power conditioning, storage and distribution platforms; - Design processes and tools; and - high availability, application-ready systems integration capabilities, including software operating systems. Our engineering staff works closely with customers to operate as a "virtual division" interacting with the customer's internal organization to develop computing and power systems that satisfy specific customer requirements. We typically retain the rights to any technology developed as part of joint design programs. INTELLECTUAL PROPERTY As our commercial businesses expand, we are placing increased emphasis on patents to provide protection for certain key technologies and products. Our success will depend in part on our ability to maintain our patents, add to them where appropriate, and to develop new products and applications without infringing the patent and other proprietary rights of third parties, and without breaching or otherwise losing rights in technology licenses we have obtained. We have well established patent portfolios covering the various technologies associated with our electronic components businesses, consisting of 22 issued patents and 18 patent applications in the United States. We also routinely secure corresponding foreign patents in principal countries of Europe, Asia and in Canada. Our power and computing systems business involves designs based largely on industry standard architecture and patents have not been an important competitive factor. This may change, however, as the designs to meet high availability requirements become more complex and proprietary. We have filed one patent application in this area and are pursuing others. Establishing and maintaining proprietary products and technologies is a key element of our success. Although we attempt to protect our intellectual property rights through patents, copyrights, trade secrets and other measures, there can be no assurance that these steps will be adequate to prevent misappropriation by third parties, or will be adequate under the laws of some foreign countries, which may not protect our proprietary rights to the same extent as do the laws of the United States. 15 We use employee and third party confidentiality and nondisclosure agreements to protect our trade secrets and unpatented know-how. We require each of our employees to enter into a proprietary rights and nondisclosure agreement in which the employee agrees to maintain the confidentiality of all proprietary Company information and, subject to certain exceptions, to assign to the Company all rights in any proprietary information or technology made or contributed by the employee during his or her employment. In addition, we regularly enter into nondisclosure agreements with third parties, such as potential joint venture partners and customers. BACKLOG Our backlog for continuing operations as of December 31, 2000 and 1999 amounted to approximately $36 million, and $34 million, respectively. Backlog consists of firm orders for products not yet delivered. We expect to deliver substantially all of our current backlog within 12 months. GOVERNMENT REGULATION Clinical and commercial application of our EMI filtered feedthroughs for the implantable medical device market is subject to regulation by the FDA. The FDA regulates pre-clinical and clinical testing, manufacture, labeling, storage, distribution and promotion of food and medical products and processes. Our EMI filters have been approved for use in cardiac pacemakers and implantable defibrillators manufactured by certain medical device OEMs, and our filtered feedthroughs are a component of new products being developed by our OEM customers that are now undergoing clinical trials as part of the FDA approval process. Required testing and the preparation and processing of FDA applications may take several years to complete. There is no assurance that the FDA will act favorably, and we, or our customers may encounter significant difficulties or costs in obtaining FDA approvals. Those costs or delays may preclude us from marketing regulated products or may furnish an advantage to our competitors. The FDA may also require post marketing testing and surveillance to monitor the effects of approved products or place conditions on any approvals that could restrict the commercial applications of our products. Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. The testing, sale and application of our computing and power systems require compliance and certification with a number of U.S. and foreign standards for electromechanical systems, such as Underwriters Laboratories (UL), Canadian Standards Association (CSA) and Committee European (CE). We incorporate compliance with such standards into the quality assurance protocols in building and testing our computing and power products. Because of the nature of our operations and the use of hazardous substances in some of our ongoing manufacturing and research and development activities, we are subject to stringent federal, state and local laws, rules, regulations and policies governing the use, generation, manufacturing, storage, air emission, effluent discharge, handling and disposal of certain materials and wastes. FOREIGN SALES Our revenue from customers outside of the United States was $25.8 million and $25.3 million in the years ended December 31, 2000 and 1999, respectively, and $10.7 million, $24.0 million, and $14.8 million in the five months ended December 31, 1999 and in the fiscal years ended July 31, 1999 and 1998, respectively. Of the total foreign sales in the year ended December 31, 2000, the five months ended December 31, 1999 and the fiscal years ended July 31, 1999 and 1998, $12.4 million, $5.6 million, $12.2 million and $7.8 million, respectively, were attributable to sales to customers located in the United Kingdom. EMPLOYEES At December 31, 2000, our continuing operations had 702 full-time employees, including 293 employees within the Electronic Components Group, 377 within I-Bus/Phoenix and 32 at the corporate level. None of our employees is represented by a labor union. We consider our relations with our employees to be good. 16 DISCONTINUED OPERATIONS - PUREPULSE TECHNOLOGIES OVERVIEW - PUREBRIGHT PATHOGEN INACTIVATION We are exploring strategic alternatives for our PurePulse subsidiary, which we expect will result in the sale of all or a majority interest in the business in 2001. PurePulse has been classified as a discontinued operation for financial reporting purposes. PurePulse is developing PureBright sterilization and purification systems to inactivate viruses and other pathogens that contaminate products sourced from human or animal tissues, such as plasma derivatives, transfusion blood components, and biopharmaceuticals, and in the production of vaccines. PureBright systems employ pulsed power technology to produce broad spectrum pulsed light (BSPL) 90,000 times more intense than sunlight at sea level to inactivate viruses and other pathogens while preserving the efficacy of beneficial proteins and other therapeutic compounds. Base material passes through a BSPL chamber and receives one or more flashes to inactivate all viruses and other microbial contaminants in the material. Each BSPL flash, lasting a fraction of a second, inactivates pathogens in base materials without generating heat or other undesirable residual effects in the sterilization process. PurePulse has developed PureBright systems that are used commercially to sterilize medical products and packaging. Prototype PureBright systems also have been developed to purify water. PUREBRIGHT SYSTEM VS. CURRENT METHODOLOGIES Producers of blood products, vaccines, biopharmaceuticals and other medical products currently rely on screening tests to avoid the use of contaminated starting materials and on manufacturing processes that inactivate pathogens. Pathogen inactivation processes currently in use include heat, solvent detergent, and gamma radiation. None of these processes is entirely satisfactory. Chemical solvents added to base materials to inactivate viruses must later be removed, which often results in a loss of valuable base material. Heat treatment for virus activation, in addition to causing damage to beneficial proteins and some loss of base material, takes up to 72 hours. Additionally, some pathogens, such as human parvovirus and hepatitis A, are resistant to currently approved inactivation methods. By contrast, extensive pre-clinical testing of our PureBright systems by multiple strategic partners in the blood fractionation, vaccine and biopharmaceutical industries has shown BSPL treatments of only a few seconds' duration to be effective in inactivating viruses by breaking down the nucleic acids required for viral reproduction. And, because therapeutic protein base materials are made up of amino acids that are not damaged by BSPL at levels required for virus inactivation, recovery of PureBright treated protein base materials is in the range of 95-100 percent. PureBright is of interest for vaccine production because BSPL treatments break down genetic material required for viral reproduction and leave intact viral protein structures that are used as antigenic material. We believe that this may allow development of more potent vaccines, reduce the risk of adverse reactions and eliminate the need for harsh chemical additives. MARKET SIZE AND BUSINESS FOCUS Blood fractionation companies and producers of vaccines and certain biopharmaceuticals pay royalties for pathogen inactivation with respect to estimated annual end product sales of $15 billion. PureBright technology has also been applied successfully to medical devices and solutions that represent a global market of $8 billion. Other potential applications for PureBright include point of use systems for purifying drinking water, as well as purification of bottled water. Sales of such systems and bottled water exceed $10 billion annually. At the beginning of 2000, we restructured PurePulse to focus on inactivation of pathogens that contaminate high value products sourced from human or animal tissues. Prior to that time, PurePulse had developed sterilization systems and opportunities for food processing, high volume water purification and surgical and medical instrument sterilization. 17 STRATEGIC COLLABORATIONS Since the beginning of 2000, we have entered into collaboration agreements with five global market leaders in the plasma derivative and vaccine markets to participate in the development of inflow PUREBRIGHT systems for incorporation and evaluation in their pharmaceutical product manufacturing lines for multiple products per collaborator. These development programs require us to deliver advanced design PUREBRIGHT systems in 2001 for testing and evaluation, and for each collaborator to begin clinical and regulatory work in late 2001 or in 2002. We also have developed BSPL based prototype water purification systems that inactivate microbial contaminants in water, including cryptosporidium, which is not affected by many other water treatment processes. Our prototype purification systems vary in capacity from 4 gallons of water per minute to 250 gallons per minute. Such systems can be installed at the point of entry into a food service, grocery or manufacturing facility. PUREBRIGHT also can be used to purify bottled water after it has been packaged and sealed with a compatible translucent packaging material. While market data suggest that a significant market exists for water applications, we believe that penetration of this market will require assistance from one or more marketing partners, which we are pursuing. RISK FACTORS AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND THE OTHER INFORMATION INCLUDED IN THIS FORM 10-K BEFORE INVESTING IN OUR COMMON STOCK. OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE SERIOUSLY HARMED IF ANY OF THE FOLLOWING RISKS OCCUR. IN ANY SUCH CASE, THE MARKET PRICE OF OUR COMMON STOCK COULD DECLINE AND YOU MAY LOSE ALL OR PART OF THE MONEY YOU PAID TO BUY OUR COMMON STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS AND UNCERTAINTIES, INCLUDING THOSE NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL, MAY ALSO RESULT IN DECREASED REVENUES, INCREASED EXPENSES OR OTHER EVENTS WHICH COULD RESULT IN A DECLINE IN THE PRICE OF OUR COMMON STOCK. WE MAY NOT BE ABLE TO DEVELOP OR MARKET COMMERCIAL PRODUCTS SUCCESSFULLY WHICH WOULD PREVENT US FROM ACHIEVING OR MAINTAINING PROFITABILITY IN THE FUTURE. Historically, we have relied in part upon government contracts to fund our research and development, and we have derived a significant portion of our revenues from the government sector. We have signed letters of intent and are scheduled to close the sale of our defense contracting business by the end of March 2001. After the sale of that business, we will generate revenue solely from developing, manufacturing and marketing commercial products. If we are unable to successfully develop or market commercial products, we may not achieve or maintain profitability in the future. We have recently introduced many of our products into commercial markets and, upon such introductions, we also must introduce our capabilities as a reliable supplier of these products. Some of our products are alternatives to established products or provide capabilities that do not presently exist in the marketplace. Our products are sold in highly competitive and rapidly changing markets. The success of our products is significantly affected by their cost, technology standards and end user preferences. In addition, the success of our products depends on a number of factors, including our ability to: - maintain an engineering and marketing staff sufficiently skilled to identify and design new products; - overcome technical, financial and other risks involved in introducing new products and technologies; - identify and develop a market for our new products and technologies and accurately anticipate demand; - develop appropriate commercial sales and distribution channels; - develop and manufacture new products at competitive prices; - increase our manufacturing capacity and improve manufacturing efficiency; - respond to technological changes by improving our existing products and technologies; 18 - demonstrate that our products have technological and/or economic advantages over the products of our competitors; and - respond to competitors that are more experienced, have significantly greater resources, and have a larger base of customers. WE MAY EXPERIENCE DIFFICULTY MANUFACTURING OUR PRODUCTS, WHICH WOULD PREVENT US FROM ACHIEVING INCREASED SALES AND MARKET SHARE. We may experience difficulty in manufacturing our products in increased quantities, outsourcing the manufacturing of our products and improving our manufacturing process. If we are unable to manufacture our products in increased quantities, or if we are unable to outsource the manufacture of our products or improve the manufacturing process, we may be unable to increase sales and market share for our products. We have limited experience in manufacturing our products in high volume. It may be difficult for us to achieve the following results: - increase the quantity of the new products we manufacture, especially those products that contain new technologies; - reduce our manufacturing costs to a level needed to produce adequate profit margins; and - design and procure automated manufacturing equipment. It may also be difficult for us to solve management, technological, engineering and other problems related to our manufacturing processes. These problems include production yields, quality assurance, component supply and shortages of qualified management and other personnel. In addition, we may elect to have some of our products manufactured by third parties. If we outsource the manufacture of our products, we will face risks with respect to quality assurance, cost and the absence of close engineering support. WE MAY BE UNABLE TO PRODUCE OUR ULTRACAPACITORS IN COMMERCIAL QUANTITIES OR REDUCE THE COST OF PRODUCTION ENOUGH TO BE COMMERCIALLY VIABLE FOR WIDESPREAD APPLICATION. If we are not able to produce large quantities of our ultracapacitors in the near future at a dramatically reduced per unit cost, our ultracapacitors may not be a commercially viable alternative to traditional or other alternative power delivery devices. Although we have already begun selling a new type of PowerCache ultracapacitor designed for automotive and transportation applications, we have only produced this ultracapacitor in limited quantities and at a relatively high cost as compared with traditional power delivery devices. We are currently investing significant resources in automating and scaling up our manufacturing capacity to permit us to produce this product in large, commercial quantities sufficient to meet the needs of our potential customers. In particular, because these products are very complex to manufacture, we cannot be certain that we will be able to maintain quality standards at high production levels. Furthermore, we believe based on discussions with potential customers in the automotive and transportation industry that our ultracapacitors will not provide a commercially viable solution for our customers' needs unless we are able to reduce the per unit cost dramatically below our current per unit cost. If we are not successful in producing large quantities of ultracapacitors in the near future, we may not be able to generate sufficient revenue from this product to recapture our significant investment in the development and manufacturing scale-up of this product and our overall business prospects will be significantly impaired. 19 OUR ULTRACAPACITORS DESIGNED FOR AUTOMOTIVE AND TRANSPORTATION APPLICATIONS MAY NOT GAIN WIDESPREAD COMMERCIAL ACCEPTANCE. We have designed one of our PowerCache ultracapacitor products primarily for use in automotive and transportation applications. Currently, most of the major automotive companies are pursuing large initiatives to develop alternative power sources for cars and trucks and to replace the traditional 12-volt electrical system with a 42-volt system. We believe our ultracapacitor provides an innovative, alternative power solution for both of these applications and are currently in discussions with several major automotive companies and their suppliers with regard to designing our ultracapacitor into their future products. However, there are many competing technologies such as nickel metal hydride batteries, combustion engines using alternative fuels and competing ultracapacitors. In particular, although we are currently working with the Allison Transmission division of General Motors Corporation in the early stages of incorporating our ultracapacitors into its first generation of hybrid drive trains, GM is under no obligation to ultimately use our ultracapacitors in their products or purchase any minimum quantity of our ultracapacitors. We believe that the long-term success of our ultracapacitors will be determined by our ability to outperform the competing technologies and to have our ultracapacitors widely designed into the next generation of the power drive trains in hybrid powered cars and trucks and the first generation of 42-volt electrical systems. If our ultracapacitors fail to achieve widespread commercial acceptance in this next generation of automotive products, our revenues will be adversely impacted in future periods and our overall business prospects will be significantly impaired. WE HAVE A HISTORY OF LOSSES AND WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY IN THE FUTURE, WHICH MAY DECREASE THE MARKET VALUE OF OUR STOCK. We have incurred net losses in our most recent fiscal year and in three of our past five fiscal periods. In the future, we may experience significant fluctuations in our revenues and we may incur net losses from period to period as a result of a number of factors, including the following: - the amounts invested in developing and marketing our products in any period as compared to the volume of sales of those products in the same period; - fluctuations in demand for our products by OEMs; - the prices at which we sell our products and services as compared to the prices of our competitors; - the timing of our product introductions as compared to those of our competitors; - the profit margins on our mix of product sales; and - the dilution, debt, expenses, and/or charges we incur as part of our acquisition strategy. In addition, we incur significant costs developing and marketing products based on new technologies. For example, we expect our investment in PurePulse to significantly exceed the revenues achieved by that operation, and operating losses due to this investment will continue until such time as we complete a strategic transaction for the business. We anticipate that, in order to increase our market share, we may sell our products and services at profit margins below those we ultimately expect to achieve and/or significantly reduce the prices of our products and services in a particular quarter or quarters. The impact of the foregoing may cause our operating results to be below the expectations of public market analysts and investors, which may decrease the market value of our stock. 20 IF OUR OEM CUSTOMERS FAIL TO SELL A SUFFICIENT QUANTITY OF PRODUCTS INCORPORATING OUR COMPONENTS, OR IF THE OEM'S SALES TIMING AND VOLUME FLUCTUATES, IT WOULD PREVENT US FROM ACHIEVING INCREASED SALES AND MARKET SHARE. Sales to a relatively small number of OEMs, as opposed to direct retail sales to customers, make up a significant percentage of our revenues. The timing and volume of these sales depend upon the sales levels and shipping schedules for the products of our OEM customers. Thus, even if we develop a successful component, our sales will not increase unless the product into which our component is incorporated is successful. If our OEM customers fail to sell a sufficient quantity of products incorporating our components, or if the OEM's sales timing and volume fluctuates, it could prevent us from achieving sales. Our OEM customers typically require a long development and engineering process before incorporating our products and services into their systems and products. This period of time is in addition to the time we spend on basic research and product development. As a result, we are vulnerable to changes in technology or end user preferences. Our opportunity to sell our products to our OEM customers typically occurs at infrequent intervals, depending on when the OEM customer designs a new product or enhances an existing one. If we are not aware of an OEM's product development schedule, or if we cannot provide components or technologies when they develop their products, we may miss an opportunity that may not reappear for some time. OUR ABILITY TO INCREASE MARKET SHARE AND SALES DEPENDS ON OUR ABILITY TO SUCCESSFULLY HIRE AND TRAIN MARKETING AND SALES PERSONNEL. We have limited experience marketing and selling our products. To sell our products, we need to train marketing and sales personnel to effectively demonstrate the advantages of our products over the products offered by our competitors. The highly technical nature of the products we offer requires that we retain and attract adequate marketing and sales personnel, and we may have difficulty doing that in a highly competitive employment market. Also, as part of our sales and marketing strategy, we enter into arrangements with distributors and sales representatives and depend upon their efforts to sell our products. Our arrangements with outside distributors and sales representatives may not be successful. IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY ADEQUATELY, WE COULD LOSE OUR COMPETITIVE ADVANTAGE IN EACH OF THE INDUSTRY SEGMENTS IN WHICH WE DO BUSINESS. Our success depends on establishing and maintaining our intellectual property rights. If we are unable to protect our intellectual property adequately, we could lose our competitive advantage in each of the industry segments in which we do business. Although we try to protect our intellectual property rights through patents, trademarks, copyrights, trade secrets and other measures, these steps may not prevent misappropriation by third parties. We have taken steps to protect our intellectual property rights under the laws of certain foreign countries, but our efforts may not be effective to the extent that foreign laws are not as protective as United States laws. In addition, we face the possibility that third parties might "reverse engineer" our products in order to determine their method of operation and produce and introduce competing products. As our business has expanded, we have emphasized protecting our technologies and products through patents. Our success depends on maintaining our patents, adding to them where appropriate, and developing products and applications without infringing on the patent and proprietary rights of others. The following risks are involved in protecting our patents: - our patents may be circumvented or challenged and held unenforceable or invalid; - our pending or future patent applications, if any, may not be issued in a timely manner and may not provide the protections we seek; and - others may claim rights in the patented and other proprietary technology that we own or license. If our patents are invalidated or if it is determined that we, or the licensor of the patent, does not hold sole rights to the patent, we could lose our competitive advantage in each of the industry segments in which we do business. 21 Competing research and patent activity in our product areas is substantial. Conflicting patent and other proprietary rights claims may result in disputes or litigation. Although we do not believe that our products or proprietary rights infringe third party rights, infringement claims could be asserted against us in the future. Also, we may not be able to stop a third party product from infringing our proprietary rights without litigation. If we are subject to such claims, or if we are forced to bring such claims, we could endure time-consuming, costly litigation resulting in product shipment delays and possible damage payments or injunctions which prevent us from making, using or selling the infringing product. We may also be required to enter into royalty or licensing agreements as part of a judgment or settlement which could have a negative impact on the amount of revenue derived from our products or proprietary rights. WE FACE RISKS ASSOCIATED WITH THE MARKETING, DISTRIBUTION AND SALE OF OUR PRODUCTS INTERNATIONALLY, AND IF WE ARE UNABLE TO EFFECTIVELY MANAGE THESE RISKS, IT COULD IMPAIR OUR ABILITY TO GROW OUR BUSINESS ABROAD. We derive a significant portion of our revenues from sales to customers located outside the United States. We expect our international sales to continue to represent a significant and increasing portion of our future revenues. As a result, our business will continue to be subject to certain risks, such as foreign government regulations, export controls, changes in tax laws, tax treaties, tariffs and freight rates. If we are unable to effectively manage these risks, it could impair our ability to grow our business abroad. We have only recently established or acquired operations in foreign countries. Since we are relatively inexperienced in managing our international operations, we may be unable to focus on the operation and expansion of our worldwide business and to manage cultural, language and legal differences inherent in international operations. In addition, to the extent we are unable to effectively respond to political, economic and other conditions in these countries, our business, results of operations and financial condition could be materially adversely affected. Moreover, changes in the mix of income from our foreign subsidiaries, expiration of tax holidays and changes in tax laws and regulations could increase our tax rates. As a result of our international operations, the United States dollar amount of our revenue and expenses is impacted by changes in foreign currency exchange rates. WE MAY FACE DIFFICULTIES IN OBTAINING FOOD AND DRUG ADMINISTRATION APPROVAL FOR CERTAIN OF OUR PRODUCTS, WHICH COULD PREVENT US FROM MARKETING SUCH PRODUCTS. Some of our products, such as EMI filters, are subject to the approval process of the Food and Drug Administration because they are used in or with medical devices or processes. There are many aspects of the FDA approval process that could impact our ability to bring our products to market, including the following: - the FDA testing and application process is expensive and lengthy, and varies based on the type of product; - our products may not ultimately receive FDA approval or clearance; - the FDA may restrict a product's intended use as a condition to approving or clearing such product, or place conditions on any approval that restrict commercial applications of such products; - the FDA may require post-marketing testing and surveillance to monitor the effects of products it initially approves; and - the FDA may withdraw its approval or clearance of any product if compliance with regulatory standards is not maintained, or if problems occur following initial marketing. If we fail to comply with existing or future regulatory requirements we may face, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the United States government to grant pre-market clearance or pre-market approval for products, withdrawal of marketing clearances or approvals and criminal prosecution. 22 Although several pacemaker manufacturers have included our EMI filters in their new pacemaker designs, these products have not yet been approved by the FDA. We are unable to predict when, if ever, the FDA will approve these products for commercial sale. We will not generate any significant revenue from these products until and unless the pacemakers or other products into which they are incorporated are available for commercial sale. IF WE ARE UNABLE TO RETAIN KEY PERSONNEL, WE COULD LOSE OUR TECHNOLOGICAL AND COMPETITIVE ADVANTAGE IN SOME PRODUCT AREAS AND BUSINESS SEGMENTS. Since we primarily focus on emerging technologies, our success depends upon the continued service of our key technical and senior management personnel. Some of our engineers are the key developers of our products and technologies and are recognized as leaders in their area of expertise. The loss of such engineers to our competitors could threaten our technological and competitive advantage in some product areas and business segments. Our performance also depends on our ability to identify, hire, train, retain and motivate high quality personnel, especially key operations executives and highly skilled engineers. The industries in which we compete are characterized by a high level of employee mobility and aggressive recruiting of skilled personnel. Our employees may terminate their employment with us at any time. IF WE ARE UNABLE TO SECURE QUALIFIED AND ADEQUATE SOURCES FOR OUR MATERIALS, COMPONENTS AND SUB-ASSEMBLIES WE MAY NOT BE ABLE TO MAKE OUR PRODUCTS AT COMPETITIVE COSTS AND WE MAY HAVE DIFFICULTY MEETING CUSTOMER DEMAND WHICH COULD DAMAGE OUR RELATIONSHIPS WITH OUR CUSTOMERS. Our ability to manufacture products depends in part on our ability to secure qualified and adequate sources of materials, components and sub-assemblies at prices that enable us to make our products at competitive costs. Some of our suppliers are currently the sole source of one or more items that we need to manufacture our products. Although we seek to reduce our dependence on sole and limited source suppliers, the partial or complete loss of these sources could have at least a temporary material effect on our business and results of operations, and damage customer relationships. On occasion, we have experienced difficulty in obtaining timely delivery of supplies from outside suppliers. This has adversely impacted our delivery time to our customers and there can be no assurance that such supply problems will not recur. WE MAY NOT BE ABLE TO OBTAIN A SUFFICIENT AMOUNT OF CAPITAL NEEDED TO GROW OUR BUSINESS WHICH COULD REQUIRE US TO CHANGE OUR BUSINESS STRATEGY AND RESULT IN DECREASED PROFITABILITY AND CAUSE A LOSS OF CUSTOMERS. We believe that in the future we will need a substantial amount of capital for a number of purposes including the following: - to meet anticipated volume production requirements for several of our product lines, in particular our ultracapacitors, which require high-speed automated production lines to achieve targeted customer volume and price requirements; - to expand our manufacturing capabilities and establish viable production alternatives; - to fund our continuing expansion into commercial markets; - to achieve our long-term strategic objectives; - to maintain and enhance our competitive position; and - to acquire new or complementary businesses, product lines and technologies. There can be no assurance that the necessary additional financing will be available to us on acceptable terms or at all. If adequate funds are not available, we may be required to change or delay our planned product commercialization strategy or our anticipated facilities expenditures which could result in decreased profitability and cause a loss of customers. 23 WE COULD INCUR SIGNIFICANT LIABILITIES IF WE DO NOT COMPLY WITH THE ENVIRONMENTAL REGULATIONS APPLICABLE TO OUR OPERATIONS. We are subject to a variety of environmental regulations relating to the use, storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances. If we fail to comply with current or future regulations, substantial fines could be imposed against us, our production could be suspended or stopped, or our manufacturing process could be altered. Such regulations could require us to acquire expensive remediation or abatement equipment or to incur substantial expenses to comply with environmental regulations. If we fail to adequately control the use, discharge, disposal or storage of hazardous or toxic substances, we could incur significant liabilities. OUR FINANCIAL CONDITION COULD BE NEGATIVELY AFFECTED IF WE ISSUE ADDITIONAL STOCK OF OUR SUBSIDIARIES. We operate our businesses through separate subsidiaries. In the future, we could engage in public offerings or other sales of the common stock of our subsidiaries, sales of entire subsidiaries or make strategic acquisitions using subsidiary stock. For example, our September 2000 acquisition of Gateworks Corporation was accomplished with a combination of cash and I-Bus/Phoenix stock. We may use subsidiary stock for future acquisitions if our board of directors determines that it is in the best interests of our stockholders to do so. Issuance of additional subsidiary stock could adversely affect our financial condition and results of operations. For example, any public offering or other sale of a minority portion of a subsidiary's stock would reduce that subsidiary's contribution to our net income and earnings per share, and could reduce our net proceeds if we were to sell that subsidiary. ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND BYLAWS COULD PREVENT TRANSACTIONS WHICH ARE IN THE BEST INTEREST OF OUR STOCKHOLDERS. Some provisions in our certificate of incorporation could make it more difficult for a third party to acquire control of Maxwell, even if such change in control would be beneficial to our stockholders. We have a staggered board of directors, which means that our directors are divided into three classes. The directors in each class are elected to serve three-year terms. Since the three-year terms of each class overlap the terms of the other classes of directors, the entire board of directors cannot be replaced in any one year. Furthermore, our certificate of incorporation contains a "fair price provision" which may require a potential acquirer to obtain the consent of our board to any business combination involving Maxwell. Our certificate of incorporation and bylaws do not permit stockholder action by written consent or the calling by stockholders of a special meeting. We have adopted a program under which our stockholders have rights to purchase our stock directly from us at a below-market price if a company or person attempts to buy us without negotiating with the Board. This program is intended to encourage a buyer to negotiate with us, but may have the effect of discouraging offers from possible buyers. The provisions of our certificate of incorporation and bylaws could delay, deter or prevent a merger, tender offer, or other business combination or change in control involving us that some, or a majority, of our stockholders might consider to be in their best interests. This includes offers or attempted takeovers that could result in our stockholders receiving a premium over the market price for their shares of our common stock. OUR COMMON STOCK EXPERIENCES LIMITED TRADING VOLUME AND OUR STOCK PRICE HAS BEEN VOLATILE. Our common stock is traded on the Nasdaq National Market. The trading volume of our common stock each day is relatively low. This means that sales or purchases of relatively small blocks of stock can have a significant impact on the price at which our stock is traded. We believe that factors such as quarterly fluctuations in financial results, announcements of new technologies impacting our products, announcements by competitors or changes in securities analysts' recommendations could cause the price of our stock to fluctuate substantially. These fluctuations, as well as general economic conditions such as recessions or higher interest rates, may adversely affect the market price of our common stock. 24 ITEM 2. PROPERTIES We conduct our operations in the following major facilities:
APPROXIMATE LOCATION SQUARE FEET USES LEASED/OWNED - ---------------------------------------------------- ----------- ------------------------- ------------ MAXWELL ELECTRONIC COMPONENTS GROUP, INC. San Diego, California(1) 45,500 Manufacturing; R&D; Leased sales and administration Carson City, Nevada 25,000 Manufacturing; R&D; Owned sales and administration I-BUS/PHOENIX, INC. San Diego, California 84,500 Manufacturing and Owned assembly and test; R&D; sales and administration Havant, Hampshire, England 12,000 Manufacturing and Leased assembly and test; R&D; sales and administration Uckfield East Sussex, England 11,000 Manufacturing Leased Munich, Germany 8,900 Assembly and test; sales Leased and administration Sophia, France 3,100 Assembly and test; sales Leased and administration PUREPULSE TECHNOLOGIES, INC. San Diego, California 20,000 Administration; R&D Leased
- --------------- (1) Our corporate offices are also located in this facility. In addition, we occupy other small sales and research facilities in the United States and Europe. We also sublease certain other leased facilities to third parties. ITEM 3. LEGAL PROCEEDINGS As of the date of this Form 10-K, we are not engaged in any legal proceedings that we expect will have a material adverse effect on our business, financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On September 15, 2000, the Company mailed a Consent Solicitation Statement to its shareholders seeking the approval of the shareholders by written consent in lieu of a meeting of a proposed amendment to the Company's 1995 Stock Option Plan to increase the number of shares authorized for issuance by 950,000. Approval was obtained on November 21, 2000 with holders of a total of 6,181,940 shares (or 62.7% of the total outstanding on the record date of September 24, 2000) casting votes. Of the shares voted, 4,941,147 shares, or 50.1% of the total outstanding on the record date, were voted in favor of the amendment; 1,167,933 shares, or 11.8% of the total outstanding on the record date, were voted against the amendment; and 72,860 shares, or 0.7% of the total outstanding on the record date, were cast to abstain. 25 ITEM 4.1 EXECUTIVE OFFICERS OF THE REGISTRANT The Executive officers of the Company are set forth below. The Company's officers serve at the pleasure of the Board of Directors.
NAME AGE POSITION - -------------------- ---- ---------------------------------------------------------------------- Carlton J. Eibl 40 President, Chief Executive Officer and Director. Mr. Eibl was appointed a director in July 1998 and named chief executive officer and president in November 1999. From February 1999 until he formally joined us on December 1, 1999, Mr. Eibl served as president and chief operating officer of Stratagene Corporation, a privately-held biotechnology company. Mr. Eibl previously held various executive positions with Mycogen Corporation, a publicly-held diversified agribusiness and biotechnology company. Mr. Eibl joined Mycogen in 1993 as executive vice president and general counsel. In 1995, he was appointed president and chief operating officer of Mycogen and in 1997 he became chief executive officer. The Dow Chemical Company acquired Mycogen at the end of 1998. Richard D. Balanson 51 Vice President, President of Maxwell Electronic Components Group, Inc. Mr. Balanson is corporate vice president and president of Maxwell Electronic Components Group, Inc. From 1996 until joining Maxwell in August 1999, Mr. Balanson was the president and chief operating officer for 3D Systems, a California-based manufacturer of rapid prototyping equipment. From 1994 to 1996, Mr. Balanson was the general manager and executive vice president of Maxtor Corporation, and before that was president and chief operating officer of Applied Magnetics Corporation. Vickie L. Capps 39 Vice President, Finance and Administration, Treasurer and Chief Financial Officer. Ms. Capps served Wavetek Wandel Golterman, Inc. as group controller from 1992 through 1994, vice president, corporate finance from 1994 through 1996 and then chief financial officer from 1996 through 1999, prior to joining Maxwell in July 1999. Previously, she spent 10 years with the firm of Ernst & Young LLP. Donald M. Roberts 52 Vice President, General Counsel and Secretary. Mr. Roberts has served as general counsel since joining us in April 1994, and was appointed secretary in June 1996 and vice president in January 1999. For more than five years prior to that, Mr. Roberts was a shareholder of the law firm of Parker, Milliken, Clark, O'Hara & Samuelian, a Professional Corporation, and a partner of the predecessor law partnership, and in that capacity had served as our outside legal advisor for more than ten years. Ted Toch 52 Vice President, President of PurePulse Technologies, Inc. Mr. Toch joined us in June 1998 as corporate vice president and president of PurePulse Technologies, Inc. Prior to joining PurePulse Technologies he was vice president of marketing and sales for Johnson & Johnson's Advanced Sterilization Products Division from 1993 to 1998 with earlier experience as vice-president and general manager of the Instruments Division of Nellcor, Inc.
26 John D. Werderman 54 Vice President, President of I-Bus/Phoenix, Inc. Mr. Werderman was named corporate vice president and president of I-Bus/Phoenix, Inc. in July 1997. Previously, Mr. Werderman served as chief operating officer of Maxwell Technologies Systems Division, Inc. Prior to joining Maxwell in October 1996, Mr. Werderman worked for M/A.COM, Inc. for over 15 years, most recently as President and General Manager of their Baltimore, Maryland operation, M/A.COM Government Products, Inc.
PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock has been quoted on the Nasdaq National Market under the symbol "MXWL" since 1983. The following table sets forth the high and low sale prices per share of our common stock as reported on the Nasdaq National Market for the periods indicated.
HIGH LOW ------- ------- CALENDAR YEAR ENDED DECEMBER 31, 1999 (1) First Quarter............. $39.625 $22.000 Second Quarter............ 24.250 18.188 Third Quarter............. 30.688 11.750 Fourth Quarter............ 12.875 7.875 CALENDAR YEAR ENDED DECEMBER 31, 2000 First Quarter............. $17.000 $10.250 Second Quarter............ 16.922 10.563 Third Quarter............. 19.063 13.875 Fourth Quarter............ 17.500 13.813
(1) We changed our fiscal year to a calendar year effective January 1, 2000. We previously reported results on a fiscal year of August 1 through July 31. The last reported sale price of common stock on the Nasdaq National market on March 15, 2001, was $19.43 per share. As of December 31, 2000, there were 513 holders of record of the Company's Common Stock. We currently anticipate that any earnings will be retained for the development and expansion of our business and, therefore, we do not anticipate paying dividends on our Common Stock in the foreseeable future. In addition, under our bank credit agreement, neither we nor any of our subsidiaries may, directly or indirectly, pay any cash dividends to our stockholders. 27 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated statement of operations data for the fiscal years ended July 31, 1996 and 1997 and consolidated balance sheet data as of July 31, 1996, 1997, 1998 and 1999 are derived from audited consolidated financial statements of the Company not included in this Form 10-K. The following selected consolidated statement of operations data for the fiscal years ended July 31, 1998 and 1999, the five months ended December 31, 1999 and the fiscal year ended December 31, 2000, and consolidated balance sheet data as of December 31, 1999 and December 31, 2000 are derived from the Consolidated Financial Statements of the Company and Notes thereto included herein, which have been audited by Ernst & Young LLP, independent auditors. All selected consolidated financial data presented has been restated to reflect certain businesses divested and to be divested by the Company as discontinued operations. The following selected data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Consolidated Financial Statements" appearing elsewhere in this Form 10-K.
YEARS ENDED JULY 31, ------------------------------------------------ 1996 1997 1998 1999 --------- --------- --------- --------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA) Continuing Operations: Sales ...................................................... $ 42,565 $ 63,736 $ 78,014 $ 102,878 Cost of sales .............................................. 30,150 36,734 48,570 70,044 --------- --------- --------- --------- Gross profit ............................................... 12,415 27,002 29,444 32,834 Operating expenses: Selling, general and administrative .................... 14,421 14,608 18,901 26,070 Research and development ............................... 1,913 3,014 5,823 6,779 Restructuring, acquisition and other charges ........... 1,202 -- 3,889 2,620 --------- --------- --------- --------- Total operating expenses .......................... 17,536 17,622 28,613 35,469 --------- --------- --------- --------- Operating income (loss) .................................... (5,121) 9,380 831 (2,635) Interest expense ........................................... (368) (220) (338) (404) Interest income and other, net ............................. 44 194 1,343 565 --------- --------- --------- --------- Income (loss) from continuing operations before income taxes, minority interest and cumulative effect of change in accounting principle ................................ (5,445) 9,354 1,836 (2,474) Provision (credit) for income taxes ........................ 1,738 1,473 413 (6,417) Minority interest in net income (loss) of subsidiaries ..... -- -- -- 4 --------- --------- --------- --------- Income (loss) from continuing operations ................... (7,183) 7,881 1,423 3,939 Discontinued operations, net of tax: Income (loss) from operations .............................. (6,239) (1,374) (3,130) 7,129 Gain (provision for estimated loss) on disposal ............ -- -- -- -- --------- --------- --------- --------- (6,239) (1,374) (3,130) 7,129 Cumulative effect of change in accounting principle ............. 564 -- -- -- --------- --------- --------- --------- Net income (loss) ............................................... $ (13,986) $ 6,507 $ (1,707) $ 11,068 ========= ========= ========= ========= Basic net income (loss) per share: Income (loss) from continuing operations ................... $ (1.13) $ 1.16 $ 0.17 $ 0.42 Income (loss) from discontinued operations ................. (0.98) (0.20) (0.37) 0.76 Cumulative effect of change in accounting principle ........ (0.09) -- -- -- --------- --------- --------- --------- Basic net income (loss) per share ............................... $ (2.20) $ 0.96 $ (0.20) $ 1.18 ========= ========= ========= ========= Diluted net income (loss) per share: Income (loss) from continuing operations ................... $ (1.13) $ 1.06 $ 0.16 $ 0.40 Income (loss) from discontinued operations ................. (0.98) (0.19) (0.35) 0.72 Cumulative effect of change in accounting principle ........ (0.09) -- -- -- --------- --------- --------- --------- Diluted net income (loss) per share ............................. $ (2.20) $ 0.87 $ (0.19) $ 1.12 ========= ========= ========= ========= FIVE MONTHS ENDED YEARS ENDED DECEMBER 31, DECEMBER 31, ------------------------ 1999 1999 2000 ------------ --------- ----------- (UNAUDITED) CONSOLIDATED STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA) Continuing Operations: Sales ...................................................... $ 36,863 $ 103,611 $ 102,347 Cost of sales .............................................. 28,322 74,525 79,472 --------- --------- --------- Gross profit ............................................... 8,541 29,086 22,875 Operating expenses: Selling, general and administrative .................... 12,204 27,501 26,260 Research and development ............................... 2,618 6,363 8,713 Restructuring, acquisition and other charges ........... 2,801 5,267 9,220 --------- --------- --------- Total operating expenses .......................... 17,623 39,131 44,193 --------- --------- --------- Operating income (loss) .................................... (9,082) (10,045) (21,318) Interest expense ........................................... (112) (331) (1,430) Interest income and other, net ............................. (29) 501 9 --------- --------- --------- Income (loss) from continuing operations before income taxes, minority interest and cumulative effect of change in accounting principle ................................ (9,223) (9,875) (22,739) Provision (credit) for income taxes ........................ (3,408) (9,925) (6,267) Minority interest in net income (loss) of subsidiaries ..... -- 4 (181) --------- --------- --------- Income (loss) from continuing operations ................... (5,815) 46 (16,291) Discontinued operations, net of tax: Income (loss) from operations .............................. (5,211) 1,766 (2,880) Gain (provision for estimated loss) on disposal ............ (2,065) (2,065) 2,854 --------- --------- --------- (7,276) (299) (26) Cumulative effect of change in accounting principle ............. -- -- -- --------- --------- --------- Net income (loss) ............................................... $ (13,091) $ (253) $ (16,317) ========= ========= ========= Basic net income (loss) per share: Income (loss) from continuing operations ................... $ (0.61) $ -- $ (1.66) Income (loss) from discontinued operations ................. (0.76) (0.03) -- Cumulative effect of change in accounting principle ........ -- -- -- --------- --------- --------- Basic net income (loss) per share ............................... $ (1.37) $ (0.03) $ (1.66) ========= ========= ========= Diluted net income (loss) per share: Income (loss) from continuing operations ................... $ (0.61) $ -- $ (1.66) Income (loss) from discontinued operations ................. (0.76) (0.03) (0.01) Cumulative effect of change in accounting principle ........ -- -- -- --------- --------- --------- Diluted net income (loss) per share ............................. $ (1.37) $ (0.03) $ (1.67) ========= ========= =========
JULY 31, DECEMBER 31, ----------------------------------------- ------------------- 1996 1997 1998 1999 1999 2000 -------- -------- -------- -------- ------- -------- (UNAUDITED) CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS) Total assets ................... $ 40,295 $ 47,315 $100,200 $113,486 $ 98,151 $122,109 Cash and cash equivalents ...... 1,015 1,326 20,934 7,948 2,885 2,686 Short-term debt ................ -- -- -- -- -- 22,754 Long-term debt, including current portion ............. 2,193 1,762 2,462 3,688 474 -- Stockholders' equity at year-end 23,243 32,617 80,153 97,168 84,416 69,754 Shares outstanding at year-end . 6,513 6,969 9,210 9,557 9,564 9,877
28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We apply industry-leading capabilities in power and computing to develop and commercialize electronic components and power and computing systems for OEM customers in multiple industries, including transportation, telecommunications, consumer and industrial electronics, medical and aerospace. In December 1999, we adopted a plan to restructure our operations. This restructuring plan: - consolidated certain commercial business operations and improved their manufacturing and other operational capabilities; - focused our defense contracting business on pulsed power systems and computer-based analysis for government and national laboratories; - focused the application of PureBright broad-spectrum pulsed light technology on bioprocessing, medical and consumer water markets; and - provided for the sale of certain non-strategic business operations. The goal of the restructuring plan was to create a product-driven, high-growth company and to improve operating results by the fourth quarter of calendar year 2000. Since January 2000, we have recruited more than 50 key managers with extensive commercial experience in engineering, manufacturing, material procurement, supply chain management, information technology, financial controls and sales and marketing. We have also invested over $11 million to build and outfit state-of-the-art production facilities, including information technology infrastructure, and implement new manufacturing and business processes and systems to increase our production capacity and improve efficiency and product quality. We experienced significant change in the early part of 2000 as part of our efforts to achieve the objectives of the restructuring plan on schedule. We made significant progress and essentially completed our facilities and organizational consolidation program in October 2000. As part of the restructuring plan, we combined our high reliability electronic components businesses, including our PowerCache ultracapacitors, EMI filtered feedthroughs and other ceramic capacitor products, and radiation-shielded microelectronics, into a single commercial, high reliability electronic components group. We also combined our applied computing systems business and our power quality systems business. We focused our defense contracting business on pulsed power systems and computer-based analysis for government and national laboratories and expect to sell this part of our business by the end of March 2001. We focused PurePulse on significant opportunities in the application of our PureBright technology to pathogen inactivation in medical and bioprocessing markets and to consumer water applications. We are now exploring strategic alternatives for PurePulse, which we expect will result in the sale of all or a majority interest in the business in 2001. Finally, in calendar year 2000, we sold our businesses involving high voltage wound film capacitors, high voltage power supplies and time card and job cost accounting software. All financial information contained in this Form 10-K has been restated for all periods presented to reflect our defense contracting and PurePulse businesses, as well as the businesses divested in 2000, as discontinued operations. Our Electronic Components Group and I-Bus/Phoenix power and computing systems business generate all of our revenues from continuing operations. We are currently investing in our PurePulse operations to develop broad-spectrum pulsed light pathogen inactivation systems. This investment will continue until such time as we complete a strategic transaction for the business. 29 We generate substantially all of our revenue from continuing operations from the sale of commercial products. From time to time, we also generate revenue from licensing technology and other rights to strategic partners. Sales and marketing for our products in the United States, Europe and Asia are conducted through both direct and indirect sales channels. We conduct marketing programs intended to position and promote our products, including trade shows, seminars, advertising, public relations, distribution of product literature and websites on the Internet. Our ability to maintain and grow our sales depends on a variety of factors including our ability to maintain our competitive position in areas such as technology, performance, price, brand identity, quality, reliability, distribution, customer service and support. Our sales growth also depends on our ability to continue to introduce new products that respond to technological change, competitive pricing pressure and market demand in a timely manner. Our operating expenses are impacted by research and product development and selling, general and administrative activities. Selling expenses are primarily driven by: - sales volume, with respect to sales force expenses and commission expenses; - the extent of market research activities for new product design efforts; - advertising and trade show activities; and - the number of new products launched in the period. General and administrative expenses primarily include costs associated with our administrative employees, facilities and functions. We incur expenses in foreign countries primarily in the functional currencies of such locations. As a result of our international operations, changes in foreign currency exchange rates impact the United States dollar amount of our revenue and expenses. In 1999, we changed our fiscal year to a calendar year effective January 1, 2000. We previously reported results on a fiscal year of August 1 through July 31. BUSINESS SEGMENTS Our continuing operations are comprised of the following two business segments. ELECTRONIC COMPONENTS GROUP As part of the restructuring plan, we organized the Electronic Components Group by combining numerous business units and product lines including our PowerCache ultracapacitors, EMI filtered feedthroughs, ceramic capacitors and our radiation-shielded microelectronics. In October 2000, we integrated the PowerCache ultracapacitor operations and the radiation-shielded microelectronics operations into one new manufacturing site in San Diego. Our EMI filters and ceramic capacitors are manufactured at our facility in Carson City, Nevada, which was redesigned in 2000. Both facilities were designed for highly efficient manufacturing, with improved processes, improved personnel training and more disciplined cost control practices. The Electronic Components Group consists primarily of the following power delivery and other high reliability devices product lines: - ultracapacitors for electrical energy storage and delivery of peak power for a variety of applications; - EMI filtered feedthroughs for cardiac pacemakers, defibrillators and other implantable medical devices and high temperature ceramic capacitors and filters used in oil exploration; and - radiation-shielded microelectronics, including integrated circuits, power modules and single board computers for space and military markets. 30 I-BUS/PHOENIX POWER AND COMPUTING SYSTEMS As part of our restructuring plan, we integrated our I-Bus, Inc. and Phoenix Power Systems, Inc. subsidiaries. The I-Bus/Phoenix organization has operations in the U.S., Europe and Asia. The new I-Bus/Phoenix operation is focused on providing high availability custom computing systems and power quality products. As part of the restructuring plan, we combined the San Diego operations of these two businesses into a single facility in October 2000. The new facility has been designed for highly efficient manufacturing, with improved processes, improved personnel training and more disciplined cost control practices. Our current I-Bus/Phoenix product offerings include applied computing systems, power distribution systems and power conditioning units. We sell our products mainly to OEMs serving the telecommunications and Internet infrastructure, industrial automation, broadcasting and medical imaging markets. We have classified the following business segment as a discontinued operation for financial reporting purposes. PUREPULSE PurePulse designs and develops systems that generate extremely intense, broad-spectrum, pulsed light to inactivate viruses and other pathogens that contaminate products sourced from human or animal tissues, such as plasma derivatives, transfusion blood components and biopharmaceuticals, and in the production of vaccines. PurePulse also is developing systems to purify water. We are exploring strategic alternatives for PurePulse, which we expect will result in the sale of all or a majority interest in the business in 2001. RESULTS OF OPERATIONS COMPARISON AND DISCUSSION OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND THE THREE MONTHS ENDED SEPTEMBER 30, 2000. The following table sets forth our selected data, expressed as a percentage of sales, for the three months ended December 31, 2000, compared to the three months ended September 30, 2000. The three months ended December 31, 2000 was the first quarter of operations in our new facilities following the completion of the restructuring plan.
THREE MONTHS ENDED -------------------------------------- SEPTEMBER 30, 2000 DECEMBER 31, 2000 ------------------ ----------------- Continuing Operations: Sales........................................................ 100.0% 100.0% Cost of sales................................................ 95.2 75.6 ------------------ ----------------- Gross profit................................................. 4.8 24.4 Operating expenses: Selling, general and administrative........................ 31.4 18.2 Research and development................................... 10.8 9.6 Restructuring, acquisition and other charges............... 34.8 -- ------------------ ----------------- Total operating expenses................................. 77.0 27.8 ------------------ ----------------- Operating loss............................................... (72.2) (3.4) Interest expense............................................. (1.7) (3.2) Interest income and other, net............................... (0.5) 0.3 ------------------ ----------------- Loss from continuing operations before income taxes and minority interest.......................................... (74.4) (6.3) Credit for income taxes...................................... (17.5) (2.4) Minority interest in net loss of subsidiaries................ -- (0.7) ------------------ ----------------- Loss from continuing operations.............................. (56.9) (3.2) Discontinued operations, net of tax: Loss from operations......................................... (3.0) (1.9) Gain on disposal............................................. -- 5.1 ------------------ ----------------- Net income (loss)............................................... (59.9)% --% ================== =====================
31 The following table sets forth sales, gross profit (loss) and gross profit as a percentage of sales for each of our business segments.
THREE MONTHS ENDED -------------------------------------------- SEPTEMBER 30, 2000 DECEMBER 31, 2000 --------------------- ------------------- (dollar amounts in thousands) Electronic Components Group: Sales............................................... $ 8,525 $12,234 Gross profit........................................ 1,634 4,157 Gross profit as a percentage of sales............... 19.2% 34.0% I-Bus/Phoenix Power and Computing Systems: Sales............................................... $ 13,146 $15,208 Gross profit (loss)................................. (594) 2,535 Gross profit as a percentage of sales............... N/A 16.7% Consolidated (from continuing operations): Sales............................................... $ 21,671 $27,442 Gross profit........................................ 1,040 6,692 Gross profit as a percentage of sales............... 4.8% 24.4%
Following the completion of the restructuring plan, we achieved significantly higher sales from continuing operations and improved operating results in the three months ended December 31, 2000, or the fourth quarter, as compared to the three months ended September 30, 2000, or the third quarter. A discussion of these improved quarterly results from continuing operations follows. SALES Sales for the fourth quarter were $27.4 million, reflecting a $5.7 million, or 26.6%, increase from sales of $21.7 million for the third quarter. Sales in the fourth quarter in the I-Bus/Phoenix power and computing systems segment increased by $2.1 million, or 15.7%, from sales in the third quarter, driven primarily by increased sales of power quality products made possible by the increased manufacturing capacity available in the new facility. We expect sales in this segment to continue to increase in 2001, reflecting the contribution of sales of products acquired in connection with the acquisition of Gateworks Corporation, as well as the contribution of sales from new applied computing products, the first of which were introduced in the first quarter of 2001. We expect to introduce additional applied computing products in 2001. Sales in the fourth quarter in the Electronic Components Group segment increased by $3.7 million, or 43.5%, from sales in the third quarter, representing increased sales in all product lines of the Electronic Components Group segment. The increase in sales was largely attributable to increased production capacity in these business areas in their new or redesigned facilities. Sales of PowerCache ultracapacitors also increased due to shipments made during the fourth quarter in connection with our supply agreement with the Allison Transmission division of General Motors Corporation. GROSS PROFIT In the fourth quarter, our gross profit was $6.7 million, or 24.4% of sales, compared to $1.0 million, or 4.8% of sales, in the third quarter. The improvement in gross profit is attributable partly to increased sales volume in the fourth quarter and partly to the fact that $2.1 million of valuation adjustments to inventories and other costs of goods sold variances in the power quality product lines of I-Bus/Phoenix were recorded to cost of sales in the third quarter, which did not recur in the fourth quarter. In addition, we wrote off certain inventories in the third quarter related to decisions made to discontinue certain product lines. We also had a higher margin mix of product sales in the fourth quarter in the microelectronics product lines of our Electronic Components Group segment. We began to realize the gross margin benefits of reduced overhead expenses in the fourth quarter of 2000 when we began to occupy our new and redesigned manufacturing facilities. 32 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES In the fourth quarter, our selling, general and administrative expenses decreased $1.8 million, or 26.6%, to $5.0 million from $6.8 million in the third quarter. As a percentage of total sales these expenses decreased to 18.2% in the fourth quarter, from 31.4% in the third quarter, primarily due to the increase in sales volume. These expenses in the fourth quarter reflect certain year-end adjustments to accrued expenses, which reduced total selling, general and administrative expenses. While we are continuing to focus on opportunities to decrease our selling, general and administrative expenses, we expect the level of such expenses in future quarters to more closely approximate the amount of such expenses in the third quarter. RESEARCH AND DEVELOPMENT EXPENSES Our research and development expenses reflect internally funded research and development programs. Research and development expenses were $2.6 million, or 9.6% of sales, for the fourth quarter, as compared to $2.3 million, or 10.8% of sales, for the third quarter. We have increased the level of spending in research and development to accelerate new product introductions and we expect our level of spending to remain at increased levels, as a percentage of sales, in future periods. RESTRUCTURING, ACQUISITION AND OTHER CHARGES In connection with our restructuring plan, we undertook various actions to improve our cost structure. As a result, we recorded restructuring and other related charges of $2.3 million during the third quarter. These charges included severance costs related to reductions in headcount, costs associated with the closure and combination of certain facilities and the write-off of non-performing operating assets. In the third quarter, we also recorded a charge of $4.8 million to reduce the carrying value of goodwill related to our 1998 acquisition of Phoenix Power Systems, Inc. to an amount representative of the current appraised value of that asset. Also, in the third quarter, we recorded a charge of $0.5 million related to in-process technology acquired in connection with our acquisition of Gateworks Corporation in September 2000. We have completed the facilities and organizational consolidation program started as part of our restructuring plan, and therefore, we did not record any additional charges related to the restructuring plan in the fourth quarter and we do not expect to incur any such additional charges in the future. OPERATING LOSS As a result of the factors mentioned above, the operating loss was $0.9 million for the fourth quarter as compared to an operating loss of $15.6 million for the third quarter. Excluding restructuring, acquisition and other charges, operating loss was $0.9 million for the fourth quarter as compared to $8.1 million for the third quarter. 33 COMPARISON AND DISCUSSION OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999, THE FIVE MONTHS ENDED DECEMBER 31, 1999, AND THE FISCAL YEARS ENDED JULY 31, 1999 AND 1998 The following table sets forth, for the periods indicated, our selected operating data, expressed as a percentage of sales.
YEARS ENDED FIVE MONTHS YEARS ENDED JULY 31, ENDED DECEMBER 31, --------------------------- DECEMBER 31, --------------------------- 1998 1999 1999 1999 2000 ----------- ----------- ----------- ---------- ------------ Continuing Operations: Sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales.................................. 62.2 68.1 76.8 71.9 77.7 ----------- ----------- ----------- ---------- ------------ Gross profit................................... 37.8 31.9 23.2 28.1 22.3 Operating expenses: Selling, general and administrative.......... 24.2 25.3 33.1 26.5 25.7 Research and development..................... 7.5 6.6 7.1 6.2 8.5 Restructuring, acquisition and other charges. 5.0 2.6 7.6 5.1 8.9 ----------- ----------- ----------- ---------- ------------ Total operating expenses................... 36.7 34.5 47.8 37.8 43.1 ----------- ----------- ----------- ---------- ------------ Operating income (loss)........................ 1.1 (2.6) (24.6) (9.7) (20.8) Interest expense............................... (0.5) (0.4) (0.3) (0.3) (1.4) Interest income and other, net................. 1.7 0.6 (0.1) 0.5 -- ----------- ----------- ----------- ---------- ------------ Income (loss) from continuing operations before income taxes and minority interest........... 2.3 (2.4) (25.0) (9.5) (22.2) Provision (credit) for income taxes............ 0.5 (6.3) (9.2) (9.6) (6.1) Minority interest in net loss of subsidiaries.. -- -- -- -- (0.2) ----------- ----------- ----------- ---------- ------------ Income (loss) from continuing operations....... 1.8 3.9 (15.8) 0.1 (15.9) Discontinued operations, net of tax: Income (loss) from operations.................. (4.0) 6.9 (14.1) 1.7 (2.8) Gain (provision for estimated loss) on disposal -- -- (5.6) (2.0) 2.8 ----------- ----------- ----------- ---------- ------------ Net income (loss)................................. (2.2)% 10.8% (35.5)% (0.2)% (15.9)% =========== =========== =========== ========== ============
The following table sets forth sales, gross profit and gross profit as a percentage of sales for each of our continuing business segments.
YEARS ENDED FIVE MONTHS YEARS ENDED JULY 31, ENDED DECEMBER 31, ---------------------------- DECEMBER 31, --------------------------- 1998 1999 1999 1999 2000 ------------ ----------- ---------- ------------ ----------- (dollar amounts in thousands) Electronic Components Group: Sales....................................... $35,166 $ 37,783 $ 9,143 $ 29,336 $ 39,139 Gross profit................................ 14,884 12,415 543 6,238 11,146 Gross profit as a percentage of sales....... 42.3% 32.9% 5.9% 21.3% 28.5% I-Bus/Phoenix Power and Computing Systems: Sales....................................... $42,848 $ 65,095 $ 27,720 $ 74,275 $ 63,208 Gross profit................................ 14,560 20,419 7,998 22,848 11,729 Gross profit as a percentage of sales....... 34.0% 31.4% 28.9% 30.8% 18.6% Consolidated (from continuing operations): Sales....................................... $78,014 $ 102,878 $ 36,863 $103,611 $102,347 Gross profit................................ 29,444 32,834 8,541 29,086 22,875 Gross profit as a percentage of sales....... 37.7% 31.9% 23.2% 28.1% 22.3%
34 SALES Sales from continuing operations for the year ended December 31, 2000 were $102.3 million, reflecting a $1.3 million, or 1.2%, decrease from sales of $103.6 million for the year ended December 31, 1999. The decrease in sales from the prior year is primarily the result of the conclusion of a major I-Bus/Phoenix supply agreement during the current year, as well as the elimination of revenue from licensing and strategic transactions, which made a contribution to revenue in the prior year, offset by increases in sales in the current year in our Electronic Components Group segment. The major supply agreement contributed sales of $8.6 million in the year ended December 31, 2000, compared to sales of $19.3 million in 1999. Sales in the year ended December 31, 1999 included contributions from licensing and strategic transactions of $1.0 million, which contributed no sales revenue in the current year. Excluding sales from the major supply agreement and from licensing and strategic transactions, sales in the year ended December 31, 2000 were $93.7 million, a $10.4 million, or 12.5%, increase over sales of $83.3 million for the year ended December 31, 1999. In the five months ended December 31, 1999, sales totaled $36.9 million. In the fiscal year ended July 31, 1999, total sales were $102.9 million, an increase of $24.9 million, or 31.9%, from $78.0 million in fiscal year 1998. Sales in the five months ended December 31, 1999 were negatively impacted by reduced revenues from licensing and strategic transactions and by economic issues facing certain customers in the commercial satellite and oil markets. Sales in the fiscal year ended July 31, 1999 increased over the fiscal year ended July 31, 1998 in each of our business segments. Sales to customers outside of the United States totaled $25.8 million and $25.3 million in the calendar years ended December 31, 2000 and 1999, respectively, and $10.7 million, $24.0 million and $14.8 million in the five months ended December 31, 1999 and in the fiscal years ended July 31, 1999 and 1998, respectively. Expansion of our applied computing business in Germany and France and the contribution of sales from our United Kingdom applied computing operation, which was acquired in fiscal year 1998, are the primary drivers for the increased foreign sales beginning in the fiscal year ended July 31, 1999. Sales within each of our continuing business segments is as follows: ELECTRONIC COMPONENTS GROUP. For the year ended December 31, 2000, sales in the Electronic Components Group segment increased $9.8 million, or 33.4%, to $39.1 million from $29.3 million for the year ended December 31, 1999. Sales increased in all product lines of the Electronic Components Group segment during 2000, including a $6.9 million increase in sales in our microelectronics product lines to customers in the commercial satellite market. Sales in our PowerCache ultracapacitor product lines also increased in 2000, despite a $1.0 million decrease in revenue received from technology license agreements, due primarily to shipments made during the fourth quarter in connection with our supply agreement with the Allison Transmission division of General Motors Corporation. In the five months ended December 31, 1999, Electronic Components Group sales totaled $9.1 million, representing lower average monthly sales volumes than those achieved in the fiscal year ended July 31, 1999. The decrease in sales in the five months ended December 31, 1999 is partly attributable to the fact that no revenue was received in the five months ended December 31, 1999 from technology licenses and other collaborative agreements, while $3.7 million of such revenue was received in the fiscal year ended July 31, 1999 in the PowerCache ultracapacitor product lines. In addition, revenues from customers of our microelectronic components product lines in the commercial satellite market decreased in the five months ended December 31, 1999 due to economic issues affecting such customers. Also, over-stock issues at our primary filtered feedthrough customer and weakness in oil and space markets resulted in decreased sales of our filtered feedthroughs and ceramic capacitors late in 1999. In the fiscal year ended July 31, 1999, Electronic Components Group sales increased $2.6 million, to $37.8 million from $35.2 million in the fiscal year ended July 31, 1998. Sales of our filtered feedthroughs and ceramic capacitors contributed to this sales increase due partly to the acquisition of a small manufacturer of ceramic capacitors used in a variety of high-voltage applications, including commercial space, defense and medical equipment, which was combined with the ceramic capacitor product lines in our Carson City, Nevada facility. Partially offsetting the increased product sales, revenue from licenses and collaborative agreements decreased to $3.7 million in the fiscal year ended July 31, 1999 from $7.3 million in the fiscal year ended July 31, 1998. 35 I-BUS/PHOENIX POWER AND COMPUTING SYSTEMS. For the year ended December 31, 2000, I-Bus/Phoenix sales decreased $11.1 million, or 14.9%, to $63.2 million from sales of $74.3 million for the year ended December 31, 1999. For the year ended December 31, 2000, foreign sales represented 34% of our total sales in this segment compared to 32% for the year ended December 31, 1999. Domestic sales in this segment are made principally to OEM customers and are primarily derived from the shipment of power and computing systems that are "designed-in" to the OEMs' products. Beginning in 1998, we strengthened the international presence of this segment through the acquisition of applied computing businesses in England and Germany and through the inception of operations in France. To date, these European businesses have focused primarily on lower-priced standard products. The decrease in sales for the year ended December 31, 2000 is primarily attributable to a decline in revenues from our OEM supply agreement with Siemens ElectroCom L.P. and the United States Postal Service, which concluded in the third quarter of 2000 and was winding down during 2000. This supply agreement contributed sales of $8.6 million in the year ended December 31, 2000, compared to sales of $19.3 million in 1999. Excluding sales from this supply agreement, sales for this segment in 2000 were $54.6 million, or approximately the same as sales of $55.0 million for 1999. Excluding the major supply agreement, sales decreased in the applied computing product lines of this segment during the current year due primarily to the phase-out of certain marginal older technology product lines without a comparable contribution in the current year from new products, which were introduced beginning in the first quarter of 2001. Offsetting reduced applied computing sales, sales within the power quality product lines of this segment increased during the current year. In the five months ended December 31, 1999, sales in this segment totaled $27.7 million. In the fiscal year ended July 31, 1999, I-Bus/Phoenix sales increased $22.3 million, or 51.9%, to $65.1 million from $42.8 million in the fiscal year ended July 31, 1998. The increase in sales in the fiscal year ended July 31, 1999, was partly attributable to an increase in European sales due to the expansion of our applied computing businesses in Germany and France and the contribution of sales from our United Kingdom applied computing operation, which was acquired in the fiscal year ended July 31, 1998. In addition, sales increased in the fiscal year ended July 31, 1999 in both the segment's power quality product lines, following the February 1998 acquisition of Phoenix Power Systems, Inc., and its applied computing product lines due to new design-in wins for customized OEM products, including the major supply agreement with Siemens ElectroCom L.P. and the United States Postal Service. Partially offsetting these increases was the completion in the second quarter of the fiscal year ended July 31, 1998 of sales to a single, long-standing OEM customer under a multi-year program and the curtailment at the end of the fiscal year ended July 31, 1998 of a program with Digital Equipment Corporation due to its acquisition by Compaq Computers. While this segment does market certain standard products, and the segment continues to expand its presence in Europe, sales under large OEM programs remain a critical element of this business. As a current enhancement of our marketing strategy, we have engaged a network of independent sales representatives in the United States and certain territories outside of the United States with the dual aim of generating direct sales, as well as leads for additional OEM design-in opportunities. In addition, the recent integration of our applied computing and power quality businesses should improve the international sales of the power quality products and services by providing access to the segment's existing international sales channels to those product lines. If sales of OEM products do not achieve the levels projected by the OEM, or if OEM projects are curtailed due to consolidations or other market conditions, we may be unable to offset such loss of sales. GROSS PROFIT In the year ended December 31, 2000, our gross profit was $22.9 million, or 22.3% of sales, compared to $29.1 million, or 28.1% of sales, in the year ended December 31, 1999. Gross profit and gross profit as a percentage of sales were negatively impacted in the year ended December 31, 2000 by reduced sales volume in the year, primarily during the third quarter of 2000, which was inadequate to fully absorb fixed manufacturing costs. In addition, the reduced gross profit in the current year reflects costs incurred in the current year in connection with training personnel in improved manufacturing processes and certain write-offs of inventories related to discontinued product lines or deemed excess or obsolete. In the five months ended December 31, 1999, our gross profit was $8.5 million, or 23.2% of sales, a substantial decrease from prior years. Reduced sales volumes, decreases in high margin revenues from licenses and other collaborative agreements, and certain write-offs of inventories determined to be excess or obsolete were the primary reasons for the reduced gross margins during the five months ended December 31, 1999. 36 In the fiscal year ended July 31, 1999, our gross profit increased $3.4 million, or 11.5%, to $32.8 million as compared to $29.4 million in the fiscal year ended July 31, 1998. As a percentage of sales, gross profit was 31.9% in the fiscal year ended July 31, 1999 compared to 37.7% in the fiscal year ended July 31, 1998. Reductions in gross margins as a percentage of sales from the fiscal year ended July 31, 1998 to the fiscal year ended July 31, 1999 resulted from a combination of factors, including an increase in revenues from sales of applied computing systems with significant third party content, upon which lower overall gross profit margins are realized; a decrease in high margin development funding and technology license fees; and changes in the mix of products and services sold. We believe that our improved manufacturing and other operational capabilities obtained through the completion of the restructuring plan in October 2000, will result in improved gross margins in future periods. Gross profit within each of our continuing business segments is as follows: ELECTRONIC COMPONENTS GROUP. In the year ended December 31, 2000, gross profit in the Electronic Components Group segment increased by $4.9 million, or 78.7%, to $11.1 million from $6.2 million in the year ended December 31, 1999. As a percentage of sales, gross profit improved to 28.5% in the current year from 21.3% in the prior year. The increase in gross profit for the current year is the result of increased sales volume and an improved cost structure, primarily in our microelectronics and PowerCache product lines, offset by a reduction in gross margins associated with revenue from licenses and other collaborative agreements and by costs incurred in connection with training personnel in improved manufacturing processes and certain write-offs of inventories related to discontinued product lines or deemed excess or obsolete. The increase in gross profit as a percentage of sales also reflects the increased sales volume and the impact of the process and cost improvements in this business segment. In our PowerCache ultracapacitor product line, we continue to make required infrastructure and other investments which negatively impact gross profit at current sales volumes. Although gross margins have improved in the PowerCache business, such margins continue to reduce the overall gross margins for the Electronic Components Group segment. Gross profit for the Electronic Components Group segment was $0.5 million in the five months ended December 31, 1999, or 5.9% of sales. Gross profit in this segment was significantly impacted in the five months ended December 31, 1999 by unabsorbed overhead and other production costs in the PowerCache ultracapacitor business area, which was in the start-up phase of volume production, resulting in negative gross margins. In addition, this business area received no contribution in the five months ended December 31, 1999 from high margin revenue from licenses and other collaborative agreements. Low sales volumes in the other Electronic Components Group business areas also contributed to reduced gross margins in the five months ended December 31, 1999. In addition, charges were recorded in our filtered feedthrough, ceramic capacitors and microelectronics product lines in the five months ended December 31, 1999 to write-off certain inventories deemed excess or obsolete, also impacting gross margins. In the fiscal year ended July 31, 1999, Electronic Components Group gross profit decreased $2.5 million to $12.4 million from $14.9 million in the fiscal year ended July 31, 1998. As a percentage of sales, gross profit decreased to 32.9% in fiscal year 1999 from 42.3% in fiscal year 1998. The decrease in gross profit primarily reflected a decrease in high margin development funding and technology license fees of $3.7 million, and also reflected a lower margin mix of products and services. This decrease also reflected changes in our pricing strategies in response to competitive pressures, as we continued to improve our penetration in various markets. I-BUS/PHOENIX POWER AND COMPUTING SYSTEMS. In the year ended December 31, 2000, I-Bus/Phoenix gross profit decreased by $11.1 million, or 48.7%, to $11.7 million from $22.8 million in the year ended December 31, 1999. As a percentage of sales, gross profit decreased to 18.6% in the current year, as compared to 30.8% in the year ended December 31, 1999. The decrease in gross profit is primarily attributable to the impact of reduced sales volume for this segment in the current year. In addition, this segment has experienced a change in product mix to include a higher proportion of lower-margin power quality products, as compared to higher margin applied computing solutions. The reduced gross profit in the current year also reflects costs incurred in the current year in connection with training personnel in improved manufacturing processes and certain write-offs of inventories related to discontinued product lines or deemed excess or obsolete. 37 In the five months ended December 31, 1999, I-Bus/Phoenix gross profit totaled $8.0 million, or 28.9% of sales, representing a decrease in gross margin as a percentage of sales from prior periods. This decrease was primarily attributable to a lower margin mix of product sales in the five months ended December 31, 1999 and certain write-offs of excess and obsolete inventories. In the fiscal year ended July 31, 1999, I-Bus/Phoenix gross profit increased $5.8 million, or 40.2%, to $20.4 million from $14.6 million in the fiscal year ended July 31, 1998. As a percentage of sales, gross profit decreased to 31.4% in the fiscal year ended July 31, 1999 from 34.0% in the fiscal year ended July 31, 1998. This decrease was primarily due to a change in sales mix which, in the fiscal year ended July 31, 1998, included certain higher margin products that were near the end of their life cycle, with no such sales in the fiscal year ended July 31, 1999. In addition, a higher proportion of our revenues in the fiscal year ended July 31, 1999, were derived from contracts which include applied computing systems with greater third party content, upon which lower overall gross profit margins were realized. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES In the year ended December 31, 2000, our selling, general and administrative expenses decreased $1.2 million, or 4.7%, to $26.3 million from $27.5 million in the year ended December 31, 1999. As a percentage of total sales, these expenses decreased to 25.7% in the year ended December 31, 2000, from 26.5% in the year ended December 31, 1999. We are continuing to focus on opportunities to decrease our selling, general and administrative expenses. In the five months ended December 31, 1999, selling, general and administrative expenses were approximately $12.2 million, or 33.1% of sales. The increase in these expenses was primarily in support of our continuing growth and the continuing expansion into Europe by I-Bus/Phoenix. The five months ended December 31, 1999 also included $750,000 of severance costs related to our former CEO. In the fiscal year ended July 31, 1999, our selling, general and administrative expenses increased $7.2 million, or 37.9%, to $26.1 million from $18.9 million in the fiscal year ended July 31, 1998. As a percentage of total sales, selling, general and administrative expenses increased to 25.3% in the fiscal year ended July 31, 1999 from 24.2% in the fiscal year ended July 31, 1998. The increase in these expenses was primarily in support of our sales growth, including the businesses acquired in the fiscal years ended 1999 and 1998. In addition, we made certain investments related to administrative infrastructure and in administrative and sales support which increased the expenses as a percentage of sales. RESEARCH AND DEVELOPMENT EXPENSES Our research and development expenses reflect internally funded research and development programs. Research and development expenses were $8.7 million, or 8.5% of sales, for the first three years ended December 31, 2000, as compared to $6.4 million, or 6.2% of sales, for the year ended December 31, 1999. We have increased our level of spending in research and development to accelerate new product introductions and we expect this level of spending to remain at increased levels in future periods. Research and development expenses were $2.6 million, $6.8 million and $5.8 million for the five months ended December 31, 1999 and the fiscal years ended July 31, 1999 and 1998, respectively. As a percentage of sales, research and development expenses were 7.1% in the five months ended December 31, 1999, 6.6% in the fiscal year ended July 31, 1999, and 7.5% in the fiscal year ended July 31, 1998. 38 RESTRUCTURING, ACQUISITION AND OTHER CHARGES In connection with the restructuring plan, we undertook various actions to improve our cost structure. As a result, we recorded restructuring and other related charges of $3.9 million during the first three quarters of the year ended December 31, 2000. These charges included severance costs related to reductions in personnel, costs associated with the closure and combination of certain facilities and the write-off of non-performing operating assets. We completed the facilities and organizational consolidation program started as part of our restructuring plan and do not expect to record any additional charges related to the restructuring plan. In the three months ended September 30, 2000, we also recorded a charge of $4.8 million to reduce the carrying value of goodwill related to our 1998 acquisition of Phoenix Power Systems, Inc. to an amount representative of the current appraised value of that asset. Also, in the three months ended September 30, 2000, we recorded a charge of $0.5 million related to in-process technology acquired in connection with our acquisition of Gateworks Corporation in September 2000. We also recorded restructuring and other related charges in connection with the restructuring plan in the five months ended December 31, 1999 totaling approximately $2.8 million. During the fiscal year ended July 31, 1999, we recorded restructuring, acquisition and other charges of approximately $2.6 million. Of these charges, approximately $1.6 million consisted of direct acquisition costs for business combinations accounted for using the pooling-of-interests method. The remaining $1.0 million charge consisted primarily of amounts provided for revised estimates of costs to resolve certain environmental and legal contingencies which occurred in prior years, as well as other restructuring provisions, including employee and facility expenses, related to decisions made in July 1999 to reduce certain administrative infrastructure in Europe and the United States. We recorded a $3.9 million charge in the fiscal year ended July 31, 1998 related to the acquisition of two businesses, including transaction costs for a business combination accounted for as a pooling-of-interest, and the appraised amount of acquired in-process research and development for the business combination accounted for as a purchase. INTEREST EXPENSE Interest expense increased to $1.4 million in the year ended December 31, 2000 from $0.3 million in the prior year. The increased interest expense relates to higher borrowing levels in the current year compared to the prior year. At December 31, 2000, we had $22.7 million outstanding under our bank line-of-credit. We expect borrowings and related interest expense to decrease in the second quarter of 2001, following the sale of our defense contracting business by the end of March 2001, the proceeds of which will be used to repay debt. Interest expense was $112,000, $404,000 and $338,000 in the five months ended December 31, 1999 and in the fiscal years ended July 31, 1999 and 1998, respectively. INTEREST INCOME AND OTHER, NET Interest income and other, net, consisting primarily of interest income, foreign currency transaction gains and losses and gains and losses on dispositions of fixed assets, was $9,000 in the year ended December 31, 2000 and $501,000 in the year ended December 31, 1999. Interest income has decreased reflecting lower average cash balances in the year ended December 31, 2000. Interest income and other, net, was $(29,000), $565,000 and $1.3 million in the five months ended December 31, 1999 and in the fiscal years ended July 31, 1999 and 1998, respectively. The decrease in interest income reflects lower average cash balances in both the five months ended December 31, 1999 and in the fiscal year ended July 31, 1999. During the fiscal year ended July 31, 1998, we received proceeds of approximately $47 million from a follow-on offering of our common stock. Such cash proceeds were used to fund growth in operations and acquisitions through December 31, 1999. 39 PROVISION (CREDIT) FOR INCOME TAXES The credit for income taxes for the year ended December 31, 2000 reflects our expected world-wide tax rate for the current fiscal year. Our effective tax rate was reduced by the fact that no tax credit was provided for the $4.8 million charge recorded to reduce the carrying value of goodwill since that amount will never be deductible for tax purposes. In future years, we will continue to provide income taxes approximating applicable statutory rates, although cash payments for taxes will be substantially lower in the near-term as tax loss carryforwards are utilized. We have net deferred tax assets of approximately $24.6 million at December 31, 2000, which relate primarily to net operating loss carryforwards that we expect to use as a result of expected gains on dispositions of discontinued operations and future income from operations. For the year ended December 31, 1999, our credit for income taxes included a credit of $4.3 million, representing the reversal of a valuation allowance provided in previous years against certain deferred tax benefits. The valuation allowance was reversed based on our determination that it had become more likely than not that such deferred tax benefits will be realized in the future. The deferred income tax credit was partially offset by certain foreign and state income tax expense. The credit for income taxes in the five months ended December 31, 1999 reflected our expected world-wide tax rate for that period. The credit for income taxes for the fiscal year ended July 31, 1999 includes the credit of $4.3 million, discussed above, representing the reversal of a valuation allowance provided in previous years against certain deferred tax benefits. Our provision for income taxes for the fiscal year ended July 31, 1998 related primarily to taxes of the businesses acquired in the fiscal year ended July 31, 1999 using the pooling-of-interests method. MINORITY INTEREST IN NET INCOME (LOSS) OF SUBSIDIARIES Minority interest in net income (loss) of subsidiaries was $(181,000) for the year ended December 31, 2000 and $4,000 for the year ended December 31, 1999. The reduction in our net loss results from losses incurred by our minority-owned subsidiaries. Minority interest in net income (loss) of subsidiaries was not material in the five months ended December 31, 1999 or in the fiscal years ended July 31, 1999 and 1998. INCOME (LOSS) FROM CONTINUING OPERATIONS As a result of the factors mentioned above, income (loss) from continuing operations was $(16.3) million and $46,000 for the years ended December 31, 2000 and 1999, respectively. As a result of the factors mentioned above, the income (loss) from continuing operations was $(5.8) million for the five months ended December 31, 1999, compared to $3.9 million and $1.4 million in the fiscal years ended July 31, 1999 and 1998, respectively. DISCONTINUED OPERATIONS In connection with the restructuring plan, we divested three of our businesses in 2000: - our high voltage wound film capacitors; - high voltage power supplies; and - time card and job cost accounting software businesses. 40 In February 2000, we sold the high voltage wound film capacitors and high voltage power supplies businesses for cash of $3.5 million, approximately the book value of the net assets sold as of that date. In addition, the buyer assumed certain liabilities of the businesses, including a long-term lease for the facility the businesses occupied, which extended through 2006 with annual rent of approximately $0.5 million. In November 2000, we sold our time card and job cost accounting software business for cash of $2.5 million and shares of common stock of the buyer with an immaterial value. In the fourth quarter of 2000, we also received cash of approximately $0.7 million related to our equity investment in an unconsolidated entity, which was classified as a discontinued operation. In December 1999, we recorded provisions of approximately $2.1 million, net of tax, for estimated losses on the sale of these discontinued businesses. Based on the actual proceeds received and the net assets of the discontinued businesses at their respective dates of sale, we reversed the provisions we estimated in December 1999 and recorded an aggregate gain on these sales of $2.9 million, net of tax, including the reversal. In late 2000, we decided to focus on our Electronic Components Group and I-Bus/Phoenix businesses. Accordingly, in late 2000, we offered for sale our defense contracting business and signed letters of intent to sell the business in separate transactions with two buyers. Both transactions are expected to be completed by March 31, 2001. Also, we are now seeking strategic alternatives for our PurePulse business, which we expect will result in the sale of all or a majority of the business in 2001. Accordingly, both the defense contracting business and PurePulse have been classified as discontinued operations for financial reporting purposes. See Note 10 to the "Consolidated Financial Statements" included elsewhere in this Form 10-K. Income (loss) from operations of these discontinued businesses was $(2.9) million in the year ended December 31, 2000, compared to $1.8 million for the year ended December 31, 1999 and $(5.2) million, $7.1 million and $(3.1) million for the five months ended December 31, 1999 and the fiscal years ended July 31, 1999 and 1998, respectively. The income from operations of the discontinued businesses for the year ended December 31, 1999 and the fiscal year ended July 31, 1999 includes a $1.7 million tax credit representing the reversal of an income tax valuation allowance provided in previous years against certain deferred tax assets. LIQUIDITY AND CAPITAL RESOURCES We have historically relied on a combination of cash on hand, internally generated funds, proceeds from sales of stock and bank borrowings to finance our working capital requirements and capital expenditures. In the fiscal year ended July 31, 1998, we received cash of $47.1 million in connection with a public offering of our stock. In addition, in the fiscal years ended July 31, 1999 and December 31, 2000, we received approximately $1.7 million and $2.9 million, respectively, from the exercise of stock options and purchases under employee stock purchase plans. Cash used by continuing operations in the year ended December 31, 2000 was approximately $15.3 million, as compared to $13.0 million in the year ended December 31, 1999. In the current year, the use of cash was primarily attributable to operating losses, cash expenditures in connection with completing our restructuring plan and certain increases in working capital. Capital expenditures in the years ended December 31, 2000 and 1999 were $11.8 million and $5.2 million, respectively. The capital expenditures in 2000 include approximately $8.9 million related to the design, construction, remodeling and outfitting of our manufacturing facilities. The remaining expenditures relate primarily to other capital assets needed to support growth. We have ordered additional equipment for volume manufacturing of ultracapacitors and for the manufacture of EMI filter capacitors. We may also consider leasing facilities or manufacturing equipment, or both, or may satisfy high-volume manufacturing requirements through outsourcing or under licensing arrangements with third parties. If we decide to construct additional facilities or purchase high-volume manufacturing equipment, a significant amount of capital may be required. In the year ended December 31, 2000, we also received cash of $6.0 million in connection with sales of businesses and used cash of $4.5 million in connection with the payment of an earn-out obligation related to a 1998 acquisition, and $500,000 of cash was paid in connection with the September 2000 acquisition of Gateworks Corporation. 41 Cash used by continuing operations in the five months ended December 31, 1999 was approximately $3.5 million, as compared to $13.4 million and $1.8 million in fiscal years 1999 and 1998, respectively. In the five months ended December 31, 1999, the operating losses were partially offset by decreases in operating assets, primarily accounts receivable. In the fiscal years ended July 31, 1999 and 1998, the use of cash was primarily attributable to increases in accounts receivable and inventories, due both to acquired businesses and in support of increased sales. Our capital expenditures in the five months ended December 31, 1999 and in the fiscal years ended July 31, 1999 and 1998 were $1.6 million, $5.5 million and $4.6 million, respectively, and related primarily to production and other capital assets needed to support growth in all of our business units. We believe that funds on hand, together with cash generated from operations, cash expected to be received from the divestiture of certain businesses and funds available under our bank credit agreement, will be sufficient to finance our operations and our capital expenditures for 2001, as well as finance remaining payments required in connection with the restructuring plan. In addition to addressing manufacturing requirements, we may also, from time-to-time, consider acquisitions of complementary businesses, products or technologies, which may require additional funding. Sources of additional funding for these purposes could include cash and cash equivalents, cash flow from operations, borrowings under the existing bank credit agreement, and additional debt or equity financings. There can be no assurance that we will be able to obtain additional sources of financing on favorable terms, if at all, at such time or times as we may require such capital. We had borrowings of $22.7 million outstanding under a bank credit agreement as of December 31, 2000. The bank was repaid in full with proceeds of our new bank credit agreement and the old agreement was terminated effective February 26, 2001. Our bank debt will be reduced following the sale of our defense contracting business, which is expected to be completed by March 31, 2001. NEW BANK CREDIT AGREEMENT In February 2001, we and all of our U.S. subsidiaries entered into a Loan and Security Agreement with Comerica Bank - California. The agreement consists of a $15.0 million term loan and a revolving credit facility. The term loan is due on the earlier of June 15, 2001, or the date we complete the sale of our defense contracting business. If we sell only part of this business for proceeds less than that necessary to repay the term loan, we must make a partial payment on the term loan. The term loan bears interest at the bank's reference rate, plus 1.50%. If we fail to repay the term loan by June 15, 2001, we must grant Comerica Bank a security interest in our real property, and we will need to negotiate with the bank a new due date, payment schedule and other terms. There can be no assurance that we will be able to negotiate such terms on a favorable basis. The current borrowing availability under the revolving credit facility is determined from a borrowing base, consisting of a portion of our accounts receivable and inventory, but the total availability will not exceed $15.0 million. After we sell our defense contracting business, repay the term loan and have a profit for one fiscal quarter, the availability under the revolving credit facility will be $15.0 million and will no longer be determined from a borrowing base. Amounts borrowed as revolving loans bear interest, at our option, at either the bank's reference rate plus 1.0%, or the LIBOR rate plus 3.0%. We may prepay revolving loans at any time, and all amounts borrowed are due on May 30, 2002. On March 15, 2001, $15.0 million was outstanding under the Term Loan and $10.0 million was outstanding under the revolving facility. The bank credit facility contains financial and other covenants and certain restrictions on our ability to sell assets, engage in mergers or acquisitions, incur additional indebtedness or pay dividends on our common stock. As of the date of this Form 10-K, we are in compliance with all required covenants. The bank credit facility is secured by all of our assets in the United States, except for our real property, and the pledge of two-thirds of the stock of certain of our foreign subsidiaries. 42 MINORITY EQUITY INTERESTS IN SUBSIDIARIES AND SUBSIDIARY OPTION PROGRAMS Each of the Electronic Components Group, I-Bus/Phoenix and PurePulse have minority equity investors. These investors are former strategic partners associated with relationships established in the past, former shareholders of companies acquired using our subsidiaries' stock and former and current employees who have exercised stock options in those entities. As of December 31, 2000, minority investors owned, of the outstanding shares, approximately 5.1% of the Electronic Components Group, 6.3% of I-Bus/Phoenix and 19.3% percent of PurePulse. In addition, each such subsidiary has an employee stock option plan that permits the issuance of incentive and nonqualified stock options to purchase subsidiary common stock. The option programs at I-Bus/Phoenix and at PurePulse are active and the Electronic Components Group program is not active, although options issued previously remain outstanding. As of mid-2000, key employees of I-Bus/Phoenix and PurePulse are eligible for option grants in their respective subsidiary plans and are not eligible for grants at the parent company level. Key parent company and Electronic Components Group employees are eligible for option grants at the parent company level, but not in any subsidiaries. The option plans are intended to encourage an entrepreneurial atmosphere in each business segment, providing focused incentives to appreciate the equity value of each business. Options that are "in-the-money" at the subsidiary level will have a negative impact on our earnings per share. We expect to report diluted earnings per share in future quarters due to in-the-money subsidiary options. Except to the extent exercised, however, such subsidiary options will not affect our consolidated net income as reported in our consolidated statement of operations. Such options, when and if exercised, will dilute our actual ownership interest in our subsidiaries, thus reducing our share of the net income, potential dividends or distributions and proceeds of any sale or other disposition of such subsidiary. The equity interest upon exercise of stock options in the subsidiaries is accounted for as a minority interest. At December 31, 2000, the potential percentage ownership interest attributable to exercisable subsidiary options was, on a diluted basis, approximately 3% of the Electronic Components Group, 3% percent of I-Bus/Phoenix and 5% of PurePulse. INFLATION AND CHANGES IN PRICES Generally, we have been able to increase prices to offset inflation-related increased costs in our commercial businesses. CONVERSION TO THE EURO CURRENCY On January 1, 1999, certain member countries of the European Union established fixed conversion rates between their existing currencies and the European Union's common currency (euro). The transition period for the introduction of the euro ends June 30, 2002. Issues we face as a result of the introduction of the euro include converting information technology systems, reassessing currency risk, negotiating and amending licensing agreements and contracts, and processing tax and accounting records. We are addressing these issues and we do not expect the conversion to the euro to have a material effect on our financial condition or results of operations. FORWARD-LOOKING STATEMENTS To the extent that the above discussion goes beyond historical information and indicates results or developments which we plan or expect to achieve, these forward-looking statements are identified by the use of terms such as "expected," "anticipates," "believes," "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, and such differences could be material. We undertake no obligation to revise these forward-looking statements to reflect future events or circumstances. You are referred to the "Risk Factors" section of this Form 10-K for a further and more detailed discussion of certain of those factors. 43 NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (later amended by Statement Nos. 137 and 138), which we are required to adopt beginning January 1, 2001. Statement No. 133 requires us to recognize all derivatives as either assets or liabilities measured at fair value. The accounting for changes in the fair value of a derivative depends on the use of the derivative. Because we make minimal use of derivatives and hedges, we do not anticipate that the adoption of Statement No. 133 will have a significant effect on the results of operations or our financial position. In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. SAB 101 provides guidance in applying generally accepted accounting principles to revenue recognition in financial statements. The adoption of SAB 101 in the current fiscal year did not have a material effect on our financial statements. In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation. FIN 44 clarifies certain issues in the application of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. FIN 44 is effective July 1, 2000, but certain provisions cover specific events that occur after either December 15, 1998 or January 12, 2000. The adoption of FIN 44 did not have a material impact on our financial statements. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK We have not entered into or invested in any instruments that are subject to market risk, except as follows. We face exposure to financial market risks, including adverse movements in foreign currency exchange rates and changes in interest rates. These exposures may change over time and could have a material adverse impact on our financial results. Our primary foreign currency exposure has been related to local currency revenue and operating expenses in Europe. As a result of our international operations, changes in foreign currency exchange rates impact the United States dollar amount of our revenue and expenses. Historically, we have not hedged specific currency exposures as gains and losses on foreign currency transactions have not been material to date. At December 31, 2000, we had $22.7 million outstanding related to variable rate U.S dollar denominated short-term debt. The carrying value of these short-term borrowings approximates fair value due to the short maturities of these instruments. Assuming a hypothetical 10% adverse change in the interest rate, annual interest expense on our short-term borrowings, if the amount outstanding remained unchanged, would increase by approximately $220,000. 44 ITEM 8. FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Ernst & Young LLP, Independent Auditors........................................................46 Consolidated Balance Sheets as of December 31, 1999 and December 31, 2000................................47 Consolidated Statements of Operations for the Fiscal Years Ended July 31, 1998 and 1999, the Five Months Ended December 31, 1999 and the Calendar Years Ended December 31, 1999 (unaudited) and 2000.................................................................................................48 Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended July 31, 1998 and 1999, the Five Months Ended December 31, 1999 and the Calendar Year Ended December 31, 2000..............49 Consolidated Statements of Cash Flows for the Fiscal Years Ended July 31, 1998 and 1999, the Five Months Ended December 31, 1999 and the Calendar Years Ended December 31, 1999 (unaudited) and 2000.................................................................................................50 Notes to Consolidated Financial Statements...............................................................51
45 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Stockholders Maxwell Technologies, Inc. We have audited the accompanying consolidated balance sheets of Maxwell Technologies, Inc. and subsidiaries, as of December 31, 1999 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the two years in the period ended July 31, 1999, for the five months ended December 31, 1999 and for the year ended December 31, 2000. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Maxwell Technologies, Inc. and subsidiaries at December 31, 1999 and 2000, and the consolidated results of their operations and their cash flows for each of the two years in the period ended July 31, 1999, for the five months ended December 31, 1999 and for the year ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP San Diego, California February 9, 2001, except for Note 4, as to which the date is February 26, 2001 and Note 12, as to which the date is March 16, 2001. 46 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, --------------------------------- 1999 2000 --------------- ------------- ASSETS Current assets: Cash and cash equivalents.................................................. $ 2,885 $ 2,686 Trade and other accounts receivable, less allowance for doubtful accounts of $811 and $826 at December 31, 1999 and 2000, respectively............. 15,836 24,652 Inventories................................................................ 21,641 24,769 Prepaid expenses........................................................... 443 1,133 Deferred income taxes...................................................... 12,095 13,031 Net assets of discontinued operations...................................... 23,821 13,963 --------------- ------------- Total current assets..................................................... 76,721 80,234 Property, plant and equipment, net............................................ 14,751 22,567 Goodwill and other non-current assets......................................... 6,679 19,308 --------------- ------------- $ 98,151 $ 122,109 =============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities................................... $ 8,762 $ 21,711 Accrued employee compensation.............................................. 3,347 2,825 Current portion of long-term debt and short-term borrowings................ 288 22,754 --------------- ------------- Total current liabilities................................................ 12,397 47,290 Long-term debt, excluding current portion..................................... 186 -- Minority interest............................................................. 1,152 5,065 Commitments and contingencies Stockholders' equity: Common stock, $0.10 par value per share, 40,000 shares authorized; 9,564 and 9,877 shares issued and outstanding at December 31, 1999 and 2000, respectively.............................................. 957 988 Additional paid-in capital................................................. 78,378 81,204 Notes receivable from executives for stock purchases....................... -- (900) Deferred compensation...................................................... (117) (15) Retained earnings (deficit)................................................ 5,375 (10,942) Accumulated other comprehensive loss - foreign currency translation adjustments.............................................................. (177) (581) --------------- ------------- Total stockholders' equity............................................... 84,416 69,754 --------------- ------------- $ 98,151 $ 122,109 =============== ============= See accompanying notes.
47 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
FIVE MONTHS YEARS ENDED YEARS ENDED JULY 31, ENDED DECEMBER 31, ---------------------- DECEMBER 31, ---------------------- 1998 1999 1999 1999 2000 --------- --------- --------- --------- --------- (Unaudited) Continuing Operations: Sales .................................. $ 78,014 $ 102,878 $ 36,863 $ 103,611 $ 102,347 Cost of sales .......................... 48,570 70,044 28,322 74,525 79,472 --------- --------- --------- --------- --------- Gross profit ........................... 29,444 32,834 8,541 29,086 22,875 Operating expenses: Selling, general and administrative .. 18,901 26,070 12,204 27,501 26,260 Research and development ............. 5,823 6,779 2,618 6,363 8,713 Restructuring, acquisition and other charges ............................ 3,889 2,620 2,801 5,267 9,220 --------- --------- --------- --------- --------- Total operating expenses ........... 28,613 35,469 17,623 39,131 44,193 --------- --------- --------- --------- --------- Operating income (loss) ................ 831 (2,635) (9,082) (10,045) (21,318) Interest expense ....................... (338) (404) (112) (331) (1,430) Interest income and other, net ......... 1,343 565 (29) 501 9 --------- --------- --------- --------- --------- Income (loss) from continuing operations before income taxes and minority interest ..... 1,836 (2,474) (9,223) (9,875) (22,739) Provision (credit) for income taxes .... 413 (6,417) (3,408) (9,925) (6,267) Minority interest in net income (loss) of subsidiaries ...................... -- 4 -- 4 (181) --------- --------- --------- --------- --------- Income (loss) from continuing operations 1,423 3,939 (5,815) 46 (16,291) Discontinued operations, net of tax: Income (loss) from operations .......... (3,130) 7,129 (5,211) 1,766 (2,880) Gain (provision for estimated loss) on disposal ............................. -- -- (2,065) (2,065) 2,854 --------- --------- --------- --------- --------- (3,130) 7,129 (7,276) (299) (26) --------- --------- --------- --------- --------- Net income (loss) ......................... $ (1,707) $ 11,068 $ (13,091) $ (253) $ (16,317) ========= ========= ========= ========= ========= Basic net income (loss) per share: Income (loss) from continuing operations $ 0.17 $ 0.42 $ (0.61) $ -- $ (1.66) Income (loss) from discontinued operations ........................... (0.37) 0.76 (0.76) (0.03) -- --------- --------- --------- --------- --------- $ (0.20) $ 1.18 $ (1.37) $ (0.03) $ (1.66) ========= ========= ========= ========= ========= Diluted net income (loss) per share: Income (loss) from continuing operations $ 0.16 $ 0.40 $ (0.61) $ -- $ (1.66) Income (loss) from discontinued operations ........................... (0.35) 0.72 (0.76) (0.03) (0.01) --------- --------- --------- --------- --------- $ (0.19) $ 1.12 $ (1.37) $ (0.03) $ (1.67) ========= ========= ========= ========= ========= Shares used in computing: Basic net income (loss) per share ...... 8,503 9,414 9,562 9,537 9,801 ========= ========= ========= ========= ========= Diluted net income (loss) per share .... 9,111 9,801 9,562 9,830 9,801 ========= ========= ========= ========= =========
See accompanying notes. 48 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY TWO YEARS ENDED JULY 31, 1999, FIVE MONTHS ENDED DECEMBER 31, 1999 AND YEAR ENDED DECEMBER 31, 2000 (IN THOUSANDS, EXCEPT SHARE DATA)
DEFERRED COMPENSATION AND NOTES ACCUMULATED ADDITIONAL RECEIVABLE RETAINED OTHER TOTAL COMMON PAID-IN FROM EARNINGS COMPREHENSIVE STOCKHOLDERS' STOCK CAPITAL EXECUTIVES (DEFICIT) LOSS EQUITY ---------- ---------- ---------- ---------- ---------- ---------- Balance at July 31, 1997 ................. $ 696 $ 23,246 $ (622) $ 9,297 $ -- $ 32,617 Issuance of 1,500,000 shares in a public stock offering, net of offering costs of $3.9 million ...... 150 46,967 -- -- -- 47,117 Issuance of 356,240 shares under stock purchase and option plans ........... 36 2,348 -- -- -- 2,384 Issuance of 544,785 shares in connection with acquisitions ........ 54 3,270 -- 609 -- 3,933 Repurchase of 162,073 shares for cash under repurchase program ............ (16) (3,586) -- (391) -- (3,993) Amortization of deferred compensation . -- -- 209 -- -- 209 Dividends paid to shareholders of acquired company prior to acquisition -- -- -- (407) -- (407) Comprehensive loss - net loss ......... -- -- -- (1,707) -- (1,707) ---------- ---------- ---------- ---------- ---------- ---------- Balance at July 31, 1998 ................. 920 72,245 (413) 7,401 -- 80,153 Issuance of 296,451 shares under stock purchase and option plans, including related income tax benefit of $4,623 30 7,498 -- -- -- 7,528 Repurchase of 62,316 shares for cash under repurchase program ............ (6) (1,679) -- (41) -- (1,726) Issuance of 113,514 shares in connection with acquisition ......... 12 18 -- 184 -- 214 Amortization of deferred compensation . -- -- 209 -- -- 209 Dividends paid to shareholder of acquired company prior to acquisition -- -- -- (146) -- (146) Comprehensive income (loss): Net income .......................... -- -- -- 11,068 -- 11,068 Other comprehensive loss - foreign currency translation adjustments .. -- -- -- -- (132) (132) ---------- ---------- ---------- ---------- ---------- ---------- Total comprehensive income ............ -- -- -- 11,068 (132) 10,936 ---------- ---------- ---------- ---------- ---------- ---------- Balance at July 31, 1999 ................. 956 78,082 (204) 18,466 (132) 97,168 Issuance of 6,680 shares under stock option plans, including related income tax benefit of $220 .......... 1 296 -- -- -- 297 Amortization of deferred compensation . -- -- 87 -- -- 87 Comprehensive loss: Net loss ............................ -- -- -- (13,091) -- (13,091) Other comprehensive loss - foreign currency translation adjustments .. -- -- -- -- (45) (45) ---------- ---------- ---------- ---------- ---------- ---------- Total comprehensive loss .............. -- -- -- (13,091) (45) (13,136) ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1999 ............. 957 78,378 (117) 5,375 (177) 84,416 Issuance of 267,084 shares under stock purchase and option plans, including related income tax benefit of $219 .. 27 2,330 (900) -- -- 1,457 Issuance of 45,506 shares in connection with acquisition ......... 4 496 -- -- -- 500 Amortization of deferred compensation . -- -- 102 -- -- 102 Comprehensive loss: Net loss ............................ -- -- -- (16,317) -- (16,317) Other comprehensive loss - foreign currency translation adjustments .. -- -- -- -- (404) (404) ---------- ---------- ---------- ---------- ---------- ---------- Total comprehensive loss .............. -- -- -- (16,317) (404) (16,721) ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2000 ............. $ 988 $ 81,204 $ (915) $ (10,942) $ (581) $ 69,754 ========== ========== ========== ========== ========== ==========
See accompanying notes 49 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FIVE MONTHS YEARS ENDED YEARS ENDED JULY 31, ENDED DECEMBER 31, --------------------- DECEMBER 31, -------------------- 1998 1999 1999 1999 2000 -------- -------- ----------- -------- -------- Operating activities: (Unaudited) Income (loss) from continuing operations .... $ 1,423 $ 3,939 $ (5,815) $ 46 $(16,291) Adjustments to reconcile income (loss) from continuing operations to net cash used in operating activities: Depreciation and amortization ........... 2,105 3,161 1,534 3,716 3,678 Non-cash restructuring, acquisition and other charges ..................... 3,000 1,405 2,381 4,292 6,997 Provision for losses on accounts receivable ............................ 714 291 223 514 194 Loss (gain) on sales of property and equipment ............................. 72 76 52 (1) (3) Deferred income taxes ................... 37 (2,674) (4,268) (6,302) (9,312) Minority interest in net income (loss) of subsidiaries ................ -- 4 -- 4 (181) Amortization of deferred compensation ... 209 209 87 196 102 Changes in operating assets and liabilities: Trade and other accounts receivable ... (7,798) (7,435) 7,079 (817) (9,229) Inventories ........................... (4,588) (2,640) (3,277) (3,933) (2,904) Prepaid expenses and other ............ (1,404) (4,117) (242) 375 2,586 Accounts payable and accrued liabilities.......................... 3,898 (2,892) (1,149) (8,807) 9,631 Accrued employee compensation ......... 555 (242) 42 274 (573) Income taxes payable and refundable, net ..................... (45) (2,468) (104) (2,572) -- -------- -------- ----------- -------- -------- Net cash used in operating ............ (1,822) (13,383) (3,457) (13,015) (15,305) activities Investing activities: Purchases of property and equipment ......... (4,607) (5,484) (1,599) (5,236) (11,790) Purchases of businesses, net of cash acquired .................................. (1,308) -- -- -- (5,524) Proceeds from sales of property and equipment ................................. 70 43 3,244 3,225 119 Proceeds from sales of businesses ........... -- -- -- -- 6,000 -------- -------- ----------- -------- -------- Net cash provided by (used in) investing activities ................ (5,845) (5,441) 1,645 (2,011) (11,195) Financing activities: Principal payments on long-term debt and short-term borrowings ..................... (2,339) (2,531) (3,214) (3,012) (4,976) Proceeds from long-term debt and short-term borrowings ..................... 1,197 3,575 -- 1,657 27,256 Proceeds from issuance of Company and subsidiary stock .......................... 50,567 2,946 332 2,055 1,678 Repurchase of Company and subsidiary stock ..................................... (4,000) (1,726) -- (354) -- Dividends paid to shareholders of acquired companies prior to acquisition ... (407) (146) -- -- -- -------- -------- ----------- -------- -------- Net cash provided by (used in) financing activities ................ 45,018 2,118 (2,882) 346 23,958 Net cash provided by (used in) discontinued operations .................................. (17,743) 3,852 (324) 5,229 2,355 Effect of exchange rate changes on cash and cash equivalents ............................ -- (132) (45) (202) (12) -------- -------- ----------- -------- -------- Increase (decrease) in cash and cash equivalents .................................. 19,608 (12,986) (5,063) (9,653) (199) Cash and cash equivalents at beginning of period ....................................... 1,326 20,934 7,948 12,538 2,885 -------- -------- ----------- -------- -------- Cash and cash equivalents at end of period ..... $ 20,934 $ 7,948 $ 2,885 $ 2,885 $ 2,686 ======== ======== =========== ======== ======== Cash (paid) received for: Interest ..................................... $ 1,287 $ 379 $ 86 $ (331) $ (875) Income taxes ................................. $ (577) $ (633) $ (168) $ (801) $ (566)
See accompanying notes. 50 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED) NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Maxwell Technologies, Inc. ("Maxwell" or the "Company") applies industry-leading capabilities in power and computing to develop and commercialize electronic components and power and computing systems for original equipment manufacturer ("OEM") customers in multiple industries, including transportation, telecommunications, consumer and industrial electronics, medical and aerospace. In December 1999, the Company adopted a plan to restructure its operations (the "Restructuring Plan"). This Restructuring Plan (i) consolidated certain commercial business operations and improved their manufacturing and other operational capabilities, (ii) focused the defense contracting business on pulsed power systems and computer-based analysis for government and national laboratories, (iii) focused the application of PUREBRIGHT broad-spectrum pulsed light technology on bioprocessing, medical and consumer water markets, and (iv) provided for the sale of certain non-strategic business operations. The Company also changed its fiscal year to a calendar year effective January 1, 2000. The Company previously reported results on a fiscal year of August 1 through July 31. The Restructuring Plan intended to make Maxwell a product-driven, high-growth company with improving operating results beginning with the fourth quarter of calendar year 2000. Since January 2000, the Company recruited more than 50 key managers with extensive commercial experience in engineering, manufacturing, material procurement, supply chain management, information technology, financial controls and sales and marketing. The Company also invested over $11 million to build and outfit state-of-the-art production facilities, including information technology infrastructure, and implement new manufacturing and business processes and systems to increase its production capacity and improve efficiency and product quality. The Company has experienced a high level of change and has made significant progress since the beginning of 2000 to achieve the objectives of the Restructuring Plan on schedule. In October 2000, the Company completed its facilities and organizational consolidation program, which essentially completed the Company's Restructuring Plan. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Maxwell Technologies, Inc. and its subsidiaries. All significant intercompany transactions and account balances are eliminated in consolidation. The accompanying consolidated financial statements have been reclassified to present the financial position and results of operations of the continuing businesses of the Company. Businesses which the Company intends to sell or discontinue, and certain businesses sold or discontinued by the Company in the current and prior periods, have been classified as discontinued operations in the accompanying consolidated financial statements (Note 10). CASH EQUIVALENTS The Company classifies all highly liquid investments with a maturity of three months or less when purchased as cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market. Inventory cost is determined principally using the average cost (first-in first-out) method. 51 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED) NOTE 1-- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost and are generally depreciated using the straight-line method. Depreciation and amortization is provided over the estimated useful lives of the related assets (three to thirty years). Depreciation and amortization of property, plant and equipment amounted to $2.1 million, $3.1 million, $1.5 million and $3.1 million in the fiscal years ended July 31, 1998 and 1999, the five months ended December 31, 1999 and the year ended December 31, 2000, respectively. CONCENTRATION OF CREDIT RISK Financial instruments which subject the Company to potential concentrations of credit risk consist principally of the Company's accounts receivable. The Company's accounts receivable result from product sales to customers in various industries and in various geographical areas, both domestic and foreign. The Company performs ongoing credit evaluations of its customers and generally requires no collateral. REVENUE RECOGNITION The Company derives substantially all of its revenue from the sale of manufactured products. Such revenue is typically recognized upon shipment of the products. In December 1999, the SEC issued Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB 101"). SAB 101 provides guidance in applying generally accepted accounting principles to revenue recognition in financial statements. The adoption of SAB 101 in the current fiscal year did not have a material effect on the Company's financial statements. FOREIGN CURRENCIES The Company has foreign subsidiaries which conduct manufacturing and sales activities in foreign countries, specifically the United Kingdom, France and Germany. As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the European markets that the Company serves. The operating results of the Company are exposed to changes in exchange rates between the United States dollar and the euro, British pound, French franc, and German mark. The Company does not currently hedge its foreign exchange risk, which is not significant at this time. The assets and liabilities of the Company's foreign subsidiaries are translated from their functional currencies into United States dollars at exchange rates in effect on the balance sheet date, and revenues and expenses are translated at weighted-average rates prevailing during the period. INCOME (LOSS) PER SHARE The Company reports basic and diluted income (loss) per share in accordance with Financial Accounting Standards Board Statement No. 128, EARNINGS PER SHARE ("Statement No. 128"). Basic income (loss) per share is calculated using the weighted average number of common shares outstanding. Diluted income (loss) per share is calculated on the basis of the weighted average number of common shares outstanding plus the dilutive effect of outstanding stock options of the Company and certain of its subsidiaries, assuming their exercise using the "treasury stock" method, and convertible preferred shares outstanding at certain subsidiaries of the Company, assuming their conversion from the original dates of issuance. 52 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED) NOTE 1-- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The following table sets forth the computation of basic and diluted income (loss) per share (in thousands, except per share amounts).
FIVE MONTHS YEARS ENDED YEARS ENDED JULY 31, ENDED DECEMBER 31, --------------------- DECEMBER 31, -------------------- 1998 1999 1999 1999 2000 -------- -------- ----------- -------- -------- (unaudited) Basic: Income (loss) from continuing operations .... $ 1,423 $ 3,939 $ (5,815) $ 46 $(16,291) Income (loss) from discontinued operations ................................ (3,130) 7,129 (7,276) (299) (26) -------- -------- ----------- -------- -------- Net income (loss) ........................... $ (1,707) $ 11,068 $ (13,091) $ (253) $(16,317) ======== ======== =========== ======== ======== Weighted average shares ........................ 8,503 9,414 9,562 9,537 9,801 ======== ======== =========== ======== ======== Basic net income (loss) per share: Income (loss) from continuing operations .... $ 0.17 $ 0.42 $ (0.61) $ -- $ (1.66) Income (loss) from discontinued operations ................................ (0.37) 0.76 (0.76) (0.03) -- -------- -------- ----------- -------- -------- Basic net income (loss) per share ........... $ (0.20) $ 1.18 $ (1.37) $ (0.03) $ (1.66) ======== ======== =========== ======== ======== Diluted: Income (loss) from continuing operations .... $ 1,423 $ 3,939 $ (5,815) $ 46 $(16,291) Effect of majority-owned subsidiaries' dilutive securities ....................... -- -- -- -- -- -------- -------- ----------- -------- -------- Income (loss) from continuing operations available to common stockholders, as adjusted ................................ 1,423 3,939 (5,815) 46 (16,291) Income (loss) from discontinued operations ................................ (3,130) 7,129 (7,276) (299) (26) Effect of majority-owned subsidiaries' dilutive securities ....................... (24) (78) -- -- (116) -------- -------- ----------- -------- -------- Income (loss) from discontinued operations, as adjusted ................... (3,154) 7,051 (7,276) (299) (142) -------- -------- ----------- -------- -------- Net income (loss), as adjusted .............. $ (1,731) $ 10,990 $ (13,091) $ (253) $(16,433) ======== ======== =========== ======== ======== Weighted average shares ........................ 8,503 9,414 9,562 9,537 9,801 Effect of dilutive stock options and other securities .......................... 608 387 -- 293 -- -------- -------- ----------- -------- -------- Weighted average shares, as adjusted ........ 9,111 9,801 9,562 9,830 9,801 ======== ======== =========== ======== ======== Diluted net income (loss) per share: Income (loss) from continuing operations .... $ 0.16 $ 0.40 $ (0.61) $ -- $ (1.66) Income (loss) from discontinued operations ................................ (0.35) 0.72 (0.76) (0.03) (0.01) -------- -------- ----------- -------- -------- Diluted net income (loss) per share ......... $ (0.19) $ 1.12 $ (1.37) $ (0.03) $ (1.67) ======== ======== =========== ======== ========
53 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED) NOTE 1-- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (later amended by Statement Nos. 137 and 138) ("Statement No. 133"), which is required to be adopted by the Company beginning January 1, 2001. Statement No. 133 requires the Company to recognize all derivatives as either assets or liabilities measured at fair value. The accounting for changes in the fair value of a derivative depends on the use of the derivative. The Company adopted Statement No. 133 on January 1, 2001. Because of the Company's minimal use of derivatives and hedges, management does not anticipate that the adoption of Statement No. 133 will have a significant effect on the results of operations or the financial position of the Company. In March 2000, the FASB issued FASB Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION ("FIN 44"). FIN 44 clarifies certain issues in the application of Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. FIN 44 is effective July 1, 2000, but certain provisions cover specific events that occur after either December 15, 1998 or January 12, 2000. The adoption of FIN 44 did not have a material impact on the Company's financial statements. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Several of the industries in which the Company operates are characterized by rapid technological change and short product life cycles. As a result, estimates are required to provide for product returns and product obsolescence as well as other matters. Historically, actual amounts recorded have not varied significantly from estimated amounts. NOTE 2 -- BUSINESS COMBINATIONS In September 2000, the Company's subsidiary, I-Bus/Phoenix, Inc., acquired Gateworks Corporation ("Gateworks"), which designs and supplies embedded computer boards, in a transaction accounted for as a purchase. On the closing date, I-Bus/Phoenix, Inc. paid $500,000 in cash and issued 855,153 new shares of I-Bus/Phoenix, Inc. common stock to the selling shareholders of Gateworks in exchange for all outstanding shares of Gateworks. Additional purchase consideration may be due in the future based upon the sales revenue of Gateworks in calendar year 2001. In connection with this acquisition, I-Bus-Phoenix, Inc. granted certain rights to the selling Gateworks shareholders that permit such shareholders, in January 2002, to require I-Bus/Phoenix, Inc. to repurchase certain of the I-Bus/Phoenix, Inc. shares issued to the shareholders on the closing date for cash not to exceed $2.9 million. The total number of I-Bus/Phoenix, Inc. shares issued to the selling Gateworks shareholders will be adjusted in the first quarter of 2002 to reflect the final purchase price based upon actual Gateworks and I-Bus/Phoenix, Inc. 2001 revenue. For purchase accounting purposes, the closing date payment was valued at approximately $4.4 million, of which $(0.1) million was allocated to the net liabilities acquired and $4.0 million was allocated to goodwill and other identifiable intangible assets, which are being amortized over a period of five years. The remaining $0.5 million related to acquired technologies, which had not achieved technological or commercial feasibility as of the closing date and was charged to operations as of the closing date. The pro forma results of operations of the Company and Gateworks, assuming Gateworks was acquired January 1, 2000, would not be materially different than reported results. 54 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED) NOTE 2 -- BUSINESS COMBINATIONS (CONTINUED) In January 1999, the Company acquired Space Electronics, Inc. ("SEi"), a closely held company that specialized in the manufacture of radiation-shielded microelectronics for the commercial space market. Under the terms of this agreement, which was accounted for as a pooling-of-interests, Maxwell purchased all of the outstanding stock of SEi in exchange for approximately 681,000 shares of Maxwell common stock valued at approximately $25 million on the closing date. The Company incurred direct acquisition costs of approximately $1.1 million, which were charged to operations in the fiscal year ended July 31, 1999. Also in January 1999, the Company purchased a German company, which was formerly a distributor for the Company's applied computing business. The acquisition was accounted for as a pooling-of-interests and consisted of the purchase of all the outstanding stock of the German company in exchange for approximately 114,000 shares of Maxwell common stock valued at approximately $5 million on the closing date. The Company incurred direct acquisition costs of approximately $75,000, which were charged to operations in the fiscal year ended July 31, 1999. The historical results of operations of the acquired company were not material in relation to those of Maxwell and financial information for prior periods was not restated to reflect the merger. During the fiscal year ended July 31, 1999, the Company's retained earnings were restated to reflect the retained earnings of the acquired company as of the acquisition date of approximately $184,000. In December 1998, the Company acquired KD Components, Inc. ("KD"), a privately held company that developed and manufactured high-voltage multilayer ceramic capacitors and switch mode power supply capacitors for military, aerospace, medical and other applications. Under the terms of the agreement, which was accounted for as a pooling-of-interests, Maxwell purchased all of the outstanding stock of KD in exchange for approximately 145,000 shares of Maxwell common stock valued at approximately $5.5 million on the closing date. The Company incurred direct acquisition costs of approximately $120,000, which were charged to operations in the fiscal year ended July 31, 1999. In March 1998, the Company acquired Tri-MAP International, Ltd. ("Tri-MAP"), a privately held, United Kingdom-based manufacturer of industrial-grade PC-compatible computer systems. Tri-MAP was acquired in a stock-for-stock exchange accounted for as a pooling-of-interests for an aggregate of 290,000 shares of Maxwell common stock valued at approximately $7.0 million. The Company incurred direct transaction costs of approximately $0.6 million, which were charged to operations during the fiscal year ended July 31, 1998. Also in March 1998, the Company acquired Phoenix Power Systems, Inc. ("Phoenix Power"), a privately held manufacturer of power quality protection products. Under the terms of this agreement, Maxwell purchased all of the outstanding stock of Phoenix Power for approximately $4 million ($1.3 million in cash and 100,679 shares of Maxwell common stock valued at approximately $2.7 million). The acquisition was accounted for as a purchase. Direct acquisition costs were approximately $95,000. The purchase price was allocated to the estimated fair values of the net tangible and intangible assets acquired, approximately $3 million of which was charged to acquired in-process technology in the fiscal year ended July 31, 1998. The value assigned to other intangible assets was $1.6 million, and is being amortized on a straight-line basis over the estimated economic lives. The terms of the agreement provided for additional contingent purchase price based upon the financial performance of Phoenix Power following the acquisition. In January 2000, the Company agreed to pay $5.0 million of such additional purchase price which was paid in the form of 45,506 shares of the Company's common stock issued in January 2000 and valued at an aggregate of $500,000 and $4.5 million cash, paid in July 2000. The additional purchase price was initially assigned to intangible assets. The book value of such intangible assets was reduced by $4.8 million in the third quarter of 2000, to an amount representing the current appraised value of such assets as of that date (Note 9). 55 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED) NOTE 3 -- BALANCE SHEET DETAILS
Trade and other accounts receivable consists of the following (in thousands): DECEMBER 31, ------------------------------ 1999 2000 ------------- ------------- Amounts billed........................................................ $ 14,415 $ 21,556 Amounts unbilled under long-term contracts............................ 1,421 1,096 Note receivable from related party (Note 12).......................... -- 2,000 ------------- ------------- $ 15,836 $ 24,652 ============= ============= Inventories consist of the following (in thousands): DECEMBER 31, ------------------------------ 1999 2000 ------------- ------------- Finished goods........................................................ $ 2,003 $ 4,927 Work-in-process....................................................... 4,090 5,850 Raw materials and purchased parts..................................... 15,548 13,992 ------------- ------------- $ 21,641 $ 24,769 ============= ============= Property, plant and equipment consists of the following (in thousands): DECEMBER 31, ------------------------------ 1999 2000 ------------- ------------- Land and land improvements............................................ $ 2,738 $ 2,810 Building and building improvements.................................... 6,537 6,748 Machinery, furniture and office equipment............................. 21,684 21,901 Leasehold improvements................................................ 563 1,936 ------------- ------------- 31,522 33,395 Less accumulated depreciation and amortization........................ (17,151) (13,667) ------------- ------------- 14,371 19,728 Construction-in-progress.............................................. 380 2,839 ------------- ------------- $ 14,751 $ 22,567 ============= ============= Goodwill and other non-current assets consists of the following (in thousands): DECEMBER 31, ------------------------------ 1999 2000 ------------- ------------- Goodwill and other intangible assets, net of accumulated amortization of $194 and $701 at December 31, 1999 and 2000, respectively....... $ 1,596 $ 6,276 Note receivable from related party, including accrued interest (Note 12).......................................................... 2,092 -- Equity investments in unconsolidated companies........................ 566 666 Deposits and other.................................................... 2,574 757 Long-term deferred income taxes....................................... (149) 11,609 ------------- ------------- $ 6,679 $ 19,308 ============= ============= Accounts payable and accrued liabilities consists of the following (in thousands): DECEMBER 31, ------------------------------ 1999 2000 ------------- ------------- Accounts payable and accrued liabilities.............................. $ 7,205 $19,722 Accrued restructuring costs........................................... 978 1,127 Customer deposits..................................................... 579 862 ------------- ------------- $ 8,762 $21,711 ============= =============
56 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED) NOTE 4 -- CREDIT AGREEMENT Outstanding borrowings under the Company's bank credit agreement were $22.7 million at December 31, 2000, at a weighted average interest rate of 11.0%. On February 26, 2001, the agreement was terminated and repaid in full with the proceeds of a new bank credit agreement (the "Credit Agreement"). The Credit Agreement provides for (i) revolving borrowings of up to $15.0 million, subject to a borrowing base computation, through May 2002, bearing interest at LIBOR plus 3% or the bank's reference rate plus 1%, and (ii) a term loan of an additional $15.0 million through June 15, 2001, bearing interest at the bank's reference rate plus 1.5% (the "Term Loan"). Borrowings under the Credit Agreement are secured by the Company's assets in the United States, except for real property, and a pledge of two-thirds of the stock of certain foreign subsidiaries. The Company will be required to comply with certain financial covenants effective March 31, 2001. The Company intends to repay the Term Loan with proceeds from the sale of its defense contracting business, which is expected to be completed by March 31, 2001 (Note 10). If this sale is not completed by June 15, 2001, or the proceeds are inadequate to repay the Term Loan in full, the Company and the bank will negotiate terms on which the Term Loan may be extended. Such terms are expected to include a pledge of the Company's real property. NOTE 5 -- STOCK ACTIVITY AND STOCK PLANS STOCK OPTION PLANS In December 1995, the Company adopted the 1995 Stock Option Plan under which, as amended, 3,340,000 shares of common stock were reserved for future grant. The Company's 1999 Director Stock Option Plan, under which 75,000 shares were reserved for future grant, was adopted in 1999 and approved by the Company's shareholders in January 2000. The plans 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. In December 1999, the Company granted 294,030 non-qualified options to the Company's new President and Chief Executive Officer, outside of the Company's other option plans. Options are also outstanding under expired stock option plans, which were superceded by the current plans. Options granted under all stock option plans are for the purchase of common stock of the Company at not less than the stock's fair market value at the date of grant. Employee options are generally exercisable in cumulative annual installments of 20 - 30 percent, while options in the Director Option Plan are exercisable in full one year after date of grant. The options have terms of five to ten years. As of December 31, 2000, the Company has 693,726 shares available for future grant under its stock option plans. 57 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED) NOTE 5 -- STOCK ACTIVITY AND STOCK PLANS (CONTINUED) The following table summarizes total aggregate stock option activity for the period July 31, 1997 through December 31, 2000:
NUMBER WEIGHTED AVERAGE OF SHARES EXERCISE PRICE ------------- -------------------- Balance at July 31, 1997...................... 1,054,680 $ 8.60 Granted..................................... 591,500 $25.23 Exercised................................... (324,825) $ 5.49 Expired or forfeited........................ (56,200) $18.57 ------------- Balance at July 31, 1998...................... 1,265,155 $16.73 Granted..................................... 684,140 $23.87 Exercised................................... (285,400) $ 9.65 Expired or forfeited........................ (41,340) $19.96 ------------- Balance at July 31, 1999...................... 1,622,555 $20.90 Granted..................................... 647,602 $10.42 Exercised................................... (6,680) $ 3.63 Expired or forfeited........................ (106,580) $21.41 ------------- Balance at December 31, 1999.................. 2,156,897 $17.78 Granted..................................... 1,028,092 $12.92 Exercised................................... (81,105) $ 5.74 Expired or forfeited........................ (427,710) $21.44 ------------- Outstanding at December 31, 2000.............. 2,676,174 $15.70 =============
The following table summarizes information concerning outstanding and exercisable Company common stock options at December 31, 2000:
WEIGHTED WEIGHTED AVERAGE WEIGHTED AVERAGE REMAINING AVERAGE RANGE OF EXERCISE OPTIONS EXERCISE CONTRACTUAL OPTIONS EXERCISE PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE ------------------- -------------- ------------ ---------------- ----------- -------------- $ 0.01 - 6.55 127,897 $ 4.37 3.3 years 127,897 $ 4.37 $ 6.56 - 9.82 520,614 $ 8.79 8.7 years 152,164 $ 8.63 $ 9.83 - 13.10 396,092 $ 11.58 8.7 years 23,650 $ 10.80 $ 13.11 - 16.37 616,000 $ 13.85 9.8 years 15,600 $ 13.13 $ 16.38 - 19.65 125,281 $ 18.93 2.8 years 100,529 $ 18.93 $ 19.66 - 22.92 259,750 $ 21.12 8.0 years 93,450 $ 21.08 $ 22.93 - 24.99 242,200 $ 23.88 7.7 years 130,800 $ 23.92 $ 25.00 - 25.00 227,890 $ 25.00 0.3 years 94,954 $ 25.00 $ 25.01 - 32.75 160,450 $ 27.51 7.0 years 121,645 $ 27.76 -------------- ----------- 2,676,174 860,689 ============== ===========
Each of the Company's subsidiaries has minority equity investors. These investors are former strategic partners, former stockholders of businesses acquired using subsidiary stock and former and current employees who have exercised stock options in those entities. As of December 31, 2000, minority investors owned, of the outstanding shares, approximately 5.1% of Maxwell Electronic Components Group, Inc., 6.3% of I-Bus/Phoenix, Inc. and 19.3% percent of PurePulse Technologies, Inc. In addition, each such subsidiary has an employee stock option plan providing for the issuance of incentive and nonqualified stock options to purchase subsidiary common stock. Only the option programs at I-Bus/Phoenix, Inc. and at PurePulse Technologies, Inc. are active with respect to current grants of options. As of mid-2000, certain employees of I-Bus/Phoenix, Inc. and PurePulse Technologies, Inc. are eligible for option grants in their respective subsidiary plans and are not eligible for grants at the Maxwell level. Certain corporate and Maxwell Electronic Components Group, Inc. employees are eligible for option grants at the Maxwell level, but not in any subsidiaries. 58 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED) NOTE 5 -- STOCK ACTIVITY AND STOCK PLANS (CONTINUED) The subsidiary option plans intend to encourage an entrepreneurial atmosphere in each business segment, providing focused incentives to appreciate the equity value of each business. Options that are "in-the-money" at the subsidiary level have a negative impact on Maxwell's earnings per share. The Company expects to report diluted earnings per share in future periods due to in-the-money subsidiary options. Except to the extent exercised, however, such subsidiary options will not affect Maxwell's consolidated net income as reported in its consolidated statement of operations. Such options, when and if exercised, will dilute Maxwell's actual ownership interest in its subsidiaries, thus reducing Maxwell's share of the net income (loss), potential dividends or distributions and proceeds of any sale or other disposition of such subsidiary. The equity interest upon exercise of stock options in the subsidiaries is accounted for as a minority interest. Based on current programs, the potential percentage ownership interest attributable to exercisable subsidiary options as of December 31, 2000 is, on a diluted basis, approximately 3% of Maxwell Electronic Components Group, Inc., 3% percent of I-Bus/Phoenix, Inc. and 5% of PurePulse Technologies, Inc. The Company has adopted the disclosure only provisions of FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement No. 123"). In accordance with the provisions of Statement No. 123, the Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plans, and accordingly, no compensation expense has been recognized for stock options granted in the fiscal years ended July 31, 1998 or 1999, the five months ended December 31, 1999 or the year ended December 31, 2000, as the stock options have been granted at their current fair market value. If the Company had elected to recognize compensation based on the fair value method prescribed by Statement No. 123, the Company's net income (loss) from continuing operations and diluted income (loss) from continuing operations per share would have been adjusted to the pro forma amounts indicated below (in thousands, except per share amounts):
FIVE MONTHS YEARS ENDED YEARS ENDED JULY 31, ENDED DECEMBER 31, --------------------- DECEMBER 31, -------------------- 1998 1999 1999 1999 2000 -------- -------- ----------- -------- -------- (unaudited) Income (loss) from continuing operations, as reported ................................. $ 1,423 $ 3,939 $ (5,815) $ 46 $(16,291) Pro forma income (loss) from continuing operations .................................. $ (2,083) $ (1,643) $ (8,290) $ (5,685) $(24,668) Diluted income (loss) from continuing operations per share, as reported ........... $ 0.16 $ 0.40 $ (0.61) $ -- $ (1.66) Pro forma diluted income (loss) from continuing operations per share ............. $ (0.24) $ (0.17) $ (0.87) $ (0.58) $ (2.52)
The impact of outstanding non-vested stock options granted prior to 1997 has been excluded from the pro forma calculations; accordingly, the pro forma adjustments shown above are not indicative of future period pro forma adjustments when the calculation will reflect all applicable stock options. The fair value of Company options at the date of grant was estimated using the Black-Scholes option-pricing model with assumptions as follows:
RISK-FREE DIVIDEND VOLATILITY WEIGHTED-AVERAGE YEARS ENDED INTEREST RATES YIELDS FACTORS EXPECTED TERMS - -------------------------- ----------------- ------------------ ------------------ ----------------------- July 31, 1998 5.5% -- 54.0% 4 Years July 31, 1999 5.0% -- 66.0% 5 Years December 31, 1999 5.0% -- 106.0% 5 Years December 31, 2000 5.0% -- 74.0% 5 Years
59 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED) NOTE 5 -- STOCK ACTIVITY AND STOCK PLANS (CONTINUED) Based on these assumptions, the estimated weighted average fair value at grant date for Company options granted during the fiscal years ended July 31, 1998 and 1999, the five months ended December 31, 1999, and the year ended December 31, 2000 was $12.00, $12.53, $9.13 and $10.01 per option, respectively. STOCK PURCHASE PLANS In December 1994, the Company established the 1994 Employee Stock Purchase Plan and a Director Stock Purchase Plan. The employee plan permits substantially all employees to purchase common stock through payroll deductions at 85% of the lower of the trading price of the stock at the beginning or at the end of each six-month offering period. The director plan permits non-employee directors to purchase common stock at 100% of the trading price of the stock on the date a request for purchase is received. In the fiscal years ended July 31, 1998 and 1999, and in the year ended December 31, 2000, aggregate shares of 40,795, 48,388 and 118,666, respectively, were issued under the two plans for aggregate proceeds to the Company of $759,000, $970,000 and $997,000 respectively. No shares were issued under the plans in the five months ended December 31, 1999. At December 31, 2000, 131,486 shares are reserved for future issuance under these plans. In January 2000, the Board adopted, and the Company's stockholders subsequently approved, the Company's Management Equity Ownership Program (the "Program"). Under the Program, executive officers of the Company and other members of senior management selected by the Committee are offered full-recourse loans from the Company to be used to purchase stock of the Company. The loans bear interest and must be repaid in annual installments of principal and interest over a four-year period. Repayment of the loans is secured by the shares purchased with the loan proceeds. On February 1, 2000, loans in the aggregate amount of $900,000, bearing interest at 6.56%, were made in connection with the aggregate purchase of 74,995 newly issued shares of the Company's common stock at $12.00 per share, the closing market price on the date of purchase. DEFERRED COMPENSATION In 1996 and 1997, the Chairman of the Company was granted shares of the Company's common stock subject to certain restrictions. The shares granted vest ratably over a four-year period, and at the grant dates the shares had a fair value of approximately $645,000 and $190,000, respectively. Those values, net of accumulated amortization, are shown as deferred compensation in the accompanying consolidated balance sheets and consolidated statements of stockholders' equity. The deferred compensation is being amortized to expense over the four-year vesting periods, and such amortization totaled $209,000, $209,000, $87,000 and $102,000 in the fiscal years ended July 31, 1998 and 1999, in the five months ended December 31, 1999 and the year ended December 31, 2000, respectively. STOCKHOLDER RIGHTS PLAN In October 1999, the Company adopted a new Stockholder Rights Plan as a successor to its previous plan, which expired in June 1999. In accordance with the new plan, the Company distributed one non-voting 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, 15% or more of the Company's common stock. Initially, each Right entitles the registered holder to purchase one share of Company common stock at a price of $75 per share, subject to certain anti-dilution adjustments. 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 twice the exercise price of the Right. In addition, the Company may redeem the Rights at a price of $0.01 per Right, subject to certain restrictions. The new Stockholder Rights Plan expires on October 21, 2009. 60 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED) NOTE 6 -- INCOME TAXES The provision (credit) for income taxes based on income (losses) from continuing operations is as follows (in thousands):
FIVE MONTHS YEARS ENDED YEARS ENDED JULY 31, ENDED DECEMBER 31, --------------------- DECEMBER 31, -------------------- 1998 1999 1999 1999 2000 -------- -------- ----------- -------- -------- (unaudited) Federal: Current ...................................... $ 127 $ -- $ -- $ -- $ -- Deferred ..................................... 16 (4,903) (3,207) (8,110) (6,134) -------- -------- ----------- -------- -------- 143 (4,903) (3,207) (8,110) (6,134) State: Current ...................................... 25 82 399 565 122 Deferred ..................................... 19 (1,964) (920) (2,884) (751) -------- -------- ----------- -------- -------- 44 (1,882) (521) (2,319) (629) Foreign: Current ...................................... 200 394 320 504 496 Deferred ..................................... 26 (26) -- -- -- -------- -------- ----------- -------- -------- 226 368 320 504 496 -------- -------- ----------- -------- -------- $ 413 $ (6,417) $ (3,408) $ (9,925) $ (6,267) ======== ======== =========== ======== ========
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The primary components of the Company's deferred tax assets and liabilities are as follows (in thousands):
DECEMBER 31, ------------------------------ 1999 2000 ------------- ------------- Deferred tax assets: Tax loss carryforwards.............................................. $ 4,000 $20,300 Research and development and other tax credit carryforwards......... 2,900 2,900 Uniform capitalization, contract and inventory-related reserves..... 2,538 1,319 Environmental and restructuring provisions.......................... 2,000 408 Asset write-downs under FASB Statement No. 121...................... 349 343 Accrued vacation.................................................... 401 430 Allowance for doubtful accounts..................................... 285 301 Other............................................................... 207 145 ------------- ------------- Total deferred tax assets................................... 12,680 26,146 Deferred tax liabilities: Book investment basis in excess of tax basis........................ -- (1,166) Tax basis depreciation in excess of book depreciation............... (734) (340) ------------- ------------- Total deferred tax liabilities.............................. (734) (1,506) ------------- ------------- Net deferred tax assets............................................... $ 11,946 $24,640 ============= =============
61 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED) NOTE 6 -- INCOME TAXES (CONTINUED) The Company cannot carry losses back to prior years. Through the fiscal year ended July 31, 1998, the Company had provided a valuation allowance against the future tax benefits of its net operating loss carryforwards and net deferred income tax assets as realization of such future benefits was deemed to be uncertain. Based on the Company's earnings from continuing operations in the fiscal years ended July 31, 1998 and 1999, management determined in July 1999 that it was more likely than not that the Company would receive the future benefits from its net deferred income tax assets, including tax credits and remaining net operating loss carryforwards. Accordingly, in fiscal year 1999, the Company reversed the valuation allowance and recorded net deferred income tax assets of approximately $8.9 million, of which $4.6 million was recorded as a credit to additional paid-in capital for tax benefits relating to employee stock option and stock purchase plan activity in the current and prior years. Management believes that realization of the Company's deferred tax assets, which are primarily comprised of net operating loss carryforwards and tax credits, is more likely than not, based on the expected gains on the disposition of discontinued operations and future taxable income. As of December 31, 2000, the Company had net operating loss carryforwards for federal and state income tax of approximately $51.8 million and $30.5 million, respectively. The federal loss carryforward begins to expire in calendar year 2011, while the state loss carryforwards begin to expire in 2001 and expire through 2010. In addition, the Company has research and development and other tax credit carryforwards for federal and state income tax purposes of $2.0 million and $0.9 million, which begin to expire in 2004. The provision (credit) for income taxes in the accompanying consolidated statements of operations differs from the amount calculated by applying the statutory income tax rate of 35% to income (loss) from continuing operations before income taxes and minority interest. The primary components of such difference are as follows (in thousands):
FIVE MONTHS YEARS ENDED YEARS ENDED JULY 31, ENDED DECEMBER 31, --------------------- DECEMBER 31, -------------------- 1998 1999 1999 1999 2000 -------- -------- ----------- -------- -------- (unaudited) Tax at federal statutory rate .................. $ 848 $ (865) $ (3,228) $ (3,456) $ (7,959) State taxes, net of federal benefit ............ 167 (221) (374) (1,072) (637) Effect of tax rate differential for foreign subsidiary .................................. (47) 84 141 142 125 Impact of asset basis difference in acquisitions ................................ 1,237 (793) -- (970) 2,191 Utilization of net operating loss carryforwards ............................... (500) (400) -- (400) -- Valuation allowance, including tax benefits of stock activity ........................... (1,119) (4,280) -- (4,280) -- Other items not reflected in consolidated statement of operations ..................... (173) 58 53 111 13 -------- -------- ----------- -------- -------- $ 413 $ (6,417) $ (3,408) $ (9,925) $ (6,267) ======== ======== =========== ======== ========
62 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED) NOTE 7 -- LEASES Rental expense amounted to $1.7 million, $2.4 million, $1.0 million and $2.6 million in fiscal years ended July 31, 1998 and 1999, the five months ended December 31, 1999, and the year ended December 31, 2000, respectively, and was incurred primarily for facility rental. Future annual minimum rental commitments as of December 31, 2000, are as follows (in thousands):
FISCAL YEARS - ------------ 2001.......................................................... $2,017 2002.......................................................... 1,603 2003.......................................................... 858 2004.......................................................... 766 2005.......................................................... 787 Thereafter.................................................... 1,308 -------- $7,339 ========
Certain leases include renewal options for periods ranging from one to ten years and are subject to rental adjustment based on consumer price indices. Substantially all leases provide that the Company pay for property taxes, insurance, and repairs and maintenance. The Company also subleases certain of its leased facilities under non-cancelable subleases through 2003. Future annual amounts due to the Company under such subleases, aggregating $2,001,000, are as follows: calendar year 2001 - $1,044,000; 2002 - $863,000; and 2003 - $94,000. NOTE 8 -- EMPLOYEE BENEFIT PLANS Substantially all United States employees are eligible to elect coverage under contributory employee savings plans which provide for Company matching contributions based on one-half of employee contributions up to certain plan limits. The Company's matching contributions under these plans totaled $345,000, $446,000, $269,000 and $387,000 in the fiscal years ended July 31, 1998 and 1999, the five months ended December 31, 1999, and the year ended December 31, 2000, respectively. NOTE 9 -- RESTRUCTURING, ACQUISITION AND OTHER CHARGES In connection with the Restructuring Plan, the Company has undertaken various actions to consolidate its facilities and reduce the cost structure of the Company. As a result, the Company recorded restructuring and other related charges in the year ended December 31, 2000 of approximately $8.7 million. Such charges were determined in accordance with Staff Accounting Bulletin No. 100, RESTRUCTURING AND IMPAIRMENT CHARGES, and Emerging Issues Task Force No. 94-3, LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING). These charges include severance costs related to a reduction in workforce, the closure and combination of certain facilities, and the write-off of certain non-performing operating assets, including goodwill balances of $4.8 million related to a previous acquisition based on a current appraisal of the acquired business. The Company completed its Restructuring Plan in October 2000 and has finalized the consolidation and integration of its operations and related facilities. Accordingly, the Company does not expect to record additional restructuring related charges. In September 2000, the Company also recorded a charge of $0.5 million related to the write-off of in-process technology acquired in connection with the acquisition of Gateworks (Note 2). 63 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED) NOTE 9 -- RESTRUCTURING, ACQUISITION AND OTHER CHARGES (CONTINUED) The following table summarizes the restructuring, acquisition and other charges recorded, and the activity related to such charges, in the five months ended December 1999 and the year ended December 31, 2000 (in thousands):
WRITE-DOWN OF ABANDONED SEVERANCE COSTS TO MOVING AND OPERATING COSTS FOR EXIT CERTAIN OTHER COSTS WRITE-OFF ASSETS AND INVOLUNTARY CONTRACTUAL RELATED TO OF IMPAIRED EMPLOYEE AND LEASE CONSOLIDATION IN-PROCESS ASSETS TERMINATIONS OBLIGATIONS OF FACILITIES TECHNOLOGY TOTAL --------------- ------------- ------------ -------------- ------------ ----------- Five Months Ended December 31, 1999: Reserves Established ...... $ 1,813 $ 831 $ 127 $ 30 $ -- $ 2,801 Utilization of Reserves: Cash .................... -- -- (10) -- -- (10) Non-Cash ................ (1,813) ` -- -- -- -- (1,813) ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, -- 831 117 30 -- 978 1999 Year Ended December 31, 2000: Reserves Established ...... 6,433 740 907 640 500 9,220 Utilization of Reserves: Cash .................... -- (951) (828) (359) -- (2,138) Non-Cash ................ (6,433) -- -- -- (500) (6,933) ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 2000 ................... $ -- $ 620 $ 196 $ 311 $ -- $ 1,127 ============ ============ ============ ============ ============ ============
During the fiscal year ended July 31, 1999, the Company recorded restructuring, acquisition and other charges of approximately $2.6 million. Of these charges, approximately $1.6 million consisted of direct acquisition costs for business combinations accounted for using the pooling-of-interests method. The remaining $1.0 million charge consists primarily of amounts provided for revised estimates of costs to resolve certain environmental and legal contingencies which occurred in prior years, as well as other restructuring provisions, including employee and facility expenses, related to decisions made in July 1999 to reduce certain administrative infrastructure of the Company in Europe and the United States. The Company recorded a $3.9 million charge in the fiscal year ended July 31, 1998 related to the acquisition of two businesses, including $0.9 million of transaction costs for a business combination accounted for as a pooling-of-interests, and $3.0 million related to the appraised amount of acquired in-process technology for a business combination accounted for as a purchase. NOTE 10 -- DISCONTINUED OPERATIONS In connection with its Restructuring Plan, the Company divested its high voltage wound film capacitors, high voltage power supplies and time card and job cost accounting software businesses in 2000. In February 2000, the Company sold the high voltage wound film capacitors and high voltage power supplies businesses for cash of $3.5 million, approximately the book value of the net assets sold as of that date. In addition, the buyer assumed certain liabilities of the businesses, including a long-term lease for the facility the businesses occupied, which extended through 2006 with annual rent of approximately $0.5 million. In November 2000, the Company sold its time card and job cost accounting software business for cash of $2.5 million and certain minority shares of common stock of the buyer with an immaterial value. In the fourth quarter of 2000, the Company also received cash of approximately $0.7 million related to its equity investment in an unconsolidated entity, which was classified as a discontinued operation. In December 1999, the Company recorded provisions of approximately $2.1 million, net of tax, for estimated losses on the sale of these discontinued businesses. Based on the actual proceeds received and the net assets of the discontinued businesses at their respective dates of sale, the Company reversed the provisions recorded in December 1999 and recorded an aggregate gain on these sales of $2.9 million, net of tax, in the year ended December 31, 2000, including such reversal. 64 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED) NOTE 10 -- DISCONTINUED OPERATIONS (CONTINUED) In late 2000, the Company decided to focus on its Electronic Components Group and I-Bus/Phoenix segments (Note 11). Accordingly, in late 2000, the Company offered for sale its defense contracting business and signed letters of intent to sell the business in separate transactions with two buyers. Both transactions are expected to be completed by March 31, 2001. The Company is also seeking strategic alternatives for its PurePulse business, which the Company expects will result in the sale of all or a majority of the Company's interest in the business in 2001. Accordingly, both the defense contracting business and PurePulse, each of which was previously classified as a separate segment, have been classified as discontinued operations for financial reporting purposes. Operating results of the discontinued operations are shown separately, net of tax, in the accompanying consolidated statements of operations. The provision (credit) for income taxes related to the discontinued operations was $0.6 million and $4.2 million in the fiscal year ended July 31, 1999 and the five months ended December 31, 1999, respectively. For the fiscal year ended July 31, 1999, the provision for income taxes was net of a credit of $1.7 million representing the reversal of a valuation allowance provided in previous years against certain deferred tax assets of the discontinued operations. No provision for income taxes was provided for discontinued operations for the fiscal year ended July 31, 1998 or the calendar year ended December 31, 2000. The businesses included in discontinued operations had sales aggregating $62.6 million, $76.8 million, $24.7 million and $47.2 million in the fiscal years ended July 31, 1998 and 1999, the five months ended December 31, 1999, and the year ended December 31, 2000, respectively. These amounts are not included in net sales in the accompanying consolidated statements of operations. Assets and liabilities of the discontinued operations consisted of the following (in thousands):
DECEMBER 31, ----------------------------------------- 1999 2000 ------------------- ------------------ Assets: Cash............................................................... $ 1,162 $ -- Accounts receivable................................................ 18,998 10,442 Inventories........................................................ 3,443 1,083 Prepaid expenses and other current assets.......................... 7,020 189 Property and equipment, net........................................ 6,678 3,484 Goodwill and other non-current assets.............................. 5,204 5,725 ------------------- ------------------ 42,505 20,923 Liabilities: Accounts payable and other current liabilities, including provisions for estimated losses upon disposal.................... 18,684 6,960 ------------------- ------------------ $ 23,821 $ 13,963 =================== ==================
Net assets of the discontinued operations have been separately classified in the accompanying consolidated balance sheets as of December 31, 1999 and 2000. Prior year consolidated financial statements have been restated to conform to the current year presentation. 65 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED) NOTE 11 -- BUSINESS SEGMENTS In accordance with the requirements and guidelines of Statement of Financial Accounting Standards No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, Maxwell's operations have been classified into two business segments as follows: - - Electronic Components Group As part of its Restructuring Plan, the Company organized the Electronic Components Group by combining numerous business units and product lines: its POWERCACHE ultracapacitors, EMI filtered feedthroughs, ceramic capacitors and radiation-shielded microelectronics. In October 2000, the Company integrated the POWERCACHE ultracapacitor operations and the radiation-shielded microelectronics operations into one new manufacturing site in San Diego, while the EMI filters and ceramic capacitors are manufactured at the Company's facility in Carson City, Nevada, which was redesigned in 2000. Both facilities were designed for highly efficient manufacturing, with improved processes, improved personnel training and more disciplined cost control practices. The Electronic Components Group consists primarily of the following power delivery and other high reliability devices product lines: - ultracapacitors for electrical energy storage and delivery of peak power for a variety of applications; - EMI filtered feedthroughs for cardiac pacemakers, defibrillators and other implantable medical devices and high temperature ceramic capacitors and filters used in oil exploration; and - radiation-shielded microelectronics, including integrated circuits, power modules and single board computers for space and military markets. - I-Bus/Phoenix Power and Computing Systems As part of its Restructuring Plan, the Company integrated its I-Bus, Inc. and Phoenix Power Systems, Inc. subsidiaries. The I-Bus/Phoenix organization has operations in the U.S., Europe and Asia. The new I-Bus/Phoenix operation is focused on providing high availability custom computing systems and power quality products. As part of the Restructuring Plan, the Company combined the San Diego operations of these two businesses into a single facility in October 2000. The new facility has been designed for highly efficient manufacturing, with improved processes, improved personnel training and more disciplined cost control practices. The Company's I-Bus/Phoenix product offerings include applied computing systems, power distribution systems and power conditioning units. These products are sold mainly to OEMs serving the telecommunications and Internet infrastructure, industrial automation, broadcasting and medical imaging markets. Maxwell's management evaluates performance and allocates resources based on a measure of segment operating profit (loss), excluding restructuring, acquisition and other charges. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Maxwell does not evaluate segment performance on amounts provided for restructuring, acquisition and other charges, or on items of income or expense below operating income (loss). Accordingly, such items are not segregated by operating segment. 66 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED) NOTE 11 -- BUSINESS SEGMENTS (CONTINUED) Business segment financial data is as follows (in thousands):
FIVE MONTHS YEARS ENDED YEARS ENDED JULY 31, ENDED DECEMBER 31, --------------------- DECEMBER 31, -------------------- 1998 1999 1999 1999 2000 -------- -------- ----------- -------- -------- (unaudited) Sales: Electronic Components Group ................. $ 35,166 $ 37,783 $ 9,143 $ 29,336 $ 39,139 I-Bus/Phoenix Power and Computing Systems ... 42,848 65,095 27,720 74,275 63,208 -------- -------- ----------- -------- -------- Consolidated total ........................ $ 78,014 $102,878 $ 36,863 $103,611 $102,347 ======== ======== =========== ======== ======== Operating income (loss): Electronic Components Group ................. $ 3,053 $ (2,275) $ (5,138) $ (7,878) $ (3,001) I-Bus/Phoenix Power and Computing Systems ... 3,297 3,444 128 4,403 (3,782) -------- -------- ----------- -------- -------- Total operating income (loss) ............. 6,350 1,169 (5,010) (3,475) (6,783) Corporate expenses, including total restructuring, acquisition and other charges (5,519) (3,804) (4,072) (6,570) (14,535) Interest and other, net ..................... 1,005 161 (141) 170 (1,421) -------- -------- ----------- -------- -------- Income (loss) from continuing operations before income taxes, and minority interest ......... $ 1,836 $ (2,474) $ (9,223) $ (9,875) $(22,739) ======== ======== =========== ======== ======== Depreciation and amortization: Electronic Components Group ................. $ 1,025 $ 1,409 $ 688 $ 1,832 $ 1,530 I-Bus/Phoenix Power and Computing Systems ... 754 1,357 612 1,409 1,545 Corporate ................................... 326 395 234 475 603 -------- -------- ----------- -------- -------- Consolidated total ........................ $ 2,105 $ 3,161 $ 1,534 $ 3,716 $ 3,678 ======== ======== =========== ======== ======== Capital expenditures: Electronic Components Group ................. $ 2,797 $ 3,698 $ 807 $ 3,504 $ 1,233 I-Bus/Phoenix Power and Computing Systems ... 861 1,223 587 1,240 3,982 Corporate ................................... 949 563 205 492 6,575 -------- -------- ----------- -------- -------- Consolidated total ........................ $ 4,607 $ 5,484 $ 1,599 $ 5,236 $ 11,790 ======== ======== =========== ======== ======== JULY 31, DECEMBER 31, ------------------------ --------------------- 1998 1999 1999 2000 ------------ --------- ----------- --------- Identifiable Assets: Electronic Components Group................. $ 23,648 $ 27,834 $ 27,147 $ 35,169 I-Bus/Phoenix Power and Computing Systems... 23,700 33,163 29,517 33,199 Corporate................................... 28,481 24,884 17,666 39,778 Net assets of discontinued operations....... 24,371 27,605 23,821 13,963 ------------ --------- ----------- --------- Consolidated total........................ $100,200 $113,486 $ 98,151 $122,109 ============ ========= =========== =========
Intersegment sales are insignificant. Identifiable assets by segment include the assets directly identified with those segments. Corporate assets consist primarily of cash and cash equivalents, deferred tax assets and credits, and the centralized telecommunications, networking and other information technology equipment of the Company. International sales amounted to $14.8 million, $24.0 million, $10.7 million and $25.8 million in the fiscal years ended July 31, 1998 and 1999, in the five months ended December 31, 1999, and in the year ended December 31, 2000, respectively, and were made principally to customers in the United Kingdom, Europe and the Pacific Rim. Company assets located outside the United States totaled approximately $8.9 million and $10.5 million at December 31, 1999 and 2000, respectively. 67 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED) NOTE 11 -- BUSINESS SEGMENTS (CONTINUED) The Company made sales to one major customer of its I-Bus/Phoenix Power and Computing Systems segment which aggregated 13.1%, 16.7%, 18.6% and 8.4% of total Company sales for the fiscal year ended July 31, 1999, the five months ended December 31, 1999 and the years ended December 31, 1999 and 2000, respectively. In addition, one other major customer of the I-Bus/Phoenix Power and Computing Systems segment accounted for 10.2% of total Company sales for the fiscal year ended July 31, 1998. NOTE 12 - RELATED PARTY TRANSACTIONS In February 1999, the Company loaned $2.0 million to its Chairman and former CEO under a full recourse promissory note agreement, bearing interest at 5% per year and secured in part by a pledge of Company stock owned by the Chairman. Principal and accumulated interest was paid in full in January 2001. In January 2001, the Company borrowed $1.5 million from its Chief Executive Officer under an unsecured promissory note bearing interest at 11.0%. The note and accrued interest was fully repaid in March 2001. 68 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED) NOTE 13 - UNAUDITED QUARTERLY RESULTS OF OPERATIONS The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 1999 and 2000, respectively. The unaudited financial information reflects all normal recurring adjustments, which are in the opinion of management, necessary for the fair statement of the results of the interim periods (in thousands, except per share amounts).
THREE MONTHS ENDED ------------------------------------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, ------------ ------------ ------------ ------------ Year Ended December 31, 1999: Continuing operations: Sales .................................... $ 24,398 $ 28,663 $ 29,074 $ 21,476 Cost of sales ............................ 16,366 19,934 21,333 16,892 ------------ ------------ ------------ ------------ Gross profit ............................. 8,032 8,729 7,741 4,584 Total operating expenses ................. 8,409 8,088 10,137 12,497 ------------ ------------ ------------ ------------ Operating income (loss) .................. (377) 641 (2,396) (7,913) Income (loss) from continuing operations . (241) 440 4,607 (4,760) Discontinued operations, net of tax ........ 2,177 4,227 (82) (6,621) ------------ ------------ ------------ ------------ Net income (loss) .......................... $ 1,936 $ 4,667 $ 4,525 $ (11,381) ============ ============ ============ ============ Basic net income (loss) per share: Income (loss) from continuing operations . $ (0.03) $ (0.05) $ 0.48 $ (0.50) Income (loss) from discontinued operations 0.23 (0.44) (0.01) (0.69) ------------ ------------ ------------ ------------ $ 0.20 $ (0.49) $ 0.47 $ (1.19) ============ ============ ============ ============ Diluted net income (loss) per share: Income (loss) from continuing operations . $ (0.03) $ (0.04) $ 0.47 $ (0.50) Income (loss) from discontinued operations 0.23 (0.43) (0.01) (0.69) ------------ ------------ ------------ ------------ $ 0.20 $ (0.47) $ 0.46 $ (1.19) ============ ============ ============ ============ Year Ended December 31, 2000: Continuing operations: Sales .................................... $ 26,149 $ 27,085 $ 21,671 $ 27,442 Cost of sales ............................ 18,645 19,446 20,631 20,750 ------------ ------------ ------------ ------------ Gross profit ............................. 7,504 7,639 1,040 6,692 Total operating expenses ................. 9,654 10,226 16,685 7,628 ------------ ------------ ------------ ------------ Operating loss ........................... (2,150) (2,587) (15,645) (936) Loss from continuing operations .......... (1,384) (1,692) (12,331) (884) Discontinued operations, net of tax ........ (107) (167) (644) 892 ------------ ------------ ------------ ------------ Net income (loss) .......................... $ (1,491) $ (1,859) $ (12,975) $ 8 ============ ============ ============ ============ Basic net income (loss) per share: Loss from continuing operations .......... $ (0.14) $ (0.18) $ (1.25) $ (0.09) Income (loss) from discontinued operations (0.04) (0.14) (0.07) 0.09 ------------ ------------ ------------ ------------ $ (0.18) $ (0.32) $ (1.32) $ -- ============ ============ ============ ============ Diluted net income (loss) per shares: Loss from continuing operations .......... $ (0.14) $ (0.18) $ (1.25) $ (0.09) Income (loss) from discontinued operations (0.04) (0.14) (0.07) 0.09 ------------ ------------ ------------ ------------ $ (0.18) $ (0.32) $ (1.32) $ -- ============ ============ ============ ============
Per share amounts for the quarters and full years have each been calculated separately. Accordingly, quarterly amounts may not add to the annual amounts presented elsewhere in this report because of differences in the average common shares outstanding during each period, and with regard to diluted per share amounts only, because of the inclusion of the effect of potentially dilutive securities only in the periods in which such effect would have been dilutive. 69 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEMS 10 THROUGH 13. The information required under Item 10 (Directors and Executive Officers of the Registrant), Item 11, (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management) and Item 13 (Certain Relationships and Related Transactions) will be reported in the Company's Proxy Statement for the 2001 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:
ITEM NUMBER HEADING IN PROXY STATEMENT - ----------- -------------------------- 10-------- "ELECTION OF DIRECTORS" 11-------- "EXECUTIVE COMPENSATION" 12-------- "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" 13-------- "EXECUTIVE COMPENSATION"
(See also Item 4.1 - "Executive Officers of the Registrant," Part I, SUPRA) PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS See Item 6, Item 7 and Item 8. (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) LIST OF EXHIBITS 3.1 Restated Certificate of Incorporation of the Registrant -- Exhibit 3.1 to the Registrant's Form 10-K Annual Report for the year ended July 31, 1987 ("1987 Form 10-K") is incorporated by reference. 3.2 Certificate of Amendment of Restated Certificate of Incorporation of the Registrant increasing the number of authorized shares to 20 million, dated November 22, 1996 -- Exhibit 3.2 to the Registrant's Form 10-K Annual Report for the year ended July 31, 1997 ("1997 Form 10-K") is incorporated by reference. 3.3 Certificate of Amendment of Restated Certificate of Incorporation of the Registrant increasing the number of authorized shares to 40 million, dated February 9, 1998 -- Exhibit 3.3 to the Registrant's Form 10-K Annual Report for the year ended July 31, 1999 ("1999 Form 10-K") is incorporated by reference. 3.4 Bylaws of the Registrant as amended to date-- Exhibit 3.2 to the 1987 Form 10-K is incorporated by reference. 3.5 Revised Article IV of the Bylaws of the Registrant-- Exhibit 3.4 to the 1997 Form 10-K is incorporated by reference. 70 4.1 Rights Agreement dated November 5, 1999 between Registrant and ChaseMellon Shareholders Services, LLC, as Rights Agent - Exhibit 1 to the Registrant's Form 8-A filed November 18, 1999 is hereby incorporated by reference. 10.1 Maxwell Laboratories, Inc. 1995 Stock Option Plan-- Exhibit 10.3 to the Registrant's Form 10-K Annual Report for the year ended July 31, 1995 ("1995 Form 10-K") is incorporated by reference. 10.2 Amendment Number One to Maxwell Laboratories, Inc. 1995 Stock Option Plan, dated March 19, 1997-- Exhibit 10.6 to the 1997 Form 10-K is incorporated by reference. 10.3 Amendment Number Two to Maxwell Technologies, Inc. 1995 Stock Option Plan, dated January 28, 1998-- Exhibit 10.6 to the 1998 Form 10-K is incorporated by reference. 10.4 Amendment Number Three to Maxwell Technologies, Inc. 1995 Stock Option Plan, dated January 28, 1999 -- Exhibit 10.8 to the 1999 Form 10-K is incorporated by reference. 10.5 Amendment Number Four to Maxwell Technologies, Inc. 1995 Stock Option Plan, dated January 28, 2000-- Exhibit 10.9 to the Registrant's December 31, 1999 Form 10-K is incorporated by reference. 10.6* Amendment Number Five to Maxwell Technologies, Inc. 1995 Stock Option Plan, dated August 14, 2000. 10.7 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. 10.8 Amendment Number One to Maxwell Laboratories, Inc. Director Stock Option Plan, dated February 7, 1997-- Exhibit 10.2 to the 1997 Form 10-K is incorporated by reference. 10.9 Amendment Number Two to Maxwell Laboratories, Inc. Director Stock Option Plan, dated January 28, 1999-- Exhibit 10.3 to the 1999 Form 10-K is incorporated by reference. 10.10 Maxwell Technologies, Inc. 1999 Director Stock Option Plan, dated January 28, 2000-- Exhibit 10.12 to the Registrant's December 31, 1999 Form 10-K is incorporated by reference. 10.11 Maxwell Laboratories, Inc. 1994 Employee Stock Purchase Plan-- Exhibit 10.4 to the 1995 Form 10-K is incorporated by reference. 10.12 Amendment Number One to the Maxwell Laboratories, Inc. 1994 Employee Stock Purchase Plan, effective as of April 30, 1997-- Exhibit 10.38 to the 1997 Form 10-K is incorporated by reference. 10.13 Maxwell Technologies, Inc. 1999 Management Equity Ownership Program dated January 28, 2000-- Exhibit 10.45 to the Registrant's December 31, 1999 Form 10-K is incorporated by reference. 10.14 Maxwell Laboratories, Inc. 1994 Director Stock Purchase Plan-- Exhibit 10.5 to the 1995 Form 10-K is incorporated by reference. 10.15 Maxwell Energy Products, Inc. 1996 Stock Option Plan-- Exhibit 10.35 to the 1997 Form 10-K is incorporated by reference. 10.16* Maxwell Electronic Components Group, Inc. 2000 Stock Option Plan. 10.17 I-Bus, Inc. 1996 Stock Option Plan-- Exhibit 10.36 to the 1997 Form 10-K is incorporated by reference. 10.18 I-Bus/Phoenix, Inc. 2000 Stock Option Plan-- Exhibit 10.3 to the Registrant's September 30, 2000 Form 10-Q is incorporated by reference. 10.19 PurePulse Technologies, Inc. 1994 Stock Option Plan-- Exhibit 10.26 to the 1996 Form 10-K is incorporated by reference. 10.20 PurePulse Technologies, Inc. 2000 Stock Option Plan-- Exhibit 10.2 to the September 30, 2000 Form 10-Q is incorporated by reference. 71 10.21 Maxwell Federal Division, Inc. 1996 Stock Option Plan-- Exhibit 10.34 to the 1997 Form 10-K is incorporated by reference. 10.22 Maxwell Technologies, Inc. Employment Agreement dated November 9, 1999 between the Registrant and Carlton J. Eibl-- Exhibit 10.19 to the Registrant's December 31, 1999 Form 10-K is incorporated by reference. 10.23 Maxwell Technologies, Inc. Employment Agreement dated April 30, 1999 between the Registrant and Thomas L. Horgan-- Exhibit 10.19 to the 1999 Form 10-K is incorporated by reference. 10.24 Restricted Stock Agreement dated July 25, 1996, between the Registrant and Kenneth F. Potashner -- Exhibit 10.17 to the Registrant's Form 10-K Annual Report for the year ended July 31, 1996 is incorporated by reference. 10.25 Amendment Number One to Restricted Stock Agreement, dated June 24, 1997, between the Registrant and Kenneth F. Potashner -- Exhibit 10.23 to the 1997 Form 10-K is incorporated by reference. 10.26 Secured Promissory Note dated February 2, 1999 and Stock Pledge Agreement dated February 2, 1999 between Registrant and Kenneth F. Potashner -- Exhibit 10.24 to the 1999 Form 10-K is incorporated by reference. 10.27 Stock Pledge Agreement dated February 2, 1999 between Registrant and Kenneth F. Potashner -- Exhibit 10.25 to the 1999 Form 10-K is incorporated by reference. 10.28* Subordinated Promissory Note dated January 17, 2001, between Maxwell Technologies, Inc. and Carl Eibl. 10.29* Executive Bonus Plan for Calendar Year 2001 10.30 Stock Purchase Agreement among Maxwell Technologies, Inc., Maxwell Energy Products, Inc., and PacifiCorp Energy Ventures, Inc., dated October 30, 1997-- Exhibit 10 to the Registrant's October 31, 1997 Form 10-Q is incorporated by reference. 10.31 Shareholder Agreement among Maxwell Technologies, Inc., PurePulse Technologies, Inc., Sanyo E&E Corporation and Three Oceans Inc., dated January 28, 1999-- Exhibit 10.44 to the 1999 Form 10-K is incorporated by reference. 10.32 Agreement and Plan of Reorganization among Gateworks Corporation, The Shareholders of Gateworks Corporation, I-Bus/Phoenix, Inc. and Maxwell Technologies, Inc. as of September 13, 2000.-- Exhibit 10.1 to the Registrant's September 30, 2000 Form 10-Q is incorporated by reference. 10.33* Loan and Security Agreement dated February 26, 2001, between Maxwell Technologies, Inc., Maxwell Electronic Components Group, Inc., I-Bus/Phoenix, Inc., PurePulse Technologies, Inc., Maxwell Technologies Systems Division, Inc., MML Acquisition Corporation and Comerica Bank - California. 10.34* Lease dated March 28, 2000 by and between Balboa Boulevard Building, G.P., as Lessor, and the Registrant, as Lessee. 10.35 Lease dated November 1, 1996, by and between Ponderosa Pines Partnership, as Lessor, and PurePulse Technologies, Inc., as Lessee -- Exhibit 10.25 to the 1997 Form 10-K is incorporated by reference. 21.1* List of subsidiaries of the Registrant. 23.1* Consent of Ernst & Young, LLP, Independent Auditors. (b) REPORTS ON FORM 8-K None. - ---------- * Filed herewith. 72 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, State of California, on this 19th day of March, 2001. MAXWELL TECHNOLOGIES, INC. By: /s/ Carlton J. Eibl ------------------------------------- Carlton J. Eibl Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE /s/ Carlton J. Eibl Chief Executive Officer, President and March 19, 2001 - --------------------------- Director Carlton J. Eibl s/ Kenneth F. Potashner Chairman of the Board, Director March 19, 2001 - --------------------------- Kenneth F. Potashner /s/ Vickie L. Capps Vice President, Finance and March 19, 2001 - --------------------------- Administration, Treasurer Vickie L. Capps and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Mark Rossi Director March 19, 2001 - --------------------------- Mark Rossi /s/ Jean Lavigne Director March 19, 2001 - --------------------------- Jean Lavigne /s/ Robert Guyett Director March 19, 2001 - --------------------------- Robert Guyett
73 EX-10.6 2 a2042380zex-10_6.txt EXHIBIT 10.6 Exhibit 10.6 AMENDMENT NUMBER FIVE TO MAXWELL TECHNOLOGIES, INC. 1995 STOCK OPTION PLAN The Maxwell Technologies, Inc. 1995 Stock Option Plan (the "Plan") is hereby amended in the following respects: 1. COMMON STOCK SUBJECT TO OPTIONS. The maximum number of shares authorized under the Plan for grant of options as set forth in paragraph 4 of the Plan entitled "Common Stock Subject to Options", consisting of 2,390,000 shares of the Company's Common Stock as previously amended, is hereby adjusted to a maximum of 3,340,000 shares of the Company's Common Stock. 2. EFFECT OF AMENDMENTS. This amendment to the Plan shall be effective as of August 14, 2000, subject to the approval of the majority shareholders of Maxwell Technologies, Inc. Except to the extent specifically modified herein, the Plan shall remain in full force and effect. MAXWELL TECHNOLOGIES, INC. By:_____________________________ Donald M. Roberts, Secretary Date: August 14, 2000 EX-10.16 3 a2042380zex-10_16.txt EXHIBIT 10.16 Exhibit 10.16 MAXWELL ELECTRONIC COMPONENTS GROUP INC. 2000 STOCK OPTION PLAN 1. PURPOSE. The 2000 Stock Option Plan (the "Plan") is intended to advance the interests of Maxwell Electronic Components Group Inc. (the "Company"), and its stockholders by encouraging and enabling selected "key employees" (as defined below) to acquire and retain a proprietary interest in the Company by ownership of its stock. For purposes of this Plan, the term "key employee" shall include employees of the Company, including employees who also serve as officers or directors of the Company, upon whose judgment, initiative and effort the Company is dependent for success in the conduct of its business. It is intended that the Plan provide the flexibility for the issuance of options which qualify as incentive stock options ("incentive stock options") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and options which do not so qualify ("non-qualified stock options"). 2. DEFINITIONS. (a) "Affiliate" means Maxwell Technologies, Inc. and each corporation in which such entity owns, directly or indirectly, more than 50% of the voting equity interests. (b) "Agreement" means the agreement between the Company and the Optionee under which an option is granted, and setting forth the terms and conditions of the option and the Optionee's rights thereunder. (c) "Board" means the Board of Directors of the Company. (d) "Committee" means the Stock Option Committee (the members of which shall be appointed by the Board from among the directors of the Company) of the Board. If no such committee has been appointed by the Board, then the term "Committee" shall refer to the entire Board. (e) "Common Stock" means the Company's common stock. (f) "Date of Grant" means the date on which an option under the Plan is approved by the Committee. (g) "Option" means an option granted under the Plan. (h) "Optionee" means a person to whom an option, which has not expired, has been granted under the Plan. (i) "Successor" means the legal representative of the estate of the deceased Optionee or the person or persons who acquire the right to exercise an option by bequest or inheritance or by reason of the death of any Optionee. 3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Committee which shall report all action taken by it to the Board. The Committee shall have full and final authority in its discretion, subject to the provisions of the Plan, to determine the number of shares and purchase price of Common Stock covered by each option, the individuals to whom and the time or times at which options shall be granted and the nature of each option granted under the Plan, i.e., whether the option will be an incentive stock option or a non-qualified stock option; to construe and interpret the Plan; to determine the terms and provisions of the respective Agreements, which need not be identical, including, but without limitation, terms covering the payment of the option price, and to make all other determinations and take all other actions deemed necessary or advisable for the proper administration of the Plan. All such actions and determinations of the Committee shall be conclusively binding for all purposes and upon all persons. 4. COMMON STOCK SUBJECT TO OPTIONS. Unless amended in accordance with the provisions of Paragraph 11, and subject to adjustment under the provisions of Paragraph 7, the aggregate number of shares of the Company's Common Stock which may be issued upon the exercise of options granted under the Plan shall not exceed 350,000. 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. 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; provided that with respect to an option granted to an individual who, on the grant date, is the holder of stock representing more than 10% of the voting equity of the Company or any Affiliate (hereinafter a "10% Holder"), the option price for such option shall be no less than 110% of such fair market value. For the purposes hereof, fair market value shall be as determined by the Committee and such determination shall be binding upon the Company 2 and upon the Optionee. The Committee may make such determination upon any factors which the Committee shall deem appropriate. (b) PERIOD OF OPTION. Except for earlier termination as provided in Subparagraphs (g) and (h) of this Paragraph 6, and in Subparagraph (b) of Paragraph 7, the expiration date of each option shall be fixed by the Committee, but, notwithstanding any provision of the Plan to the contrary, such expiration date shall not be more than ten years from the Date of Grant or, with respect to a 10% Holder, five years from the Date of Grant. (c) VESTING OF STOCKHOLDER RIGHTS. Neither an Optionee nor any Successor shall have any of the rights of a stockholder 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; provided that for Optionees other than officers, directors or consultants of the Company options will become exercisable at a rate of no less than 20% per year over five (5) years from the date the Option is granted. An Option may not be exercised for a fraction of a share. (e) PAYMENT OF OPTION PRICE. Upon exercise of an option, the Optionee or Successor shall pay the option price by delivering to the Company cash or a check payable to the Company in an amount equal to the option price. The Committee may, at its discretion exercised at the time of the exercise of an option, permit the payment of the option in the following ways: (i) delivery by the Optionee or Successor of 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 (ii) delivery by the Optionee or Successor 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. 3 (f) NON-TRANSFERABILITY OF OPTION. No option shall be transferable or assignable by an Optionee, otherwise than by will or the laws of descent and distribution and each option shall be exercisable during the Optionee's lifetime only by the Optionee. No option shall be pledged or hypothecated in any way and no option shall be subject to execution, attachment or similar process. (g) TERMINATION OF EMPLOYMENT. Upon termination of an Optionee's employment with the Company and all Affiliates other than by reason of the death of the Optionee, the option privileges of such Optionee shall be limited to the shares which were immediately purchasable by Optionee at the date of such termination and such option privilege shall expire unless exercised by Optionee within sixty (60) days after the date of such termination. The granting of an option to any person shall not alter in any way the Company's right to terminate such person's employment at any time for any reason, nor shall it confer upon the Optionee any rights or privileges except as specifically provided for in the Plan. (h) DEATH OF OPTIONEE. If an Optionee dies while in the employ of the Company or any Affiliate, the option privileges of said Optionee shall be limited to the shares which were immediately purchasable by such Optionee at the date of death and such option privileges shall expire unless exercised by said Optionee's Successor within one (1) year after the date of death. 7. ADJUSTMENTS. (a) In the event that the outstanding shares of Common Stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation, by reason of a recapitalization, reclassification, stock split-up, combination of shares, dividend or other distribution payable in capital stock, appropriate adjustment shall be made by the Board in the number, kind and exercise price of shares for the purchase of which options have theretofore been or may thereafter be granted under the Plan. (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 4 the date the notice referred to in said clause (ii) is given and concluding on the date of such merger, consolidation, reorganization, dissolution or liquidation, as the case may be, to exercise such Optionee's outstanding and unexercised stock options, including shares as to which such options would not otherwise have been exercisable by reason of an insufficient lapse of time. (c) All adjustments and determinations under this Paragraph 7 shall be made by the Board, whose decisions as to what adjustments or determinations shall be made, and the extent thereof, shall be final, binding and conclusive. 8. DOLLAR LIMITATION ON INCENTIVE STOCK OPTIONS. The aggregate fair market value (determined as of the Date of Grant) of the Common Stock with respect to which incentive stock options are exercisable for the first time by any individual during any calendar year (under the Plan and all other stock option plans of the Company or any Affiliate) shall not exceed $100,000. 9. RESTRICTIONS ON ISSUING SHARES. The exercise of each option shall be subject to the condition that if at any time the Company shall determine in its discretion that (i) the satisfaction of withholding tax or other withholding liabilities, or (ii) the listing, registration or qualification of any shares otherwise deliverable upon such exercise upon any securities exchange or under any state or federal law, or (iii) the consent or approval of any regulatory body, or (iv) the perfection of any exemption from any such withholding, listing, registration, qualification, consent or approval is necessary or desirable as a condition of, or in connection with, such exercise or the issuance, delivery or purchase of shares thereunder, then in any such event, such exercise shall not be effective unless such withholding, listing registration, 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 stockholders 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 5 termination of the Plan. Except as otherwise provided in the Plan, no amendment, suspension or termination of the Plan shall, without an Optionee's consent, alter or impair any of the right or obligations under any option theretofore granted to such Optionee under the Plan. 12. EFFECTIVE DATE OF THE PLAN AND STOCKHOLDER APPROVAL. The effective date of the Plan shall be the date of its approval by the Board; provided, however, that in the event that stockholder approval of the Plan is not secured on or before the date which is twelve (12) months from the date of approval by the Board, the Plan shall thereupon terminate. Any options granted prior to the aforesaid stockholder approval being secured shall be subject to such approval being secured. 13. INFORMATION TO OPTIONEES. The Company shall provide to each Optionee not less frequently than annually, during the period such Optionee has one or more Options, copies of annual financial statements. The Company shall not be required to provide such statements to key employees whose duties in connection with the Company assure their access to equivalent information. MAXWELL ELECTRONIC COMPONENTS GROUP INC. By: /s/ DONALD M. ROBERTS -------------------------------------- Donald M. Roberts, Secretary Date: ------------------------------------ 6 EX-10.28 4 a2042380zex-10_28.txt EXHIBIT 10.28 Exhibit 10.28 SUBORDINATED PROMISSORY NOTE January 17, 2001 $1,500,000 San Diego, California FOR VALUE RECEIVED, the undersigned, Maxwell Technologies, Inc., a Delaware corporation, ("Maker") hereby promises to pay to the order of Carl Eibl, an individual, ("Holder") at his office located at 9244 Balboa Avenue, San Diego, California 92123, or such other place as Holder may designate in writing from time to time, the principal sum of One Million Five Hundred Thousand Dollars ($1,500,000), on the terms and conditions of this Subordinated Promissory Note ("Note"). This Note reflects a short-term loan from Holder to Maker to assist Maker in meeting its financial obligations during the remaining term of that certain Amended and Restated Credit Agreement dated as of October 24, 2000, as subsequently amended, (the "Credit Agreement") between Maker, as borrower, and Sanwa Bank California, as lender ("Sanwa Bank") and is intended to be fully subordinate to the rights of Sanwa Bank under the Credit Agreement and related loan documents. Holder has obtained the funds representing the principal hereunder pursuant to borrowings for which the interest rate is based on minimum thirty (30) day periods for the borrowings to be outstanding, and the first such 30-day period commences on the date of this Note. Accordingly, the entire principal amount of this Note shall be due and payable at the end of the first such 30-day period that ends after Sanwa Bank has been paid all amounts owed to it under the Credit Agreement and related loan documents. No prepayment of principal is permitted under this Note. Interest shall accrue on the unpaid principal of this Note at the rate of 11% per annum. Accrued interest shall be due and payable on the last day of each 30-day period described in the preceding paragraph but only if no event of default has occurred and is continuing under the Credit Agreement. If such an event of default has occurred and is continuing at the time interest is due to be paid hereunder, such interest payment shall not be due and payable at that time and interest shall continue to accrue hereunder until the next interest payment date on which no such event of default has occurred and is continuing. Maker agrees to reimburse Holder for any costs incurred by Holder in seeking collection of amounts due hereunder, including, but not limited to, reasonable attorneys' fees, costs and expenses. Maker waives presentment; demand; notice of protest and non-payment; notice of costs, expenses or losses and interest; and diligence in taking any action to collect any sums owing under this Note. This Note is made in the State of California, and the law of California shall apply to the interpretation of the terms and conditions of this Note. IN WITNESS WHEREOF, this Note is executed on the date first above written. Maxwell Technologies, Inc. By /s/ Vickie L. Capps --------------------------------- Vickie L. Capps Chief Financial Officer EX-10.29 5 a2042380zex-10_29.txt EXHIBIT 10.29 Exhibit 10.29 EXECUTIVE BONUS PLAN FOR CALENDAR YEAR 2001 Payout guidelines for participants employed by Maxwell Technologies, Inc., Maxwell Electronic Components Group, Inc. and I-Bus/Phoenix, Inc.: 1. Maxwell Electronic Components Group, Inc. and I-Bus/Phoenix, Inc. ("Divisions") bonus payouts will be based upon respective Division results only. Division payouts will not be influenced by overall Maxwell Technologies, Inc. results. An exception relates to Division Presidents, for whom the payouts will be determined two-thirds based on the results for the respective Division and one-third based upon consolidated Maxwell Technologies, Inc. results. Bonuses for employees of Maxwell Technologies, Inc. ("Corporate") will be paid out based on consolidated Maxwell Technologies, Inc. results, including PurePulse. 2. If YTD results at end of first half are equal to 100% of the First Half "Threshold" Amounts for BOTH sales and operating income, a payout equal to 25% of the full year target bonus will be paid to all bonus plan participants, except the CEO and direct reports to the CEO ("Executive Staff"), following the release of earnings for Q2. The Executive Staff shall not be eligible for mid-year payouts under the bonus plan. 3. The remaining 75% of the target bonus (or the full 100% if there is no payout at the end of the first half) will begin to be earned if the full year results reach the Full Year "Threshold" amounts for BOTH sales and operating income. There will be no year-end bonus payout if BOTH sales and operating income do not meet the respective Threshold amounts. 4. Half (50%) of the full year target bonus will be earned, pro rata, on results achieved which are greater than the Threshold amounts, up to and including the full Plan amounts. The payout will be weighted one-third on sales and two-thirds on operating income. 5. If 100% or more of BOTH Plan sales and Plan operating income are achieved, year-end bonus payouts will be made at 100% of target. 6. All year-end bonus payouts will be paid following the release of Q4 results for the Company, and will be paid net of any amounts paid out at the end of the first half. 7. Results from acquired businesses and other transactions not in the ordinary course and not included in the Plan will be excluded from the results for purposes of determining bonus payouts. 8. At the discretion of the Division Presidents, Division payouts can be further subject to the achievement of individual business unit or country targets, within the constraints of the overall maximum payout computed above. 9. Further, at the discretion of the Division Presidents, up to 20% of an individual's bonus achievement can be determined by performance of management objectives to be agreed with the individual, subject to an overall cap on bonus payouts as computed above. Payout for participants employed by PurePulse Technologies, Inc. will be subject to the achievement of the Financial Plan of PurePulse as well as the achievement of certain business operating milestones, which are expected to enhance the enterprise value of PurePulse. PurePulse participants are not eligible for mid-year payouts under the bonus plan. EX-10.33 6 a2042380zex-10_33.txt EXHIBIT 10.33 Exhibit 10.33 - -------------------------------------------------------------------------------- MAXWELL TECHNOLOGIES, INC. MAXWELL ELECTRONIC COMPONENTS GROUP, INC. I-BUS/PHOENIX, INC. PUREPULSE TECHNOLOGIES, INC. MAXWELL TECHNOLOGIES SYSTEMS DIVISION, INC. MML ACQUISITION CORP. LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- This LOAN AND SECURITY AGREEMENT is entered into as of February 26, 2001, by and between COMERICA BANK-CALIFORNIA ("Bank") and MAXWELL TECHNOLOGIES, INC., MAXWELL ELECTRONIC COMPONENTS GROUP, INC., I-BUS/PHOENIX, INC., PUREPULSE TECHNOLOGIES, INC., MAXWELL TECHNOLOGIES SYSTEMS DIVISION, INC., MML ACQUISITION CORP. (individually, a "Borrower" and collectively, the "Borrowers"). RECITALS Borrowers wish to obtain credit from time to time from Bank, and Bank desires to extend credit to Borrowers. This Agreement sets forth the terms on which Bank will advance credit to Borrowers, and Borrowers will repay the amounts owing to Bank. AGREEMENT The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION. 1.1 DEFINITIONS. As used in this Agreement, the following terms shall have the following definitions: "Accounts" means all presently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to any Borrower arising out of the sale or lease of goods (including, without limitation, the licensing of software and other technology) or the rendering of services by such Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by such Borrower and such Borrower's Books relating to any of the foregoing. "Advance" or "Advances" means a cash advance or cash advances under the Revolving Facility. "Affiliate" means, with respect to any Person, without duplication, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person's senior executive officers, directors, and partners. "Bank Expenses" means all: reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; reasonable Collateral audit fees; and Bank's reasonable attorneys' fees and expenses incurred in amending, enforcing or defending the Loan Documents (including fees and expenses of appeal), incurred before, during and after an Insolvency Proceeding, whether or not suit is brought. "Bridge Advance" has the meaning set forth in Section 2.1(e). "Bridge Loan" means a credit extension of up to Fifteen Million Dollars ($15,000,000). "Bridge Maturity Date" means the earliest of (i) the sale of all or substantially all the assets of the Systems Division or (ii) June 15, 2001. "Borrowers' Books" means all of each Borrower's books and records including: ledgers; records concerning each Borrower's assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information. "Borrowing Base" means an amount equal to eighty percent (80%) of Eligible Accounts, PLUS, through December 31, 2001, twenty percent (20%) of Eligible Inventory, not to exceed Two Million Dollars ($2,000,000), as determined by Bank with reference to the most recent Borrowing Base Certificate delivered by Borrowers. "Business Day" means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close. "Closing Date" means the date of this Agreement. "Code" means the California Uniform Commercial Code. "Collateral" means the property described on EXHIBIT A attached hereto. "Committed Revolving Line" means a credit extension of up to Fifteen Million Dollars ($15,000,000). "Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit issued for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designed to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term "Contingent Obligation" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement. "Copyrights" means any and all copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held. "Credit Extension" means each Advance, Letter of Credit, or any other extension of credit by Bank for the benefit of Borrowers hereunder. "Current Assets" means, as of any applicable date, all amounts that should, in accordance with GAAP, be included as current assets on the consolidated balance sheet of Borrowers and their Subsidiaries as at such date. "Current Liabilities" means, as of any applicable date, all amounts that should, in accordance with GAAP, be included as current liabilities on the consolidated balance sheet of Borrowers and their Subsidiaries, as at such date, plus, to the extent not already included therein, all outstanding Credit Extensions made under this Agreement, including all Indebtedness that is payable upon demand or within one year from the date of determination thereof unless such Indebtedness is renewable or extendible at the option of Borrowers or any Subsidiary to a date more than one year from the date of determination. "Daily Balance" means the amount of the Obligations owed at the end of a given day. "Eligible Accounts" means those Accounts that arise in the ordinary course of Borrowers' business that comply with all of Borrowers' representations and warranties to Bank set forth in Section 5.4; provided, that standards of eligibility may be fixed and revised from time to time by Bank as a consequence of any Collateral audits done pursuant to Section 6.3 in Bank's reasonable judgment and upon notification thereof to Borrowers in accordance with the provisions hereof. Unless otherwise agreed to by Bank, Eligible Accounts shall not include the following: (a) Accounts that the account debtor has failed to pay within ninety (90) days of invoice date; (b) Accounts with respect to an account debtor, twenty-five percent (25%) of whose Accounts the account debtor has failed to pay within ninety (90) days of invoice date; (c) Accounts with respect to which the account debtor is an officer, employee, or agent of any Borrower; (d) Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the account debtor may be conditional; (e) Accounts with respect to which the account debtor is a Borrower or an Affiliate of any Borrower; (f) Accounts with respect to which the account debtor does not have its principal place of business in the United States, except for Eligible Foreign Accounts; (g) Accounts with respect to which the account debtor is the United States or any department, agency, or instrumentality of the United States; (h) Accounts with respect to which any Borrower is liable to the account debtor for goods sold or services rendered by the account debtor to such Borrower, but only to the extent of any amounts owing to the account debtor against amounts owed to such Borrower; (i) Accounts with respect to an account debtor, including subsidiaries and Affiliates thereof, whose total obligations to any Borrower exceed twenty percent (20%) of all Accounts, to the extent such obligations exceed the aforementioned percentage, except as approved in writing by Bank; (j) Accounts with respect to which the account debtor disputes liability or makes any claim with respect thereto as to which Bank believes, in its sole discretion, that there may be a basis for dispute (but only to the extent of the amount subject to such dispute or claim), or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; and (k) Accounts the collection of which Bank reasonably determines to be doubtful. "Eligible Foreign Accounts" means Accounts with respect to which the account debtor does not have its principal place of business in the United States and that (i) are supported by one or more letters of credit in an amount and of a tenor, and issued by a financial institution, acceptable to Bank, or (ii) that Bank approves on a case-by-case basis. "Eligible Inventory" means Borrowers' raw materials and finished goods, only. "Equipment" means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrowers have any ownership interest. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder. "Event of Default" has the meaning assigned in Article 8. "Foreign Subsidiary" means any Subsidiary whose principal place of business is located outside the United States or whose assets and business are located outside the United States. "GAAP" means generally accepted accounting principles as in effect from time to time. "Indebtedness" means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, but excluding trade accounts payable and accrued expenses arising in the ordinary course of business, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations, to the extent such obligations would be required to be included in a balance sheet prepared in accordance with GAAP, and (d) all Contingent Obligations. "Insolvency Proceeding" means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "Intellectual Property Collateral" means all of Borrowers' right, title, and interest in and to the following: (a) Copyrights, Trademarks and Patents; (b) Any and all trade secrets, and any and all intellectual property rights in computer software and computer software products now or hereafter existing, created, acquired or held; (c) Any and all design rights which may be available to Borrowers now or hereafter existing, created, acquired or held; (d) Any and all claims for damages by way of past, present and future infringement of any of the rights included above, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the intellectual property rights identified above; (e) All licenses or other rights to use any of the Copyrights, Patents or Trademarks of the Borrowers, and all license fees and royalties arising from such use to the extent permitted by such license or rights; (f) All amendments, renewals and extensions of any of the Copyrights, Trademarks or Patents; and (g) All proceeds and products of the foregoing, including without limitation all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing. "Interest Period" means for each LIBOR Rate Extension, a period of approximately one (1), two (2) or three (3) months as Parent may elect, PROVIDED that the last day of an Interest Period for a LIBOR Rate Extension shall be determined in accordance with the practices of the LIBOR interbank market as from time to time in effect, PROVIDED, FURTHER, such period shall expire not later than the Revolving Maturity Date. "Inventory" means all present and future inventory in which any Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or at any time hereafter owned by such Borrower, including such inventory as is temporarily out of its custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and such Borrower's Books relating to any of the foregoing. "Investment" means any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "LIBOR Base Rate" means, for any Interest Period for a LIBOR Rate Extension, the rate of interest per annum determined by Bank to be the per annum rate of interest at which deposits in United States Dollars are offered to Bank in the London interbank market in which Bank customarily participates at 11:00 a.m. (local time in such interbank market) three (3) Business Days before the first day of such Interest Period for a period approximately equal to such Interest Period and in an amount approximately equal to the amount of such Credit Extension. "LIBOR Rate" shall mean, for any Interest Period for a LIBOR Rate Extension, a rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) equal to (i) the LIBOR Base Rate for such Interest Period divided by (ii) 1 minus the Reserve Requirement for such Interest Period. "LIBOR Rate Advances" means any Advances or a portion thereof, on which interest is payable based on the LIBOR Rate in accordance with the terms hereof. "LIBOR Rate Extensions" means any LIBOR Rate Advances or any portion thereof bearing interest at a rate based on the LIBOR Rate. "Lien" means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "Loan Documents" means, collectively, this Agreement, any note or notes executed by Borrowers, and any other agreement entered into between Borrowers and Bank in connection with this Agreement, all as amended or extended from time to time. "Material Adverse Effect" means a material adverse effect on (i) the business operations or condition (financial or otherwise) of Borrowers and their Subsidiaries taken as a whole and (ii) the ability of Borrowers to repay the Obligations or otherwise perform their obligations under the Loan Documents. "Negotiable Collateral" means all of each Borrower's present and future letters of credit of which it is a beneficiary, notes, drafts, instruments, securities, documents of title, and chattel paper, and Borrowers' Books relating to any of the foregoing. "Obligations" means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by Borrowers pursuant to the Loan Documents or any other agreement arising under or related to the Loan Documents, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding and including any debt, liability, or obligation owing from Borrowers to others that Bank may have obtained by assignment or otherwise. "Parent" means Maxwell Technologies, Inc. "Patents" means all patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same. "Periodic Payments" means all installments or similar recurring payments that Borrowers may now or hereafter become obligated to pay to Bank pursuant to the terms and provisions of any instrument, or agreement now or hereafter in existence between Borrowers and Bank. "Permitted Indebtedness" means: (a) Indebtedness of Borrowers in favor of Bank arising under this Agreement or any other Loan Document; (b) Indebtedness existing on the Closing Date and disclosed in the Schedule; (c) Indebtedness secured by a lien described in clause (c) of the defined term "Permitted Liens," provided such Indebtedness does not exceed the cost of the equipment financed with such Indebtedness; (d) Subordinated Debt; (e) Indebtedness between or among Borrowers; (f) The deferred purchase price of property or services in the ordinary course of business; (g) Indebtedness incurred by Foreign Subsidiaries, not to exceed Five Million Dollars ($5,000,000) (U.S.) in the aggregate outstanding at any time, and related Borrower guarantees thereof; (h) Borrower credit extensions to Foreign Subsidiaries, not to exceed Two Million Dollars ($2,000,000) (U.S.); (i) Contingent Obligations in the ordinary course of business; and (j) Up to Two Million Dollars ($2,000,000) (U.S.) of other Indebtedness not otherwise permitted under subdivisions (a) - (i) of the definition of Permitted Indebtedness. "Permitted Investment" means: (a) Investments existing on the Closing Date disclosed in the Schedule; (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one (1) year from the date of creation thereof and currently having rating of at least A-2 or P-2 from either Standard & Poor's Corporation or Moody's Investors Service, (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein issued by Bank, (iv) Bank's money market accounts and (v) any other financial instrument agreed to by Bank in writing; (c) Investments between or among Borrowers; (d) Investments in Foreign Subsidiaries, not to exceed Two Million Dollars ($2,000,000) (U.S.); (e) Travel and expense advances to employees and compensatory bonuses to employees in the form of forgivable loans; (f) Loans to employees under Parent's Management Equity Ownership Program and other compensatory stock programs; (g) Investments made using Borrower's equity provided that Borrowers meet all covenants contained herein as determined on a proforma basis after the Investment; (h) Discharge of existing obligation to former shareholders of Gateworks Corporation; and (i) Up to Two Million Dollars ($2,000,000) (U.S.) of other Investments not otherwise permitted under subdivisions (a) - (h) of the definition of Permitted Investment. "Permitted Liens" means the following: (a) Any Liens existing on the Closing Date and disclosed in the Schedule or arising under this Agreement or the other Loan Documents; (b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings, provided the same have no priority over any of Bank's security interests; (c) Liens (i) upon or in any equipment acquired or held by Borrowers or any of its Subsidiaries to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition of such equipment, or (ii) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment; (d) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (c) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase; (e) Mechanics', materialmen's, warehousemen's and similar statutory liens created in the ordinary course of business; and (f) Liens related to judgments pending discharge in accordance with section 8.8. "Person" means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency. "Prime Rate" means the variable rate of interest, per annum, most recently announced by Bank, as its "prime rate," whether or not such announced rate is the lowest rate available from Bank. "Prime Rate Advances" means any Advances or any portion thereof, on which interest is payable based on the Prime Rate in accordance with the terms hereof. "Prime Rate Extensions" means any Prime Rate Advances or any portion thereof bearing interest at a rate based on the Prime Rate. "Quick Assets" means, at any date as of which the amount thereof shall be determined, the unrestricted cash and cash-equivalents, accounts receivable and investments with maturities not to exceed 90 days, of Borrowers determined on a consolidated basis in accordance with GAAP. "Real Property" refers to the real property held of record by Parent and commonly referred to as (i) 8888-8892 Balboa Boulevard, San Diego, California 92123, and (ii) 5200 Sigstrom Drive, Carson City, Nevada. "Reserve Requirement" means, for any Interest Period, the average maximum rate at which reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during such Interest Period under Regulation D against "Eurocurrency liabilities" (as such term is used in Regulation D) by member banks of the Federal Reserve System. Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by Bank by reason of any Regulatory Change against (i) any category of liabilities which includes deposits by reference to which the LIBOR Rate is to be determined as provided in the definition of "LIBOR Base Rate" or (ii) any category of extensions of credit or other assets which include Advances. "Responsible Officer" means each of the Chief Executive Officer, the Chief Financial Officer and the VP-General Counsel of Parent. "Revolving Facility" means the facility under which Borrowers may request Bank to issue Advances, as specified in Section 2.1(a) hereof. "Revolving Maturity Date" means May 30, 2002. "Schedule" means the schedule of exceptions attached hereto, if any. "Shares" means (i) sixty-six and two-thirds percent (66-2/3%) of the issued and outstanding capital stock owned or held of record by any Borrower in any Subsidiary of any Borrower which is not an entity organized under the laws of the United States or any territory thereof, and (ii) one hundred percent (100%) of the issued and outstanding capital stock owned or held of record by any Borrower in any Subsidiary of any Borrower which is an entity organized under the laws of the United States or any territory thereof. "Subordinated Debt" means any debt incurred by any Borrower that is subordinated to the debt owing by such Borrower to Bank on terms reasonably acceptable to Bank (and identified as being such by such Borrower and Bank). "Subsidiary" means any corporation or partnership in which (i) any general partnership interest or (ii) more than 50% of the stock of which by the terms thereof ordinary voting power to elect the Board of Directors, managers or trustees of the entity shall, at the time as of which any determination is being made, is owned by any Borrower, either directly or through an Affiliate. "Systems Division" means Maxwell Technologies Systems Division, Inc. "Tangible Net Worth" means at any date as of which the amount thereof shall be determined, the sum of the capital stock and additional paid-in capital plus retained earnings (or minus accumulated deficit) of Parent minus intangible assets, debts owing from Affiliates, officers, shareholders or directors of Borrowers, plus Subordinated Debt, all determined on a consolidated basis in accordance with GAAP. "Total Liabilities" means at any date as of which the amount thereof shall be determined, all obligations that should, in accordance with GAAP be classified as liabilities on the consolidated balance sheet of Borrowers, including in any event all Indebtedness. "Trademarks" means any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrowers connected with and symbolized by such trademarks. 1.2 ACCOUNTING TERMS. All accounting terms not specifically defined herein shall be construed in accordance with GAAP and all calculations made hereunder shall be made in accordance with GAAP. When used herein, the terms "financial statements" shall include the notes and schedules thereto. 2. LOAN AND TERMS OF PAYMENT. 2.1 CREDIT EXTENSIONS. Borrowers promise to pay when due to the order of Bank, in lawful money of the United States of America, the aggregate unpaid principal amount of all Credit Extensions made by Bank to Borrowers hereunder. Borrowers shall also pay interest on the unpaid principal amount of such Credit Extensions at rates in accordance with the terms hereof. (a) REVOLVING ADVANCES. (i) Subject to and upon the terms and conditions of this Agreement and as long as no default or Event of Default has occurred and is continuing, Parent may request Advances in an aggregate outstanding amount of (1) unless and until (x) the Borrowers reach quarterly profitability on a consolidated basis (excluding one-time gains) and (y) completion of the sale of all or substantially all of the assets of Systems Division, the lesser of (i) the Committed Revolving Line, and (ii) the Borrowing Base; and (2) thereafter, the Committed Revolving Line; in any event MINUS the sum of (w) the then outstanding principal balance of the Advances, (x) the aggregate face amount of any outstanding Letters of Credit (including any drawn but unreimbursed Letters of Credit) (y) Advances under the Credit Card Sublimit and (z) amounts outstanding under the Foreign Exchange Sublimit. Subject to the terms and conditions of this Agreement, amounts borrowed pursuant to this Section 2.1(a) may be repaid and reborrowed at any time prior to the Revolving Maturity Date, at which time all Advances under this Section 2.1(a) shall be immediately due and payable. Borrowers may prepay any Advances without penalty or premium. (ii) Whenever Borrowers desire an Advance, Parent will notify Bank by facsimile transmission or telephone no later than 3:00 p.m. Pacific time, on the Business Day that a Prime Rate Advance is to be made, and 3:00 p.m. Pacific time on the Business Day that is three (3) Business Days prior to the Business Day on which a LIBOR Rate Advance is made. Each such notification shall be promptly confirmed by a Payment/Advance Form in substantially the form of EXHIBIT B hereto. Bank is authorized to make Advances under this Agreement, based upon instructions received from a Responsible Officer or a designee of a Responsible Officer, or without instructions if in Bank's discretion such Advances are necessary to meet Obligations which have become due and remain unpaid. Bank shall be entitled to rely on any telephonic notice given by a person who Bank reasonably believes to be a Responsible Officer or a designee thereof, and Borrowers shall indemnify and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance. Bank will credit the amount of Advances made under this Section 2.1(a) to Parent's deposit account. Each such notice shall specify: a) the date such Advance is to be made, which shall be a Business Day; b) the amount of such Advance; c) whether such Advance is to be a Prime Rate Advance or a LIBOR Rate Advance; and d) if the Advance is to be a LIBOR Rate Advance, the Interest Period for such Advance. Each written request for an Advance, and each confirmation of a telephone request for such an Advance, shall be in substantially the form of EXHIBIT B-1 hereto executed by Parent. (iii) PRIME RATE ADVANCES. The outstanding principal balance of each Prime Rate Advance shall bear interest until principal is due (computed daily on the basis of a 360 day year and actual days elapsed), at a floating rate per annum equal to one percent (1.0%) above the Prime Rate. Borrowers shall pay the entire outstanding principal amount of each Prime Rate Advance on the Revolving Maturity Date. (iv) LIBOR RATE ADVANCES. Each LIBOR Rate Advance shall be in an amount of not less than Five Hundred Thousand Dollars ($500,000). The outstanding principal balance of each LIBOR Rate Advance shall bear interest until principal is due (computed daily on the basis of a 360 day year and actual days elapsed) at a rate per annum equal to the LIBOR Rate plus three percent (3%) for such LIBOR Rate Advance. The entire outstanding principal amount of each LIBOR Rate Advance shall be due and payable on the earlier of (i) the last day of the LIBOR Rate Interest Period for such LIBOR Rate Advance, and (ii) on the Revolving Maturity Date. (v) PREPAYMENT OF THE ADVANCES. Borrowers may at any time prepay any Prime Rate Advance or any LIBOR Rate Advance, in full or in part. Each partial prepayment for a LIBOR Rate Advance shall be in an amount not less than One Hundred Thousand Dollars ($100,000). Each prepayment shall be made upon the irrevocable written or telephone notice of any Borrower received by Bank not later than 10:00 a.m. Pacific time on the date of the prepayment of a Prime Rate Advance, and not less than three (3) Business Days prior to the date of the prepayment of a LIBOR Rate Advance. The notice of prepayment shall specify the date of the prepayment, the amount of the prepayment, and the Advance or Advances prepaid. Each prepayment of a LIBOR Rate Advance shall be accompanied by the payment of accrued interest on the amount prepaid and any amount required by Section 2.7. (b) LETTER OF CREDIT SUBLIMIT. (i) Subject to the terms and conditions of this Agreement, from the Closing Date through the Revolving Maturity Date, Bank agrees to issue or cause to be issued letters of credit (each a "Letter of Credit," collectively, the "Letters of Credit") for the account of any Borrower in an aggregate face amount not to exceed (A) the lesser of the Committed Revolving Line or the Borrowing Base, MINUS the sum of (w) the then outstanding principal balance of the Advances, (x) the aggregate face amount of any outstanding Letters of Credit (including any drawn but unreimbursed Letters of Credit), (y) Advances under the Credit Card Sublimit and (z) amounts outstanding under the Foreign Exchange Sublimit, OR (B) Five Million Dollars ($5,000,000) (the "Letter of Credit Sublimit"). Each such Letter of Credit shall be renewable annually and shall have an expiration date no later than the Revolving Maturity Date. Repayment of any Letter of Credit having an expiration date later than the Revolving Maturity Date shall be secured by cash on deposit with Bank in the full face amount of such Letter of Credit. All Letters of Credit shall be, in form and substance, acceptable to Bank in its sole discretion and shall be subject to the terms and conditions of Bank's form of application and letter of credit agreement. All amounts actually paid by Bank in respect of a Letter of Credit shall, when paid, constitute an Advance under this Agreement. (ii) The obligation of Borrowers to immediately reimburse Bank for drawings made under Letters of Credit shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement and such Letters of Credit, under all circumstances whatsoever. Borrowers shall indemnify, defend, protect, and hold Bank harmless from any loss, cost, expense or liability, including, without limitation, reasonable attorneys' fees, arising out of or in connection with any Letters of Credit. (c) CREDIT CARD SUBLIMIT. Subject to the terms and conditions of this Agreement, from the Closing Date through the Revolving Maturity Date, Bank agrees to issue or cause to be issued corporate credit cards for the executives of Borrowers in an aggregate credit limit not to exceed (A) the lesser of the Committed Revolving Line or the Borrowing Base, MINUS the sum of (w) the then outstanding principal balance of the Advances, (x) the aggregate face amount of any outstanding Letters of Credit (including any drawn but unreimbursed Letters of Credit), (y) Advances under the Credit Card Sublimit and (z) amounts outstanding under the Foreign Exchange Sublimit, OR (B) One Million Dollars ($1,000,000) (the "Credit Card Sublimit"). The terms and conditions (including repayment and fees) of such Credit Card Sublimit shall be subject to the terms and conditions of the Bank's standard forms of application and agreement for corporate credit card(s), which Borrowers hereby agree to execute. (d) FOREIGN EXCHANGE SUBLIMIT. Subject to the terms and conditions of this Agreement, from the Closing Date through the Revolving Maturity Date, Borrowers may enter in foreign exchange forward contracts with the Bank under which Borrowers commit to purchase from or sell to Bank a set amount of foreign currency more than one (1) Business Day after the contract date (each, a "FX Forward Contract") in an aggregate amount not to exceed (A) the lesser of the Committed Revolving Line or the Borrowing Base, MINUS the sum of (w) the then outstanding principal balance of the Advances, (x) the aggregate face amount of any outstanding Letters of Credit (including any drawn but unreimbursed Letters of Credit), (y) Advances under the Credit Card Sublimit and (z) ten percent (10%) of the face amount of the foreign exchange instrument, OR (B) Three Million Dollars ($3,000,000) (the "Foreign Exchange Sublimit"). Bank may terminate the FX Forward Contracts if an Event of Default occurs. The terms and conditions (including repayment and fees) of such FX Forward Contracts shall be subject to the terms and conditions of the Bank's standard forms of application and agreement for FX Forward Contracts, which Borrowers hereby agree to execute. (e) BRIDGE ADVANCE. (i) Subject to and upon the terms and conditions of this Agreement, upon the Closing Date, Parent may request and Bank will provide Parent an advance (the "Bridge Advance") in an aggregate outstanding amount not to exceed the Bridge Loan. The principal amount of and all accrued interest on the Bridge Advance shall be immediately due and payable on the Bridge Maturity Date. The Bridge Advance, once repaid, may not be reborrowed. Borrowers may prepay the Bridge Advance without penalty or premium. (ii) Whenever Parent desires the Bridge Advance, Borrower will notify Bank by facsimile transmission or telephone no later than 3:00 p.m. Pacific time, on the Business Day that the Bridge Advance is to be made. Such notification shall be promptly confirmed by a Payment/Advance Form in substantially the form of Exhibit B-3 hereto. Bank is authorized to make the Bridge Advance under this Agreement, based upon instructions received from a Responsible Officer or a designee of a Responsible Officer. Bank shall be entitled to rely on any telephonic notice given by a person who Bank reasonably believes to be a Responsible Officer or a designee thereof, and Borrowers shall indemnify and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance. Bank will credit the amount of the Bridge Advance made under this Section 2.1(e) to Parent's deposit account. (iii) Upon the sale of all or a portion of the assets of the Systems Division outside the ordinary course of business, Borrower shall immediately apply the net proceeds, after payment of or provision for retained liabilities and minority shareholders interests not to exceed Four Million Dollars ($4,000,000) in the aggregate, received therefrom to satisfy the corresponding amount of first, the accrued interest on and second, the principal amount of the Bridge Loan. (iv) If Borrower does not sell all or substantially all of the assets of the Systems Division, and is therefore unable to repay the Bridge Loan on or before the Bridge Maturity Date, Borrowers and Bank will discuss the terms under which Bank may refinance the Bridge Loan. 2.2 OVERADVANCES. If at any time the availability of Advances hereunder is subject to the Borrowing Base, the outstanding Advances under Section 2.1(a), PLUS the Letter of Credit Sublimit, the Credit Card Sublimit and the Foreign Exchange Sublimit, exceed the lesser of the Borrowing Base or the Committed Revolving Line, Borrowers shall immediately pay Bank, in cash, the amount of such excess. 2.3 INTEREST RATES, PAYMENTS, AND CALCULATIONS. (a) INTEREST RATES. Except as set forth in Section 2.3(b), the Bridge Advance shall bear interest, on the outstanding daily balance thereof, at a rate equal to one and one-half percent (1.50%) above the Prime Rate. (b) DEFAULT RATE. All Obligations shall bear interest, from and after the occurrence and during the continuance of an Event of Default, at a rate equal to five (5) percentage points above the interest rate applicable immediately prior to the occurrence of an Event of Default. (c) PAYMENTS. Interest hereunder shall be due and payable on the last calendar day of each month during the term hereof. Bank shall charge such interest, all Bank Expenses, and all Periodic Payments against any of Borrowers' deposit accounts. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder. Bank shall deliver to Parent statements of account in the ordinary course of business reflecting charges made hereunder. (d) COMPUTATION. In the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased, effective as of the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate. All interest chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. 2.4 CREDITING PAYMENTS. Prior to the occurrence of an Event of Default, Bank shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligation as Parent specifies. After the occurrence of an Event of Default, the receipt by Bank of any wire transfer of funds, check, or other item of payment shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment on account unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 12:00 noon Pacific time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day. Whenever any payment to Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension. 2.5 FEES. Borrowers shall pay to Bank the following: (a) FACILITY FEES. On account of the Revolving Facility, Borrowers shall pay to Bank a fee equal to (i) $15,000, which fee shall be due and payable and shall be fully earned and nonrefundable as of the Closing Date; and (ii) one quarter of one percent (0.25%) per annum of the difference between the Revolving Committed Line and the average daily outstanding balance in any fiscal quarter under the Revolving Committed Line, which fee shall be payable within five (5) days of the last day of such fiscal quarter. On account of any Letter of Credit, one and one half percent (1.50%) per annum of the face amount of each Letter of Credit, whether or not drawn. On account of the Bridge Loan, Borrowers shall pay Bank a fee equal to Thirty Seven Thousand Five Hundred Dollars ($37,500), which fee shall be due and payable and shall be fully earned and nonrefundable as of the Closing Date. (b) BANK EXPENSES. On the Closing Date, all Bank Expenses incurred through the Closing Date, including reasonable attorneys' fees and expenses and, after the Closing Date, all Bank Expenses, including reasonable attorneys' fees and expenses, as and when they become due. 2.6 CONVERSION/CONTINUATION OF EXTENSIONS. (i) Parent may from time to time submit in writing a request that Prime Rate Extensions be converted to LIBOR Rate Extensions or that any existing LIBOR Rate Extensions continue for an additional Interest Period. Such request shall specify the amount of the Prime Rate Extensions which will constitute LIBOR Rate Extensions (subject to the limits set forth below) and the Interest Period to be applicable to such LIBOR Rate Extensions. Each written request for a conversion to a LIBOR Rate Extension or a continuation of a LIBOR Rate Extension shall be substantially in the form of a Libor Rate Conversion/Continuation Certificate as set forth on EXHIBIT B-2, which shall be duly executed by a Responsible Officer. Subject to the terms and conditions contained herein, three (3) Business Days after Bank's receipt of such a request from Parent, such Prime Rate Extensions shall be converted to LIBOR Rate Extensions or such LIBOR Rate Extensions shall continue, as the case may be provided that: a) no Event of Default or event which with notice or passage of time or both would constitute an Event of Default exists; b) no party hereto shall have sent any notice of termination of the Agreement; c) Parent shall have complied with such customary procedures as Bank has established from time to time for Parent's requests for LIBOR Rate Extensions; d) the amount of a LIBOR Rate Extension shall be $500,000 or such greater amount which is an integral multiple of $500,000; and e) Bank shall have determined that the Interest Period or LIBOR Rate is available to Bank as of the date of the request for such LIBOR Rate Extension. Any request by Parent to convert Prime Rate Extensions to LIBOR Rate Extensions or continue any existing LIBOR Rate Extensions shall be irrevocable. Notwithstanding anything to the contrary contained herein, Bank shall not be required to purchase United States Dollar deposits in the London interbank market or other applicable LIBOR Rate market to fund any LIBOR Rate Extensions, but the provisions hereof shall be deemed to apply as if Bank had purchased such deposits to fund the LIBOR Rate Extensions. (ii) Any LIBOR Rate Extensions shall automatically convert to Prime Rate Extensions upon the last day of the applicable Interest Period, unless Bank has received and approved a complete and proper request to continue such LIBOR Rate Extension at least three (3) Business Days prior to such last day in accordance with the terms hereof. Any LIBOR Rate Extensions shall, at Bank's option, convert to Prime Rate Extensions in the event that an Event of Default shall exist. Borrowers shall pay to Bank, upon demand by Bank any amounts required to compensate Bank for any loss (including loss of anticipated profits), cost or expense incurred by such person, as a result of the conversion of LIBOR Rate Extensions to Prime Rate Extensions pursuant to any of the foregoing. 2.7 ADDITIONAL REQUIREMENTS/PROVISIONS REGARDING LIBOR RATE EXTENSIONS. (i) If for any reason (including voluntary or mandatory prepayment or acceleration), Bank receives all or part of the principal amount of a LIBOR Rate Extension prior to the last day of the Interest Period for such LIBOR Rate Extension, Borrowers shall on demand by Bank, pay Bank the amount (if any) by which (i) the additional interest which would have been payable on the amount so received had it not been received until the last day of such Interest Period or term exceeds (ii) the interest which would have been recoverable by Bank by placing the amount so received on deposit in the certificate of deposit markets or the offshore currency interbank markets or United States Treasury investment products, as the case may be, for a period starting on the date on which it was so received and ending on the last day of such Interest Period or term at the interest rate determined by Bank. Bank's determination as to such amount shall be conclusive absent manifest error. (ii) Borrowers shall pay to Bank, upon demand by Bank, from time to time such amounts as Bank may reasonably determine to be necessary to compensate it for any costs incurred by Bank that Bank determines are attributable to its making or maintaining of any amount receivable by Bank hereunder in respect of any Credit Extensions relating thereto (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), in each case resulting from any Regulatory Change that: a) changes the basis of taxation of any amounts payable to Bank under this Agreement in respect of any Credit Extensions (other than changes which affect taxes measured by or imposed on the overall net income of Bank by the jurisdiction in which Bank has its principal office); or b) imposes or modifies any reserve, special deposit or similar requirements relating to any extensions of credit or other assets of, or any deposits with or other liabilities of Bank (including any Credit Extensions or any deposits referred to in the definition of "LIBOR Base Rate"); or c) imposes any other material condition affecting this Agreement (or any of such extensions of credit or liabilities). Bank will notify Parent of any event occurring after the date of the Agreement that will entitle Bank to compensation pursuant to this section as promptly as practicable after it obtains knowledge thereof and determines to request such compensation. Bank will furnish Parent with a statement setting forth the basis and amount of each request by Bank for compensation under this Section 2.6. Determinations and allocations by Bank for purposes of this Section 2.6 of the effect of any Regulatory Change on its costs of maintaining its obligations to make Credit Extensions or of making or maintaining Credit Extensions or on amounts receivable by it in respect of Credit Extensions, and of the additional amounts required to compensate Bank in respect of any Additional Costs, shall be conclusive absent manifest error. (iii) Borrowers shall pay to Bank, upon the request of Bank, such amount or amounts as shall be sufficient (in the sole good faith opinion of Bank) to compensate it for any reasonable loss, costs or expense incurred by it as a result of any failure by Borrowers to borrow a LIBOR Rate Extension on the date for such borrowing specified in the relevant notice of borrowing hereunder. (iv) If Bank shall determine that the adoption or implementation of any applicable law, rule, regulation or treaty regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Bank (or its applicable lending office) with any respect or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of Bank or any person or entity controlling Bank (a "Parent") as a consequence of its obligations hereunder to a level below that which Bank (or its Parent) could have achieved but for such adoption, change or compliance (taking into consideration its policies with respect to capital adequacy) by an amount deemed by Bank to be material, then from time to time, within 15 days after demand by Bank, Borrowers shall pay to Bank such additional amount or amounts as will compensate Bank for such reduction. A statement of Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive absent manifest error. (v) If at any time Bank, in its sole and absolute discretion, determines that: (i) the amount of the LIBOR Rate Extensions for periods equal to the corresponding Interest Periods or any other period are not available to Bank in the offshore currency interbank markets, or (ii) the LIBOR Rate does not accurately reflect the cost to Bank of lending the LIBOR Rate Extension, then Bank shall promptly give notice thereof to Parent, and upon the giving of such notice Bank's obligation to make the LIBOR Rate Extensions shall terminate, unless Bank and Parent agree in writing to a different interest rate applicable to LIBOR Rate Extensions. If it shall become unlawful for Bank to continue to fund or maintain any Advances, or to perform its obligations hereunder, upon demand by Bank, Borrowers shall prepay the Advances in full with accrued interest thereon and all other amounts payable by Borrowers hereunder (including, without limitation, any amount payable in connection with such prepayment pursuant to Section 2.6(a)). 2.8 TERM. This Agreement shall become effective on the Closing Date and, subject to Section 13.7, shall continue in full force and effect for so long as any Obligations are outstanding. Notwithstanding the foregoing, Bank shall have the right to terminate its obligation to make Credit Extensions under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default. Notwithstanding termination, Bank's Lien on the Collateral shall remain in effect for so long as any Obligations are outstanding. 3. CONDITIONS OF LOANS. 3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION. The obligation of Bank to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following: (a) this Agreement; (b) a certificate of the Secretary of each of the Borrowers with respect to incumbency and resolutions authorizing the execution and delivery of this Agreement; (c) a financing statement (Form UCC-1) from each Borrower for the state of such Borrower's formation and the location of such Borrower's assets; (d) termination statements from Sanwa Bank, terminating Sanwa Bank's interests in all real and personal property assets of Borrowers, such termination statements to be delivered concurrently with full repayment of amounts owed to Sanwa Bank; (e) an intellectual property security agreement from each Borrower; (f) the certificate(s) or other evidence for the Shares, accompanied by an instrument of assignment duly executed in blank by the appropriate Borrower; (g) Non-Encumbrance Agreements, for recordation with respect to the Real Property; (h) an opinion of counsel for the Borrowers; (i) an agreement to provide insurance; (j) payment of the fees and Bank Expenses then due specified in Section 2.5 hereof; (k) an audit of the Collateral, the results of which shall be satisfactory to Bank; and (l) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate. 3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS. The obligation of Bank to make each Credit Extension, including the initial Credit Extension, is further subject to the following conditions: (a) timely receipt by Bank of the Payment/Advance Form as provided in Section 2.1; and (b) the representations and warranties contained in Section 5 shall be true and correct in all material respects on and as of the date of such Payment/Advance Form and on the effective date of each Credit Extension as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would exist after giving effect to such Credit Extension (provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date). The making of each Credit Extension shall be deemed to be a representation and warranty by Borrowers on the date of such Credit Extension as to the accuracy of the facts referred to in this Section 3.2(b). 4. CREATION OF SECURITY INTEREST. 4.1 GRANT OF SECURITY INTEREST. Borrowers grant and pledge to Bank a continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by Borrowers of each of their covenants and duties under the Loan Documents. Except as set forth in the Schedule and except for Permitted Liens, such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in Collateral acquired after the date hereof. 4.2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrowers shall from time to time execute and deliver to Bank, at the request of Bank, all Negotiable Collateral, all financing statements and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfected Bank's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. 4.3 RIGHT TO INSPECT. Bank (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Borrowers' usual business hours but no more than once a year (unless an Event of Default has occurred and is continuing), to inspect Borrowers' Books and to make copies thereof and to check, test, and appraise the Collateral in order to verify Borrowers' financial condition or the amount, condition of, or any other matter relating to, the Collateral. 4.4 PLEDGE OF COLLATERAL. Each Borrower which is the owner of Shares hereby pledges, assigns and grants to Bank a security interest in the Shares, together with all proceeds and substitutions thereof, all cash, stock and other moneys and property paid thereon, all rights to subscribe for securities declared or granted in connection therewith, and all other cash and noncash proceeds of the foregoing, as security for the performance of the Obligations. Upon the Closing Date, the certificate or certificates, where available, for the Shares shall be delivered to Bank, accompanied by an instrument of assignment duly executed in blank by the respective Borrower. Each such Borrower shall cause the books of each entity whose shares are part of the Collateral and are not represented by certificates to reflect the pledge of the Shares. Upon the occurrence of an Event of Default hereunder, Bank may effect the transfer of the Shares into the name of Bank and cause new certificates representing such Shares to be issued in the name of Bank or its transferee. The respective Borrower will execute and deliver such documents, and take or cause to be taken such actions, as Bank may reasonably request to perfect or continue the perfection of Bank's security interest in the Shares. Unless an Event of Default shall have occurred and be continuing, the respective Borrowers shall be entitled to exercise any rights with respect to the Shares and to give consents, waivers and ratifications in respect thereof, provided that no vote shall be cast or consent, waiver or ratification given or action taken which would be inconsistent with any of the terms of this Agreement or which would constitute or create any violation of any of such terms. All such rights to vote and give consents, waivers and ratifications shall terminate upon the occurrence and continuance of an Event of Default. 4.5 GRANT OF SECURITY INTEREST IN REAL PROPERTY. In the event a sale or sales of all or substantially all the assets of the Systems Division is not closed by the Bridge Maturity Date and the Bridge Loan remains outstanding, Parent shall execute and deliver to Bank, in form and content satisfactory to Bank and sufficient for recordation, Deeds of Trust with respect to the Real Property and, in such event, Parent shall grant to Bank first in priority security interests, except for Permitted Liens, with respect to the Real Property. 5. REPRESENTATIONS AND WARRANTIES. Each Borrower represents and warrants as follows: 5.1 DUE ORGANIZATION AND QUALIFICATION. Borrower and each Subsidiary is an entity duly existing under the laws of its country or state of formation and qualified and licensed to do business in any country or state in which the conduct of its business or its ownership of property requires that it be so qualified, except for those countries or states where such failure to qualify would not have a Material Adverse Effect. 5.2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery, and performance of the Loan Documents are within Borrower's powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrower's Articles of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement to which Borrower is a party or by which Borrower is bound. Borrower is not in default under any agreement to which it is a party or by which it is bound, which default could have a Material Adverse Effect. 5.3 NO PRIOR ENCUMBRANCES. To the best of its knowledge, Borrower has good and indefeasible title to its Collateral, free and clear of Liens, except for Permitted Liens. 5.4 BONA FIDE ELIGIBLE ACCOUNTS. The Eligible Accounts are bona fide existing obligations. The property giving rise to such Eligible Accounts has been shipped to the account debtor or to the account debtor's agent for immediate shipment to and in anticipation of unconditional acceptance (subject only to commercially available trade terms and warranties) by the account debtor. Borrower has not received notice of actual or imminent Insolvency Proceeding of any account debtor that is included in any Borrowing Base Certificate as an Eligible Account. 5.5 MERCHANTABLE INVENTORY. All Inventory is in all material respects of good and marketable quality, free from all material defects, except for Inventory for which adequate reserves have been made. 5.6 INTELLECTUAL PROPERTY COLLATERAL. Borrower is the owner of the Intellectual Property Collateral, except for licenses granted by Borrower in the ordinary course of business. Each of the Patents is valid and enforceable, and no part of the Intellectual Property Collateral has been judged invalid or unenforceable, in whole or in part, and no claim has been made that any part of the Intellectual Property Collateral violates the rights of any third party. Except as set forth in the Schedule, Borrower's rights as a licensee of intellectual property do not give rise to more than five percent (5%) of its gross revenue in any given month, including without limitation revenue derived from the sale, licensing, rendering or disposition of any product or service. 5.7 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. Except as disclosed in the Schedule, Borrower has not done business under any name within the last five years other than that specified on the signature page hereof. The chief executive office of Parent is located at the address indicated in Section 10 hereof. 5.8 LITIGATION. Except as set forth in the Schedule, there are no actions or proceedings pending by or against Borrower or any Subsidiary before any court or administrative agency in which an adverse decision could have a Material Adverse Effect, or a material adverse effect on Borrower's interest or Bank's security interest in the Collateral. 5.9 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All consolidated financial statements related to Borrowers and any Subsidiaries that are delivered by Borrowers to Bank fairly present in all material respects Borrowers' consolidated financial condition as of the date thereof and Borrowers' consolidated results of operations for the period then ended. There has not been a material adverse change in the consolidated financial condition of Borrowers since the date of the most recent of such financial statements submitted to Bank. 5.10 SOLVENCY, PAYMENT OF DEBTS. Borrowers, on a consolidated basis, are solvent and able to pay their debts (including trade debts) as they mature. 5.11 REGULATORY COMPLIANCE. Borrower and each Subsidiary have met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from Borrower's failure to comply with ERISA that is reasonably likely to result in Borrower's incurring any liability that could have a Material Adverse Effect. Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940. Borrower is not engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations T and U of the Board of Governors of the Federal Reserve System). Borrower has complied with all the provisions of the Federal Fair Labor Standards Act. Borrower has not violated any statutes, laws, ordinances or rules applicable to it, which violations could have a Material Adverse Effect. 5.12 ENVIRONMENTAL CONDITION. Except as disclosed in the Schedule, none of Borrower's or any Subsidiary's properties or assets has ever been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous owners or operators, in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance in violation of applicable law, except for such violations which would not have a Material Adverse Effect; to the best of Borrower's knowledge, none of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Borrower or any Subsidiary; and neither Borrower nor any Subsidiary has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal, state or other governmental agency concerning any action or omission by Borrower or any Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste or hazardous substances into the environment, which has not been resolved to the satisfaction of the regulatory agency. 5.13 TAXES. To the best of its knowledge, Borrower and each Subsidiary have filed or caused to be filed all tax returns required to be filed, and have paid, or have made adequate provision for the payment of, all material taxes reflected therein. 5.14 SUBSIDIARIES. Borrower does not own any stock, partnership interest or other equity securities of any Person, except for Permitted Investments. 5.15 GOVERNMENT CONSENTS. Borrower and each Subsidiary have obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Borrower's business as currently conducted, the failure to obtain which could have a Material Adverse Effect. 5.16 FULL DISCLOSURE. No representation, warranty or other statement made by Borrower in any certificate or written statement furnished to Bank contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading. 5.17 SHARES. Borrower has full power and authority to create a first lien on the Shares and no disability or contractual obligation exists that would prohibit Borrower from pledging the Shares pursuant to this Agreement. Except as set forth on the Schedule, there are no subscriptions, warrants, rights of first refusal or other restrictions on, or options exercisable with respect to the Shares. The Shares have been and will be duly authorized and validly issued, and are fully paid and non-assessable. To the best of Borrower's knowledge, the Shares are not the subject of any present or threatened suit, action, arbitration, administrative or other proceeding, and Borrower knows of no reasonable grounds for the institution of any such proceedings. 6. AFFIRMATIVE COVENANTS. Each Borrower covenants and agrees that, until payment in full of all outstanding Obligations, and for so long as Bank may have any commitment to make a Credit Extension hereunder, such Borrower (except as indicated otherwise) shall do all of the following: 6.1 GOOD STANDING. Borrower shall maintain its and each of its Subsidiaries' corporate existence in its jurisdiction of incorporation, except as a result of mergers or other corporate changes permitted herein, and maintain qualification in each jurisdiction in which the failure to so qualify could have a Material Adverse Effect. Borrower shall maintain, and shall cause each of its Subsidiaries to maintain, in force all licenses, approvals and agreements, the loss of which could have a Material Adverse Effect. 6.2 GOVERNMENT COMPLIANCE. Borrower shall meet, and shall cause each Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Borrower shall comply, and shall cause each Subsidiary to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, except for noncompliances with which would not have a Material Adverse Effect, or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral. 6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Parent shall deliver to Bank: (a) as soon as available, but in any event within thirty (30) days after the end of each calendar month, a company prepared consolidated and consolidating balance sheet and income statement covering Borrowers' consolidated operations during such period, certified by a Responsible Officer; (b) as soon as available, but in any event within forty-five (45) days after the end of each calendar quarter, company prepared consolidated and consolidating financial statements covering Borrowers' consolidated operations during such period, certified by a Responsible Officer; (c) as soon as available, but in any event within ninety (90) days after the end of Borrowers' fiscal year, audited consolidated financial statements of Parent prepared in accordance with GAAP, consistently applied, together with an unqualified opinion on such financial statements of Ernst & Young LLP or other independent certified public accounting firm reasonably acceptable to Bank; (d) copies of all statements, reports and notices sent or made available generally by any Borrower to its security holders or to any holders of Subordinated Debt and, within five (5) days of filing, all reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission; (e) promptly upon receipt of notice thereof, a report of any legal actions filed against any Borrower or any Subsidiary that could result in damages or costs to any Borrower or any Subsidiary of Two Hundred Fifty Thousand Dollars ($250,000) or more; (f) such budgets, sales projections, operating plans or other financial information as Bank may reasonably request from time to time generally prepared by Borrowers in the ordinary course of business; and (g) within thirty (30) days of February 1 and August 1 of each year in which any Obligations are outstanding, unless an Event of Default has occurred and is continuing, a report signed by Borrowers, in form reasonably acceptable to Bank, listing any applications or registrations that any Borrower has made or filed in respect of any Patents, Copyrights or Trademarks and the status of any outstanding applications or registrations, as well as any material change in Borrowers' intellectual property, including but not limited to any subsequent ownership right of Borrowers in or to any Trademark, Patent or Copyright not specified in EXHIBITS A, B, and C of the Intellectual Property Security Agreements delivered to Bank by each Borrower in connection with this Agreement. Within thirty (30) days after the last day of each month in which Bank's Credit Extensions are limited by the Borrowing Base, Parent shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of EXHIBIT C hereto, together with aged listings of accounts receivable and accounts payable. Parent shall deliver to Bank with the quarterly financial statements a Compliance Certificate signed by a Responsible Officer in substantially the form of EXHIBIT D hereto. Bank shall have a right from time to time hereafter to audit Borrowers' Accounts and appraise Collateral at Borrowers' expense, provided that such audits will not be conducted more frequently than semi-annually unless an Event of Default has occurred and is continuing. 6.4 INVENTORY; RETURNS. Borrower shall keep all Inventory in good and marketable condition, free from all material defects except for Inventory for which adequate reserves have been made. Returns and allowances, if any, as between Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, substantially as such practices exist at the time of the execution and delivery of this Agreement. Borrower shall promptly notify Bank of all returns and recoveries and of all disputes and claims, where the return, recovery, dispute or claim involves more than Five Hundred Thousand Dollars ($500,000). 6.5 TAXES. Borrower shall make, and shall cause each U.S. Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law. Borrower will make, and will cause each U.S. Subsidiary to make, timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon reasonable request, furnish Bank with proof satisfactory to Bank indicating that Borrower or a Subsidiary has made such payments or deposits; provided that Borrower or a Subsidiary need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Borrower. 6.6 INSURANCE. (a) Borrower, at its expense, shall keep the Collateral and the Real Property insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrower's business is conducted on the date hereof. Borrower shall also maintain insurance relating to Borrower's ownership and use of the Collateral and the Real Property in amounts and of a type that are customary to businesses similar to Borrower's. Bank agrees that Borrowers' existing policies of insurance satisfy these requirements. (b) All replacement policies of insurance shall be in such form, with such companies, and in such amounts as reasonably satisfactory to Bank. All policies of property insurance shall contain a lender's loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee thereof, and all liability insurance policies shall show the Bank as an additional insured and shall specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy for any reason. Upon Bank's request, Borrower shall deliver to Bank certified copies of such policies of insurance and evidence of the payments of all premiums therefore. If the event giving rise to the payment of insurance proceeds could have a Material Adverse Effect, all proceeds payable under any such policy shall, at the option of Bank, be payable to Bank to be applied on account of the Obligations. 6.7 PRINCIPAL DEPOSITORY. Borrower shall maintain its principal depository and operating accounts with Bank. 6.8 QUICK RATIO. Borrowers shall maintain, as of the last day of each calendar quarter beginning with the quarter ending March 31, 2001, a ratio of Quick Assets to Current Liabilities of at least 0.65 to 1.00. 6.9 TOTAL LIABILITIES-TANGIBLE NET WORTH. Borrowers shall maintain, as of the last day of each calendar quarter beginning with the quarter ending March 31, 2001, a ratio of Total Liabilities to Tangible Net Worth of not more than 0.75 to 1.00. 6.10 TANGIBLE NET WORTH. Borrowers shall maintain, as of the last day of each calendar quarter beginning with the quarter ending March 31, 2001, a Tangible Net Worth of not less than (i) Sixty Million Dollars ($60,000,000) prior to the sale of all or substantially all the assets of Systems Division and, (ii) Sixty Three Million Dollars ($63,000,000) after the sale of all or substantially all the assets of Systems Division, in each case to increase by (x) fifty percent (50%) of net income, and (y) seventy five percent (75%) of net proceeds received by Parent in connection with the sale or issuance of Parent's equity securities after the Closing Date. 6.11 PROFITABILITY. Borrowers shall report a minimum consolidated net income of One Million Dollars for the fourth quarter of 2001, and shall not suffer a consolidated net loss in fiscal year 2001 in excess of $1,250,000 (excluding any net gain on the sale of any discontinued operation and any Extraordinary Items (as defined in accordance with GAAP)). Upon achieving quarterly profitability (excluding any net gain on the sale of any discontinued operation and any Extraordinary Items (as defined in accordance with GAAP)), Borrowers must maintain quarterly consolidated net income thereafter. 6.12 NO MATERIAL DIFFERENCE IN FINANCIAL STATEMENTS. The final audit of the Borrowers prepared by Ernst & Young for the fiscal year ended December 31, 2000 shall not be materially different than the draft audit of the Borrowers prepared by Ernst & Young for the same period. 6.13 REGISTRATION OF INTELLECTUAL PROPERTY RIGHTS. (a) Borrower shall register or cause to be registered on an expedited basis (to the extent not already registered) with the United States Patent and Trademark Office or the United States Copyright Office, as applicable: (i) those intellectual property rights listed on EXHIBITS A, B and C to the Intellectual Property Security Agreement delivered to Bank by Borrower in connection with this Agreement, within thirty (30) days of the date of this Agreement, (ii) all material registerable intellectual property rights Borrower has developed as of the date of this Agreement but heretofore failed to register, within thirty (30) days of the date of this Agreement and (iii) those additional intellectual property rights developed or acquired by Borrower from time to time in connection with any product and deemed to be material with respect to such product, prior to the sale or licensing of such product to any third party, (including without limitation major revisions or additions to the intellectual property rights listed on such EXHIBITS A, B and C). Borrower shall give Bank notice of all such applications or registrations pursuant to Section 6.3 (g). (b) Borrower shall execute and deliver such additional instruments and documents from time to time as Bank shall reasonably request to perfect Bank's security interest in the Intellectual Property Collateral. (c) With respect to those Trademarks, Patents and Copyrights deemed to be material by Borrower, Borrower shall (i) protect, defend and maintain the validity and enforceability of the Trademarks, Patents and Copyrights, (ii) use its best efforts to detect infringements of the Trademarks, Patents and Copyrights and promptly advise Bank in writing of material infringements detected and (iii) not allow any material Trademarks, Patents or Copyrights to be abandoned, forfeited or dedicated to the public without the written consent of Bank, which shall not be unreasonably withheld. (d) Bank may audit Borrower's Intellectual Property Collateral to confirm compliance with this Section 6.13, provided such audit may not occur more often than once per year, unless an Event of Default has occurred and is continuing. Bank shall have the right, but not the obligation, to take, at Borrower's sole expense, any actions that Borrower is required under this Section 6.13 to take but which Borrower fails to take, after fifteen (15) days' notice to Borrower. Borrower shall reimburse and indemnify Bank for all reasonable costs and reasonable expenses incurred in the reasonable exercise of its rights under this Section 6.13. 6.14 FURTHER ASSURANCES. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement. 7. NEGATIVE COVENANTS. Each Borrower covenants and agrees that, so long as any credit hereunder shall be available and until payment in full of the outstanding Obligations or for so long as Bank may have any commitment to make any Credit Extensions, no Borrower will do any of the following: 7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, other than: (i) Transfers of property in the ordinary course of business; (ii) Transfers or grants of licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries; (iii) Transfers of surplus, worn-out or obsolete Equipment; (iv) the sale of all or substantially all assets of Systems Division; (v) Transfers to any Borrower; (vi) Transfers permitted by 7.9 (iv); (vii) leases of surplus real property or leasehold interests; (viii) Transfers of real property after the Bridge Loan has been paid in full; or (ix) other transfers to third parties not to exceed Two Million Dollars ($2,000,000) (U.S.) in the aggregate at any time. 7.2 CHANGE IN BUSINESS. Engage in any business, or permit any of its Subsidiaries to engage in any business, other than the businesses currently engaged in by Borrower and any business substantially similar or related thereto (or incidental thereto). Parent will not, without thirty (30) days prior written notification to Bank, relocate its chief executive office. 7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person, other than: (i) mergers or consolidations between or among Borrowers; (ii) mergers or consolidations between or among Foreign Subsidiaries of Borrowers; or (iii) mergers or consolidations permitted under subsection (g) of the defined term Permitted Investments. 7.4 INDEBTEDNESS. Create, incur, assume or be or remain liable with respect to any Indebtedness, or permit any Subsidiary so to do, other than Permitted Indebtedness. 7.5 ENCUMBRANCES. Create, incur, assume or suffer to exist any Lien with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens. 7.6 DISTRIBUTIONS. Other than between or among the Borrowers, pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock, except that (i) Borrower may repurchase the stock of current and former employees pursuant to stock repurchase and restricted stock agreements as long as an Event of Default does not exist prior to such repurchase or would not exist after giving effect to such repurchase; and (ii) Borrower may discharge its obligation to satisfy certain existing put rights of former shareholders of Gateworks Corporation. 7.7 INVESTMENTS. Directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments. 7.8 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into any material transaction with any Affiliate of Borrower except for transactions with any other Borrower and transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms. 7.9 TRANSACTIONS WITH FOREIGN AFFILIATES. Transfer any assets or consideration to Foreign Subsidiaries, except for (i) Permitted Indebtedness, (ii) Permitted Investments, and (iii) other transfers of domestic assets not to exceed Two Million Dollars ($2,000,000) (U.S.) in the aggregate outstanding at any time. 7.10 SUBORDINATED DEBT. Make any payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt, or amend any provision contained in any documentation relating to the Subordinated Debt without Bank's prior written consent. 7.11 INVENTORY AND EQUIPMENT. Store the Inventory or the Equipment with a bailee, warehouseman, or similar party unless Bank has received a pledge of the warehouse receipt covering such Inventory; provided, however, that Borrower may store non-material inventory offsite and may deposit software code in escrow for customers in the ordinary course of business. Except for Inventory sold in the ordinary course of business and except for such other locations as Bank may approve in writing, Borrower shall keep the Inventory and Equipment only at the locations set forth in the Schedule and such other locations of which Borrower gives Bank prior written notice and as to which Borrower signs and files a financing statement where needed to perfect Bank's security interest. 7.12 COMPLIANCE. Become an "investment company" or be controlled by an "investment company," within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Credit Extension for such purpose. Fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply with the Federal Fair Labor Standards Act or violate any law or regulation, which violation could have a Material Adverse Effect, or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral, or permit any of its Subsidiaries to do any of the foregoing. 7.13 INTELLECTUAL PROPERTY AGREEMENTS. Borrower shall use best efforts not to permit the inclusion in any material contract to which it becomes a party of any provisions that could or might in any way prevent the creation of a security interest in Borrower's rights and interests in any material property included within the definition of the Intellectual Property Collateral acquired under such contracts. 7.14 NEGATIVE PLEDGE/NEGATIVE PLEDGE AGREEMENTS. Except in the ordinary course of business, Borrower shall not sell, transfer, assign, mortgage, pledge, lease, grant a security interest in, encumber or permit the inclusion in any contract to which any Borrower becomes a party of any provisions that could restrict or invalidate the creation of a security interest in Borrower's rights and interests in the Collateral or the Real Property. 7.15 REAL PROPERTY DEEDS OF TRUST. Fail to perform its obligations or otherwise perform its duties under any Deed of Trust granted to Bank with respect to the Real Property. 8. EVENTS OF DEFAULT. Any one or more of the following events shall constitute an Event of Default under this Agreement: 8.1 PAYMENT DEFAULT. If a Borrower fails to pay within five (5) calendar days of the date when due, any of the Obligations; 8.2 COVENANT DEFAULT. If a Borrower fails to perform any obligation under Article 6 or violates any of the covenants contained in Article 7 of this Agreement, or fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between a Borrower and Bank and as to any default under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within ten (10) days after a Borrower receives notice thereof or any officer of a Borrower becomes aware thereof; provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by a Borrower be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then a Borrower shall have an additional reasonable period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default (provided that no Credit Extensions will be required to be made during such cure period); 8.3 MATERIAL ADVERSE CHANGE. If there occurs a Material Adverse Effect, if Bank reasonably determines that a Borrower is likely to fail to comply with any of the financial covenants set forth in Sections 6.8 through 6.11 as of any date of measurement, or a material impairment of the value or priority of Bank's security interests in the Collateral; 8.4 ATTACHMENT. If any material portion of Borrowers' assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within ten (10) days, or if a Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of Borrowers' business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrowers' assets, or if a notice of lien, levy, or assessment is filed of record with respect to a material portion of Borrowers' assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within ten (10) days after a Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by a Borrower (provided that no Credit Extensions will be required to be made during such cure period); 8.5 INSOLVENCY. If Borrowers, on a consolidated basis, become insolvent, or if an Insolvency Proceeding is commenced by any Borrower, or if an Insolvency Proceeding is commenced against any Borrower and is not dismissed or stayed within thirty (30) days (provided that no Credit Extensions will be made prior to the dismissal of such Insolvency Proceeding); 8.6 OTHER AGREEMENTS. If there is a default in any agreement to which a Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness that could have a Material Adverse Effect; 8.7 JUDGMENTS. If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least Two Hundred Fifty Thousand Dollars ($250,000) shall be rendered against a Borrower and shall remain unsatisfied and unstayed for a period of thirty (30) days (provided that no Credit Extensions will be made prior to the satisfaction or stay of such judgment); or 8.8 MISREPRESENTATIONS. If any material misrepresentation or material misstatement exists as of the closing date in any warranty or representation set forth herein or in any certificate delivered to Bank as of delivery date by any Responsible Officer pursuant to this Agreement. 8.9 DEEDS OF TRUST. If Parent fails to perform its obligations or otherwise perform its duties under any Deed of Trust granted to Bank with respect to the Real Property, following any grace or cure period provided by such Deed of Trust. 9. BANK'S RIGHTS AND REMEDIES. 9.1 RIGHTS AND REMEDIES. Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by each Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 8.5, all Obligations shall become immediately due and payable without any action by Bank); (b) Cease advancing money or extending credit to or for the benefit of Borrowers under this Agreement or under any other agreement between any Borrower and Bank; (c) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable; (d) Make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Each Borrower agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Each Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of a Borrower's owned premises, Borrowers hereby grant Bank a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of Bank's rights or remedies provided herein, at law, in equity, or otherwise; (e) Set off and apply to the Obligations any and all (i) balances and deposits of Borrowers held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of Borrowers held by Bank; (f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Bank is hereby granted a license or other right, solely pursuant to the provisions of this Section 9.1, to use, without charge, each Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank's exercise of its rights under this Section 9.1, Borrowers' rights under all licenses and all franchise agreements shall inure to Bank's benefit; (g) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrowers' premises) as Bank determines is commercially reasonable, and apply any proceeds to the Obligations in whatever manner or order Bank deems appropriate; (h) Bank may credit bid and purchase at any public sale; and (i) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrowers. 9.2 POWER OF ATTORNEY. Effective only upon the occurrence and during the continuance of an Event of Default, each Borrower hereby irrevocably appoints Bank (and any of Bank's designated officers, or employees) as Borrowers' true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of Bank's security interest in the Accounts; (b) endorse any Borrower's name on any checks or other forms of payment or security that may come into Bank's possession; (c) sign any Borrower's name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) dispose of any Collateral; (e) make, settle, and adjust all claims under and decisions with respect to any Borrower's policies of insurance; and (f) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Bank determines to be reasonable; (g) to modify, in its sole discretion, any intellectual property security agreement entered into between any Borrower and Bank without first obtaining such Borrower's approval of or signature to such modification by amending EXHIBITS A, B, and C, thereof, as appropriate, to include reference to any right, title or interest in any Copyrights, Patents or Trademarks acquired by such Borrower after the execution hereof or to delete any reference to any right, title or interest in any Copyrights, Patents or Trademarks in which such Borrower no longer has or claims to have any right, title or interest; (h) to file, in its sole discretion, one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of any Borrower where permitted by law; and (i) to transfer the Intellectual Property Collateral into the name of Bank or a third party to the extent permitted under the California Uniform Commercial Code; provided Bank may exercise such power of attorney to sign the name of any Borrower on any of the documents described in Section 4.2 regardless of whether an Event of Default has occurred. Bank shall provide Parent notice of any action taken with respect to Section 4.2. The appointment of Bank as Borrowers' attorney in fact, and each and every one of Bank's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Bank's obligation to provide advances hereunder is terminated. 9.3 ACCOUNTS COLLECTION. Upon the occurrence and during the continuance of an Event of Default, Bank may notify any Person owing funds to any Borrower of Bank's security interest in such funds and verify the amount of such Account. Upon the occurrence and during the continuance of an Event of Default, Borrowers shall collect all amounts owing to any Borrower for Bank, receive in trust all payments as Bank's trustee, and immediately deliver such payments to Bank in their original form as received from the account debtor, with proper endorsements for deposit. 9.4 BANK EXPENSES. If any Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following after reasonable notice to Borrower: (a) make payment of the same or any part thereof; (b) set up such reserves under the Revolving Facility as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.6 of this Agreement, and take any action with respect to such policies as Bank deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement. 9.5 BANK'S LIABILITY FOR COLLATERAL. So long as Bank complies with reasonable banking practices, Bank shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of loss, damage or destruction of the Collateral shall be borne by Borrowers. 9.6 REMEDIES CUMULATIVE. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Borrowers' part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given. 9.7 DEMAND; PROTEST. Other than notices provided for or related to this Agreement, Borrowers waive demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which any Borrower may in any way be liable. 10. NOTICES. Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, certified mail, postage prepaid, return receipt requested, or by telefacsimile to Parent or to Bank, as the case may be, at its addresses set forth below: If to Borrowers: c/o MAXWELL TECHNOLOGIES, INC. 9244 Balboa Avenue San Diego, California 92123 Attn: Chief Financial Officer Fax: (858) 277-6754 If to Bank: Comerica Bank-California 600 B Street, 1st Floor San Diego, CA 92101 Attn: Craig Nelson FAX: (619) 687-5310 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. 11. CO-BORROWERS. 11.1 PRIMARY OBLIGATION. This Agreement is a primary and original obligation of each Borrower and shall remain in effect notwithstanding future changes in conditions, including any change of law or any invalidity or irregularity in the creation or acquisition of any Obligations or in the execution or delivery of any agreement between Bank and any Borrower. Each Borrower shall be liable for existing and future Obligations as fully as if all of the Advances were advanced to such Borrower. Bank may rely on any certificate or representation made by any Borrower as made on behalf of, and binding on, all Borrowers, including without limitation Advance Request Forms, Borrowing Base Certificates and Compliance Certificates. 11.2 ENFORCEMENT OF RIGHTS. Borrowers are jointly and severally liable for the Obligations and Bank may proceed against one or more of the Borrowers to enforce the Obligations without waiving its right to proceed against any of the other Borrowers. 11.3 BORROWERS AS AGENTS. Each Borrower appoints the other Borrower as its agent with all necessary power and authority to give and receive notices, certificates or demands for and on behalf of both Borrowers, to act as disbursing agent for receipt of any Advances on behalf of each Borrower and to apply to Bank on behalf of each Borrower for Advances, any waivers and any consents. This authorization cannot be revoked, and Bank need not inquire as to each Borrower's authority to act for or on behalf of Borrower. 11.4 SUBROGATION AND SIMILAR RIGHTS. Notwithstanding any other provision of this Agreement or any other Loan Document, as long as Bank's commitment to make Credit Extensions exists hereunder or any Obligations are or in the future could be outstanding, each Borrower irrevocably waives all rights that it may have at law or in equity (including, without limitation, any law subrogating the Borrower to the rights of Bank under the Loan Documents) to seek contribution, indemnification, or any other form of reimbursement from any other Borrower, or any other Person now or hereafter primarily or secondarily liable for any of the Obligations, for any payment made by the Borrower with respect to the Obligations in connection with the Loan Documents or otherwise and all rights that it might have to benefit from, or to participate in, any security for the Obligations as a result of any payment made by the Borrower with respect to the Obligations in connection with the Loan Documents or otherwise. Any agreement providing for indemnification, reimbursement or any other arrangement prohibited under this Section 11.4 shall be null and void. If any payment is made to a Borrower in contravention of this Section 11.4, such Borrower shall hold such payment in trust for Bank and such payment shall be promptly delivered to Bank for application to the Obligations, whether matured or unmatured. 11.5 WAIVERS OF NOTICE. Each Borrower waives notice of acceptance hereof; notice of the existence, creation or acquisition of any of the Obligations; notice of an Event of Default; notice of the amount of the Obligations outstanding at any time; notice of intent to accelerate; notice of acceleration; notice of any adverse change in the financial condition of any other Borrower or of any other fact that might increase the Borrower's risk; presentment for payment; demand; protest and notice thereof as to any instrument; default; and all other notices and demands to which the Borrower would otherwise be entitled. Each Borrower waives any defense arising from any defense of any other Borrower, or by reason of the cessation from any cause whatsoever of the liability of any other Borrower. Bank's failure at any time to require strict performance by any Borrower of any provision of the Loan Documents shall not waive, alter or diminish any right of Bank thereafter to demand strict compliance and performance therewith. Nothing contained herein shall prevent Bank from foreclosing on the Lien of any deed of trust, mortgage or other security instrument, or exercising any rights available thereunder, and the exercise of any such rights shall not constitute a legal or equitable discharge of any Borrower. Each Borrower also waives any defense arising from any act or omission of Bank that changes the scope of the Borrower's risks hereunder. Each Borrower hereby waives any right to assert against Bank any defense (legal or equitable), setoff, counterclaim, or claims that such Borrower individually may now or hereafter have against another Borrower or any other Person liable to Bank with respect to the Obligations in any manner or whatsoever. 11.6 SUBROGATION DEFENSES. Each Borrower hereby waives any defense based on impairment or destruction of its subrogation or other rights against any other Borrower and waives all benefits which might otherwise be available to it under California Civil Code Sections 2809, 2810, 2819, 2839, 2845, 2848, 2849, 2850, 2899, and 3433 and California Code of Civil Procedure Sections 580a, 580b, 580d and 726, as those statutory provisions are now in effect and hereafter amended, and under any other similar statutes now and hereafter in effect. 11.7 RIGHT TO SETTLE, RELEASE. (a) The liability of Borrowers hereunder shall not be diminished by (i) any agreement, understanding or representation that any of the Obligations is or was to be guaranteed by another Person or secured by other property, or (ii) any release or unenforceability, whether partial or total, of rights, if any, which Bank may now or hereafter have against any other Person, including another Borrower, or property with respect to any of the Obligations. (b) Without notice to any Borrower and without affecting the liability of any Borrower hereunder, Bank may (i) compromise, settle, renew, extend the time for payment, change the manner or terms of payment, discharge the performance of, decline to enforce, or release all or any of the Obligations with respect to a Borrower, (ii) grant other indulgences to a Borrower in respect of the Obligations, (iii) modify in any manner any documents relating to the Obligations with respect to a Borrower, (iv) release, surrender or exchange any deposits or other property securing the Obligations, whether pledged by a Borrower or any other Person, or (v) compromise, settle, renew, or extend the time for payment, discharge the performance of, decline to enforce, or release all or any obligations of any guarantor, endorser or other Person who is now or may hereafter be liable with respect to any of the Obligations. 12. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Each of Borrowers and Bank hereby submits to the nonexclusive jurisdiction of the state and Federal courts located in the County of Santa Clara, State of California. BORROWERS AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. 13. GENERAL PROVISIONS. 13.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by any Borrower without Bank's prior written consent, which consent may be granted or withheld in Bank's sole discretion. Bank shall have the right with the consent of or notice to any Borrower to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits hereunder. 13.2 INDEMNIFICATION. Each Borrower shall defend, indemnify and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement; and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential to transactions between Bank and any Borrower whether under this Agreement, or otherwise (including without limitation reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. 13.3 TIME OF ESSENCE. Time is of the essence for the performance of all obligations set forth in this Agreement. 13.4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 13.5 AMENDMENTS IN WRITING, INTEGRATION. This Agreement cannot be amended or terminated orally. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are merged into this Agreement and the Loan Documents. 13.6 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. 13.7 SURVIVAL. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding. The obligations of Borrowers to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 13.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. MAXWELL TECHNOLOGIES, INC. By: /s/ Vickie L. Capps --------------------------------- Title: Chief Financial Officer ------------------------------- MAXWELL ELECTRONIC COMPONENTS GROUP, INC. By: /s/ Vickie L. Capps --------------------------------- Title: Chief Financial Officer ------------------------------- I-BUS/PHOENIX, INC. By: /s/ Vickie L. Capps --------------------------------- Title: Chief Financial Officer ------------------------------- PUREPULSE TECHNOLOGIES, INC. By: /s/ Vickie L. Capps --------------------------------- Title: Vice President ------------------------------- MAXWELL TECHNOLOGIES SYSTEMS DIVISION, INC. By: /s/ Vickie L. Capps --------------------------------- Title: Chief Financial Officer ------------------------------- MML ACQUISITION CORP. By: /s/ Vickie L. Capps --------------------------------- Title: Chief Financial Officer ------------------------------- COMERICA BANK-CALIFORNIA By: Craig Nelson --------------------------------- Title: Vice President ------------------------------- EX-10.34 7 a2042380zex-10_34.txt EXHIBIT 10.34 Exhibit 10.34 OFFICE BUILDING LEASE BETWEEN BALBOA BOULEVARD BUILDING, G.P., LANDLORD AND MAXWELL TECHNOLOGIES, INC., TENANT
TABLE OF CONTENTS PAGE 1. BASIC LEASE TERMS......................................................................................1 2. PREMISES...............................................................................................3 3. TERM...................................................................................................3 4. POSSESSION.............................................................................................3 5. RENT...................................................................................................3 6. OPERATING EXPENSES.....................................................................................4 7. INTENTIONALLY OMITTED..................................................................................5 8. USE....................................................................................................5 9. NOTICES................................................................................................6 10. BROKERS................................................................................................6 11. SURRENDER; HOLDING OVER................................................................................6 12. TAXES ON TENANT'S PROPERTY.............................................................................7 13. ALTERATIONS............................................................................................7 14. REPAIRS................................................................................................9 15. LIENS.................................................................................................10 16. ENTRY BY LANDLORD.....................................................................................10 17. UTILITIES AND SERVICES................................................................................10 18. ASSUMPTION OF RISK AND INDEMNIFICATION................................................................11 19. INSURANCE.............................................................................................11 20. DAMAGE OR DESTRUCTION.................................................................................13 21. EMINENT DOMAIN........................................................................................14 22. DEFAULTS AND REMEDIES.................................................................................15 23. LANDLORD'S DEFAULT....................................................................................17 24. ASSIGNMENT AND SUBLETTING.............................................................................17 25. SUBORDINATION .......................................................................................19 26. ESTOPPEL CERTIFICATE..................................................................................19 27. INTENTIONALLY OMITTED.................................................................................19 28. RULES AND REGULATIONS.................................................................................19 29. MODIFICATION AND CURE RIGHTS OF LANDLORD'S MORTGAGEES AND LESSORS.....................................19 30. DEFINITION OF LANDLORD................................................................................20 31. WAIVER................................................................................................20 32. PARKING...............................................................................................20 33. FORCE MAJEURE.........................................................................................20 34. SIGNS.................................................................................................20 35. LIMITATION ON LIABILITY...............................................................................21 36. FINANCIAL STATEMENTS..................................................................................21 37. QUIET ENJOYMENT.......................................................................................21 38. MISCELLANEOUS.........................................................................................21 39. EXECUTION OF LEASE....................................................................................22 EXHIBITS: A-I Site Plan of Premises A-II Legal Description B Intentionally Omitted C Work Letter Agreement D Notice of Lease Term Dates E Definition of Operating Expenses F Intentionally Omitted G Estoppel Certificate H Rules and Regulations
OFFICE BUILDING LEASE This OFFICE BUILDING LEASE ("Lease") is entered into as of this 28th day of March, 2000, by and between BALBOA BOULEVARD BUILDING, G.P., a general partnership ("Landlord"), and MAXWELL TECHNOLOGIES, INC., a Delaware corporation ("Tenant"). 1. BASIC LEASE TERMS. For purposes of this Lease, the following terms have the following definitions and meanings: (a) LANDLORD: BALBOA BOULEVARD BUILDING, G.P., a general partnership. (b) LANDLORD'S ADDRESS (FOR NOTICES): c/o The Philip MacDonald Company 2925 Bristol Street Costa Mesa, California 92626 Attention: Philip MacDonald or such other place as Landlord may from time to time designate by notice to Tenant. (c) TENANT: MAXWELL TECHNOLOGIES, INC., a Delaware corporation. (d) TENANT'S ADDRESS (FOR NOTICES): Maxwell Technologies, Inc. 9275 Sky Park Court San Diego, California 92123 Attention: Don Roberts or such other place as Tenant may from time to time designate by notice to Landlord. (e) BUILDING: A one (1) story building located at 9244 Balboa Avenue in the City of San Diego (the "City"), County of San Diego (the "County"), State of California (the "State"), which Building for all purposes of this Lease the parties agree contains 45,530 total Rentable Square Feet as shown on the site plan attached hereto as EXHIBIT "A-I". The parties hereto stipulate and agree as to the "Rentable Square Footage" of the Premises and there shall be no remeasure of the Premises for purposes of adjusting any payments from time to time due under this Lease. (f) PREMISES: The Building, the legal parcel of land upon which the Building is located (the "Land"), and all other improvements thereon including, without limitation, all parking areas, landscaping and signs, as generally shown on the site plan attached hereto as EXHIBIT "A-I". The legal description of the Land is described in EXHIBIT "A-II" attached hereto. (g) TERM: Seven (7) Lease Years (as defined in Paragraph 3 hereof). (h) INTENTIONALLY OMITTED. (i) COMMENCEMENT DATE: The date on which the Term of this Lease will commence as determined in accordance with the provisions of EXHIBIT "C" and as stated on EXHIBIT "D". (j) INITIAL MONTHLY BASE RENT: $54,636.00 ($1.20/RSF/mo.), subject to adjustment as provided in Subparagraph 1(k) below and as otherwise provided in this Lease. (k) ADJUSTMENT TO MONTHLY BASE RENT: Monthly Base Rent will be adjusted in accordance with the following: Effective on the first (1st) anniversary of the Commencement Date and annually thereafter (the "CPI Adjustment Date(s)"), the Monthly Base Rent in effect immediately before each CPI Adjustment Date shall be increased in accordance with a percentage increase, if any, in the Index (as hereinafter defined), to an amount which is equal to the product of (i) the Index for the fourth (4th) month preceding the month in which the applicable CPI Adjustment Date occurs, multiplied by (ii) the Monthly Base Rent which was in effect immediately prior to the applicable CPI Adjustment Date, divided by (iii) the Basic Index (as hereinafter defined); provided, however, in no event shall the Monthly Base Rent in effect after any CPI Adjustment Date be less than the Monthly Base Rent in effect immediately preceding the CPI Adjustment Date. The parties intend that the foregoing equation result in a compounding of adjustments to Monthly Base Rent. The "Index" shall mean the Consumer Price Index, All Items, 1982-1984 = 100, All Urban Consumers, for the Los Angeles/Anaheim/Riverside, California Area, as published by the United States Department of Labor, Bureau of Labor Statistics, or its successor index, and the "Basic Index" shall mean the Index published for the fourth (4th) month preceding the month in which the Commencement Date occurs for the first adjustment to the Monthly Base Rent, and for each succeeding adjustment, the Basic Index will be the Index for the fourth (4th) month preceding the month in which the most recent CPI Adjustment Date occurred. In the event the compilation or publication of the Index shall be transferred to any other governmental department, bureau or agency or shall be discontinued, the index most nearly the same as the Index shall be used to make such calculation. Notwithstanding the foregoing, in no event shall Monthly Base Rent increase annually by more than five percent (5%) of the Monthly Base Rent in effect immediately prior to any such increase. (l) BASE YEAR OPERATING EXPENSES: Base Year Operating Expenses means that portion of Operating Expenses as described in Paragraph 6 below which Landlord has included in Monthly Base Rent, which, for purposes of this Lease, will be an amount equal to Operating Expenses for the base year which is first Lease Year; provided, however, the base year for Real Property Taxes and Assessments (as defined in EXHIBIT "E" attached hereto) shall be the actual Real Property Taxes and Assessments applicable to the Premises for the 2000/2001 fiscal tax year. (m) TENANT IMPROVEMENTS: All tenant improvements installed or to be installed by Tenant within the Premises to prepare the Premises for occupancy pursuant to the terms of the Work Letter Agreement attached hereto as EXHIBIT "C". (n) TENANT IMPROVEMENT ALLOWANCE: $1,365,900 ($30.00 per Rentable Square Foot of the Building), to be applied as provided in the Work Letter Agreement attached hereto as EXHIBIT "C". (o) PERMITTED USE: General office use, research and development, light manufacturing and associated functions to the extent permitted under the existing M-1B zoning. (p) BROKER(S): CB Richard Ellis representing both Tenant and Landlord. (q) INTEREST RATE: For any event giving rise the imposition of interest pursuant to this Lease, the interest rate will be ten percent (10%) per annum. (r) EXHIBITS: "A-I" through "H", inclusive, exclusive of EXHIBITS "B" and "F," which Exhibits are attached to this Lease and incorporated herein by this reference. As provided in Paragraph 3 below, a completed version of EXHIBIT "D" will be delivered to Tenant after the Commencement Date. 2. -2- PREMISES. (a) PREMISES. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises, as defined in Subparagraph 1(f), which includes but is not limited to the Building as improved or to be improved with the Tenant Improvements described in the Work Letter Agreement, a copy of which is attached hereto as EXHIBIT "C". (b) MUTUAL COVENANTS. Landlord and Tenant agree that the letting and hiring of the Premises is upon and subject to the terms, covenants and conditions contained in this Lease and each party covenants as a material part of the consideration for this Lease to keep and perform their respective obligations under this Lease. 3. TERM. The term of this Lease ("Term") will be for the period designated in Subparagraph 1(g), commencing on the Commencement Date. Each consecutive twelve (12) month period of the Term of this Lease, commencing on the Commencement Date, will be referred to herein as a "Lease Year". Landlord's Notice of Lease Term Dates ("Notice"), in the form of EXHIBIT "D" attached hereto, will set forth the Commencement Date and the date upon which the Term of this Lease shall end, and will be delivered to Tenant after Landlord delivers possession of the Premises to Tenant. The Notice will be binding upon Tenant unless Tenant objects to the Notice in writing within thirty (30) days of Tenant's receipt of the Notice. 4. POSSESSION. (a) DELIVERY OF POSSESSION. Landlord agrees to deliver to Tenant possession of the Premises in accordance with the terms of the Work Letter Agreement attached hereto as EXHIBIT "C". Notwithstanding the foregoing, Landlord will not be obligated to deliver possession of the Premises to Tenant (but Tenant will be liable for rent if Landlord can otherwise deliver the Premises to Tenant) until Landlord has received from Tenant all of the following: (i) the first installment of Monthly Base Rent; (ii) executed copies of policies of insurance or certificates thereof as required under Paragraph 19 of this Lease; and (iii) if Tenant is a corporation or partnership, such evidence of due formation, valid existence and authority as Landlord may reasonably require, which may include, without limitation, a certificate of good standing, certificate of secretary, articles of incorporation, statement of partnership, or other similar documentation. (b) CONDITION OF PREMISES. Except for any express representations or warranties of Landlord contained in this Lease, Tenant will be deemed to have accepted the Premises in its condition on the date of delivery of possession and to have acknowledged that there are no items needing work or repair, latent defects of which Landlord is notified within one (1) year of the Commencement Date excepted. Tenant acknowledges that, except as expressly contained in this Lease, neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the Premises or any portions thereof or with respect to the suitability of same for the conduct of Tenant's business and Tenant further acknowledges that Landlord will have no obligation to construct or complete any additional buildings or improvements within the Premises. As of the Commencement Date, Landlord, at its sole cost and expense, shall be responsible for causing the exterior of the Building and parking/drive areas located on the Land (collectively, the "Exterior Areas") to comply with the requirements of the Americans With Disabilities Act of 1990, as same has been and may be subsequently amended, and all rules and regulations promulgated pursuant thereto (the "ADA") which are in effect as of the Commencement Date. Except as provided herein, Landlord agrees to comply with the modifications or amendments to the ADA as to the Exterior Areas, as and when required under any amendments to the ADA at Landlord's sole expense; provided, however, that Tenant shall be responsible, at its sole cost and expense, for compliance with the ADA to the extent such compliance is mandated as a result of Tenant's use, alteration or occupancy of the Premises. 5. RENT. (a) MONTHLY BASE RENT. Tenant agrees to pay Landlord the Monthly Base Rent for the Premises (subject to adjustment as hereinafter provided) in advance on the first day of each calendar month during the Term without prior notice or demand, except that Tenant agrees to pay the Monthly Base Rent for the first month of the Term directly to Landlord concurrently with Tenant's delivery of the executed Lease to Landlord. If the Term of this Lease commences or ends on a day other than the first day of a calendar month, then the rent for such period will be prorated in the proportion that the number of days this Lease is in effect during such period bears to the number of days in such month. All rent must be paid to Landlord, without any deduction or offset except as set forth in this Paragraph 5, in lawful money of the United States of America, at the address designated by Landlord or to such other person or at such other place as Landlord may from time to time designate in writing. Monthly Base Rent will be adjusted during the Term of this Lease as provided in Subparagraph l(k). -3- (b) ADDITIONAL RENT. All amounts and charges to be paid by Tenant hereunder, including, without limitation, payments for Operating Expenses (as defined in Paragraph 6 below), insurance and repairs will be considered additional rent for purposes of this Lease, and the word "rent" as used in this Lease will include all such additional rent unless the context specifically or clearly implies that only Monthly Base Rent is intended. (c) LATE PAYMENTS. Late payments of Monthly Base Rent and/or any item of additional rent will be subject to interest and a late charge as provided in Subparagraph 22(f) below. Notwithstanding anything to the contrary contained in this Lease, wherever it is stipulated that interest is to accrue on an unpaid amount, such accrual shall not commence until thirty (30) days after the amount in question is due and payable. 6. OPERATING EXPENSES. (a) OPERATING EXPENSES. In addition to Monthly Base Rent, throughout the Term of this Lease, Tenant agrees to pay Landlord as additional rent in accordance with the terms of this Paragraph 6, all Operating Expenses as defined in EXHIBIT "E" attached hereto to the extent Operating Expenses exceed Base Year Operating Expenses. (b) DECLINE IN EXPENSES. In the event Operating Expenses for any year are less than Base Year Operating Expenses, Tenant will not be entitled to a credit against any rent, additional rent or Operating Expenses payable hereunder. (c) ACTUAL STATEMENT. By the date which is 90 days after the end of each Lease Year during the Term of this Lease, Landlord will deliver to Tenant a statement ("Actual Statement") which states the actual Operating Expenses for the preceding year determined in accordance with generally accepted accounting principles, consistently applied. If the Actual Statement reveals that the actual Operating Expenses are more than the total Base Year Operating Expenses, Tenant agrees to pay Landlord the difference in a lump sum within thirty (30) days of receipt of the Actual Statement. (d) MISCELLANEOUS. Any delay of less than one (1) year by Landlord in delivering any Actual Statement pursuant to this Paragraph 6 will not constitute a waiver of its right to require an increase in rent nor will it relieve Tenant of its obligations pursuant to this Paragraph 6, except that (i) the foregoing time limit shall not apply to supplemental tax bills (so long as Tenant is promptly notified thereof), and (ii) Tenant will not be obligated to make any payments based on such Actual Statement until thirty (30) days after receipt of such Actual Statement. Even though the Term has expired and Tenant has vacated the Premises, when the final determination is made of the actual Operating Expenses for the year in which this Lease terminates, Tenant agrees to promptly pay any excess Operating Expenses over the Base Year Operating Expenses. Such obligation will be a continuing one which will survive the expiration or earlier termination of this Lease. (e) AUDIT. In the event of any dispute as to the amount of Operating Expenses, Tenant or a "Big 6" accounting firm selected by Tenant will have the right, by prior written notice ("Audit Notice") given within ninety (90) days ("Audit Period") following receipt of an Actual Statement and at reasonable times during normal business hours, to audit Landlord's accounting records with respect to Operating Expenses relative to the year to which such Actual Statement relates at the offices of Landlord's property manager. Tenant will be supplied with copies of any existing records reasonably required by Tenant to perform this audit. Tenant must pay Operating Expenses when due pursuant to the terms of this Lease and may not withhold payment of Operating Expenses or any other rent pending results of the audit or during a dispute regarding Operating Expenses. The audit must be completed within sixty (60) days of the date of Tenant's Audit Notice and the results of such audit shall be delivered to Landlord within seventy-five (75) days of the date of Tenant's Audit Notice. If Tenant does not comply with any of the aforementioned time frames, then such Actual Statement will be conclusively binding on Tenant. If such audit or review correctly reveals that Landlord has overcharged Tenant, then within thirty (30) days after the results of such audit are made available to Landlord, Landlord agrees to reimburse Tenant the amount of such overcharge. If Landlord disagrees with the results of such audit, the dispute shall be resolved by arbitration in accordance with Paragraph 45 below. If the audit reveals that Tenant was undercharged, then within thirty (30) days after the results of the audit are made available to Tenant, Tenant agrees to reimburse Landlord the amount of such undercharge, less the actual, third-party costs incurred by Tenant in performing such audit. Tenant agrees to pay the cost of such audit, provided that if the audit reveals that Landlord's determination of Operating Expenses as set forth in the relevant Actual Statement was in error in Landlord's favor by more than eight percent (8%) of the amount charged by Landlord to Tenant pursuant to such Actual Statement, then Landlord agrees to pay the reasonable, third-party costs of such audit incurred by Tenant. To the extent Landlord must pay the cost of such audit, such costs shall not exceed a reasonable hourly charge for a reasonable amount of hours spent by such third party in connection with the audit, and no event will exceed the actual amount of the error (that is, without accounting for the 8% factor described above). -4- 7. INTENTIONALLY OMITTED. 8. USE. (a) TENANT'S USE OF THE PREMISES. The Premises may be used for the use or uses set forth in Subparagraph 1(o) only, and Tenant will not use or permit the Premises to be used for any other purpose without the prior written consent of Landlord, which consent Landlord may withhold in its sole and absolute discretion. (b) COMPLIANCE. At Tenant's sole cost and expense, Tenant agrees to procure, maintain and hold available for Landlord's inspection, all governmental licenses and permits required for the proper and lawful conduct of Tenant's business from the Premises, if any. Tenant agrees not to use, alter or occupy the Premises or allow the Premises to be used, altered or occupied in violation of, and Tenant, at its sole cost and expense, agrees to use and occupy the Premises and cause the Premises to be used and occupied in compliance with: (i) any and all laws, statutes, zoning restrictions, ordinances, rules, regulations, orders and rulings now or hereafter in force and any reasonable requirements of the insurer of the Premises, or duly constituted public authority having jurisdiction over the Premises or the Building now or hereafter in force, including, without limitation, the requirements of the ADA, (ii) the requirements of the Board of Fire Underwriters and any other similar body, (iii) the Certificate of Occupancy issued for the Building, and (iv) any recorded covenants, conditions and restrictions and similar regulatory agreements, if any, which affect the use, occupation or alteration of the Premises and/or the Building. Tenant agrees to comply with the Rules and Regulations referenced in Paragraph 28 below. Tenant agrees not to cause, maintain or permit any nuisance or waste in, on, under or about the Premises. Notwithstanding anything contained in this Lease to the contrary, all transferable development rights related in any way to the Premises are and will remain vested in Landlord, and Tenant hereby waives any rights thereto. (c) HAZARDOUS MATERIALS. Except for the Hazardous Materials which the original Tenant under this Lease must use in order to operate its business in the Premises (all of which Hazardous Materials still being subject to the remaining terms of this Paragraph 8(c)), Tenant agrees not to cause or knowingly permit any Hazardous Materials to be brought upon, stored, used, handled, generated, released or disposed of on, in, under or about the Premises by Tenant, its agents, employees, subtenants, assignees, licensees, contractors or invitees (collectively, "Tenant's Parties"), without the prior written consent of Landlord, which consent Landlord may withhold in its sole and absolute discretion. In furtherance of the foregoing, (i) within one hundred twenty (120) days following the Commencement Date, Tenant shall in writing identify to Landlord the Hazardous Materials and quantities planned for use by Tenant in the Premises during the then-current Lease Year, and (ii) from time to time (but not more often than annually), upon Landlord's request, Tenant shall furnish to Landlord a written description of the Hazardous Materials and quantities used at the Premises during the most recent past calendar year. Upon the expiration or earlier termination of this Lease, Tenant agrees to promptly remove from the Premises, at its sole cost and expense, any and all Hazardous Materials, including any equipment or systems containing Hazardous Materials which are installed, brought upon, stored, used, generated or released upon, in, under or about the Premises or any portion thereof by Tenant or any of Tenant's Parties, up to the clean up standards imposed by law or governmental regulators having jurisdiction. To the fullest extent permitted by law, Tenant agrees to promptly indemnify, protect, defend and hold harmless Landlord and Landlord's partners, officers, directors, employees, agents, successors and assigns (collectively, "Landlord Indemnified Parties") from and against any and all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs (including, without limitation, clean-up, removal, remediation and restoration costs, sums paid in settlement of claims, attorneys' fees, consultant fees and expert fees and court costs) which arise or result from the presence of Hazardous Materials on, in, under or about the Premises and which are caused or knowingly permitted by Tenant or any of Tenant's Parties. Tenant agrees to promptly notify Landlord of any release of Hazardous Materials at the Premises which Tenant becomes aware of during the Term of this Lease, whether caused by Tenant or any other persons or entities. In the event of any release of Hazardous Materials caused or knowingly permitted by Tenant or any of Tenant's Parties, Landlord shall have the right, but not the obligation, to cause Tenant to immediately take all steps Landlord deems necessary or appropriate to remediate such release and prevent any similar future release to the clean up standards imposed by law or governmental regulators. As used in this Lease, the term "Hazardous Materials" shall mean and include any hazardous or toxic materials, substances or wastes as now or hereafter designated under any law, statute, ordinance, rule, regulation, order or ruling of any agency of the State, the United States Government or any local governmental authority, including, without limitation, asbestos, petroleum, petroleum hydrocarbons and petroleum based products, urea formaldehyde foam insulation, polychlorinated biphenyls ("PCBs"), and freon and other chlorofluorocarbons. None of the foregoing is intended to reduce or expand Landlord's or Tenant's rights and obligations under any prior agreements to which Landlord and Tenant are parties concerning environmental remediation relating to Tenant's prior occupancy of the Premises. The provisions of this Subparagraph 8(c) will survive the expiration or earlier termination of this Lease. -5- 9. NOTICES. Any notice required or permitted to be given hereunder must be in writing and may be given by personal delivery (including delivery by overnight courier or an express mailing service) or by mail, if sent by registered or certified mail. Notices to Tenant shall be sufficient if delivered to Tenant at the address designated in Subparagraph 1(d) and notices to Landlord shall be sufficient if delivered to Landlord at the address designated in Subparagraph 1(b). Either party may specify a different address for notice purposes by written notice to the other. 10. BROKERS. The parties acknowledge that the broker(s) who negotiated this Lease are stated in Subparagraph 1(p), who Landlord shall pay in accordance with Landlord's separate agreements with said brokers. Each party represents and warrants to the other, that, to its knowledge, no other broker, agent or finder (a) negotiated or was instrumental in negotiating or consummating this Lease on its behalf, and (b) is or might be entitled to a commission or compensation in connection with this Lease. Landlord and Tenant each agree to promptly indemnify, protect, defend and hold harmless the other from and against any and all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs (including attorneys' fees and court costs) resulting from any breach by the indemnifying party of the foregoing representation, including, without limitation, any claims that may be asserted by any broker, agent or finder undisclosed by the indemnifying party. The foregoing mutual indemnity shall survive the expiration or earlier termination of this Lease. 11. SURRENDER; HOLDING OVER. (a) SURRENDER. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not constitute a merger, and shall, at the option of Landlord, operate as an assignment to Landlord of any or all subleases or subtenancies. Upon the expiration or earlier termination of this Lease, Tenant agrees to peaceably surrender the Premises to Landlord broom clean and in a state of good repair and condition, ordinary wear and tear and casualty damage (if this Lease is terminated as a result thereof pursuant to Paragraph 20) excepted, with all of Tenant's personal property and Alterations (as defined in Paragraph 13) removed from the Premises to the extent required under Paragraph 13 and all damage caused by such removal repaired as required by Paragraph 13. Prior to the date Tenant is to actually surrender the Premises to Landlord, Tenant agrees to give Landlord reasonable prior notice of the exact date Tenant will surrender the Premises so that Landlord and Tenant can schedule an inspection of the Premises to review the condition of the Premises and identify any Alterations and personal property which are to remain upon the Premises and which items Tenant is to remove, as well as any repairs Tenant is to make upon surrender of the Premises. (b) HOLDING OVER. Tenant will not be permitted to hold over possession of the Premises after the expiration or earlier termination of the Term without the express written consent of Landlord, which consent Landlord may withhold in its sole and absolute discretion. If Tenant holds over after the expiration or earlier termination of the Term, Landlord may, at its option, treat Tenant as a tenant at sufferance only, and such continued occupancy by Tenant shall be subject to all of the terms, covenants and conditions of this Lease, so far as applicable, except that the Monthly Base Rent for any such holdover period shall be equal to one hundred twenty-five percent (125%) of the Monthly Base Rent in effect under this Lease immediately prior to such holdover, prorated on a daily basis. Notwithstanding the foregoing, by not less than one hundred (180) days prior written notice to Landlord, Tenant, provided it is not in default under this Lease, shall have the right to hold over for two (2) consecutive one hundred eighty (180) day terms at one hundred five percent (105%) of the prevailing market rate for the Premises as determined by Landlord (said 105% figure being referred to herein as the "Prevailing Rate"). Within ten (10) days following Landlord's receipt of Tenant's holdover notice, Landlord will advise Tenant of Landlord's determination of the Prevailing Rate ("Landlord's Prevailing Rate"). Tenant will then have a period of ten (10) days following receipt of Landlord's Prevailing Rate in which to either (x) demand appraisal in accordance with the procedures set forth below, (y) accept Landlord's Prevailing Rate, or (z) rescind such holdover notice. Tenant's failure to timely take any of the actions set forth in clauses (x), (y) or (z) immediately preceding shall constitute Tenant's acceptance of Landlord's Prevailing Rate and commitment to pay the holdover rate based thereon for the one hundred (180) day holdover term in accordance with the foregoing. If Tenant timely demands appraisal pursuant to the foregoing ("Tenant's Demand for Appraisal"), then the following shall apply: (i) For a period of ten (10) days following Landlord's receipt of Tenant's Demand for Appraisal, Landlord and Tenant will attempt in good faith to agree upon the Prevailing Rate using their best good faith efforts. If Landlord and Tenant fail to reach agreement on such Prevailing Rate within such ten (10) day period of time (the "Outside Date"), then each party's determination will be submitted to appraisal in accordance with the provisions below. (ii) Landlord and Tenant shall each appoint one (1) independent, unaffiliated real estate broker who has been active over the five (5) year period ending on the date of such appointment in the leasing of comparable properties in the Comparison Area (as defined in Paragraph 40(c) hereof). Each such broker will be appointed within ten (10) days after the Outside Date. -6- (iii) The two (2) brokers so appointed will, within ten (10) days of the date of the appointment of the last appointed broker, agree upon and appoint a third broker who shall be qualified under the same criteria set forth hereinabove for qualification of the initial two (2) brokers. (iv) The determination of the brokers shall be limited solely to the issue of whether Landlord's or Tenant's last proposed (as of the Outside Date) Prevailing Rate is the closest to the actual Prevailing Rate as determined by the brokers, taking into account the meaning of "fair market rental rate" as defined in Paragraph 40(c) hereof. (v) The three (3) brokers shall, within ten (10) days of the appointment of the third broker, reach a decision as to whether the parties shall use Landlord's or Tenant's last submitted (on the Outside Date) Prevailing Rate, and shall notify Landlord and Tenant thereof. (vi) The decision of the majority of the three (3) brokers shall be binding upon Landlord and Tenant and neither party will have the right to undo Tenant's exercise of the right to remain for one hundred (180) extra days or reject the brokers' determination. The cost of each party's broker shall be the responsibility of the party selecting such broker, and the cost of the third broker shall be shared equally by Landlord and Tenant. (vii) If either Landlord or Tenant fails to appoint a broker within the time period specified in clause (ii) above, the broker appointed by one of them shall reach a decision, notify Landlord and Tenant thereof, and such broker's decision shall be binding upon Landlord and Tenant and neither party will have the right to undo Tenant's exercise of its right to stay one hundred eighty (180) extra days or reject the broker's determination. (viii) If the two (2) brokers fail to agree upon and appoint a third broker, then the parties' last submitted (on the Outside Date) Prevailing Rates shall be averaged and such figure shall be binding upon Landlord and Tenant and neither party will have the right to undo Tenant's exercise of its right to stay one hundred eighty (180) extra days or reject such average figure. (ix) In the event that the Prevailing Rate is not established prior to the end of the then-current Term, Landlord's Prevailing Rate will be used until a determination is made in accordance with the foregoing, at which time the parties shall settle any overpayment by Tenant on the next Monthly Base Rent payment date following not less than thirty (30) days after such determination. Acceptance by Landlord of rent after such expiration or earlier termination will not result in a renewal of this Lease. The foregoing provisions of this Paragraph 11 are in addition to and do not affect Landlord's right of re-entry or any rights of Landlord under this Lease or as otherwise provided by law. If Tenant fails to surrender the Premises upon the expiration of this Lease in accordance with the terms of this Paragraph 11 despite demand to do so by Landlord, Tenant agrees to promptly indemnify, protect, defend and hold Landlord harmless from all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs (including attorneys' fees and costs), including, without limitation, costs and expenses incurred by Landlord in returning the Premises to the condition in which Tenant was to surrender it and claims made by any succeeding tenant founded on or resulting from Tenant's failure to surrender the Premises. The provisions of this Subparagraph 11(b) will survive the expiration or earlier termination of this Lease. 12. TAXES ON TENANT'S PROPERTY. Tenant agrees to pay before delinquency, all taxes and assessments (real and personal) levied against any personal property or trade fixtures placed by Tenant in or about the Premises (including any increase in the assessed value of the Premises based upon the value of any such personal property or trade fixtures). If any such taxes or assessments are levied against Landlord or Landlord's property, Landlord may, after written notice to Tenant (and under proper protest if requested by Tenant) pay such taxes and assessments, in which event Tenant agrees to reimburse Landlord all amounts paid by Landlord within ten (10) business days after demand by Landlord; provided, however, Tenant, at its sole cost and expense, will have the right, with Landlord's cooperation, to bring suit in any court of competent jurisdiction to recover the amount of any such taxes and assessments so paid to Landlord and/or the applicable taxing authority under protest. 13. ALTERATIONS. After installation of the initial Tenant Improvements for the Building pursuant to EXHIBIT "C", Tenant may, at its sole cost and expense, make alterations, additions, improvements and decorations to the Building and/or the Premises (collectively, "Alterations") subject to and upon the following terms and conditions: (a) PROHIBITED ALTERATIONS. Tenant may not make any Alterations which: (i) affect any area outside the Premises; (ii) have a materially adverse affect on the Building's structure, equipment, services or systems, or the proper functioning thereof, or Landlord's access thereto; (iii) affect the outside appearance, character or use of the Building; (iv) in the reasonable opinion of Landlord, lessen the value -7- of the Premises; or (v) will violate or require a change in any occupancy certificate applicable to the Premises. (b) LANDLORD'S APPROVAL. Before proceeding with any Alterations which are not prohibited in Subparagraph 13(a) above, Tenant must first obtain Landlord's written approval of the plans, specifications and working drawings for such Alterations, which approval Landlord will not unreasonably withhold or delay; provided, however, Landlord's prior approval will not be required for any such Alterations which are not prohibited by Subparagraph 13(a) above and which cost less than Twenty-Five Thousand Dollars ($25,000) as long as (i) Tenant delivers to Landlord notice and a copy of any final plans, specifications and working drawings for any such Alterations at least ten (10) days prior to commencement of the work thereof, and (ii) the other conditions of this Paragraph 13 are satisfied, including, without limitation, conforming to Landlord's rules, regulations and insurance requirements which govern contractors. Landlord's approval of plans, specifications and/or working drawings for Alterations will not create any responsibility or liability on the part of Landlord for their completeness, design sufficiency, or compliance with applicable permits, laws, rules and regulations of governmental agencies or authorities. (c) CONTRACTORS. Alterations may be made or installed only by contractors and subcontractors which have been approved by Landlord, which approval Landlord will not unreasonably withhold or delay. Before proceeding with any Alterations, Tenant agrees to provide Landlord with ten (10) days prior written notice and Tenant's contractors must obtain and maintain, on behalf of Tenant and at Tenant's sole cost and expense: (i) all necessary governmental permits and approvals for the commencement and completion of such Alterations; and (ii) if requested by Landlord, a completion and lien indemnity bond, or other surety, reasonably satisfactory to Landlord for such Alterations. Throughout the performance of any Alterations, Tenant agrees to obtain, or cause its contractors to obtain, workers compensation insurance and general liability insurance in compliance with the provisions of Paragraph 19 of this Lease. (d) MANNER OF PERFORMANCE. All Alterations must be performed: (i) in accordance with the approved plans, specifications and working drawings; (ii) in a lien-free and first-class and workmanlike manner; (iii) in compliance with all applicable permits, laws, statutes, ordinances, rules, regulations, orders and rulings now or hereafter in effect and imposed by any governmental agencies and authorities which assert jurisdiction; and (iv) at such times, in such manner, and subject to such rules and regulations as Landlord may from time to time reasonably designate. (e) OWNERSHIP. The Tenant Improvements, including, without limitation, all affixed sinks, dishwashers, microwave ovens and other fixtures, and all Alterations will become the property of Landlord and will remain upon and be surrendered with the Premises at the end of the Term of this Lease; provided, however, Landlord shall, by written notice delivered to Tenant concurrently with Landlord's approval of the final working drawings for any Alterations (which approval Landlord will not unreasonably withhold), identify those Alterations which Landlord will require Tenant to remove at the end of the Term of this Lease. Landlord may also require Tenant to remove Alterations which Landlord did not have the opportunity to approve as provided in this Paragraph 13. If Landlord requires Tenant to remove any Alterations, Tenant, at its sole cost and expense, agrees to remove the identified Alterations on or before the expiration or earlier termination of this Lease and repair any damage to the Premises caused by such removal. (f) PLAN REVIEW. Tenant agrees to pay Landlord, as additional rent, the reasonable costs of professional services and costs for general conditions of Landlord's third party consultants if utilized by Landlord (but not Landlord's "in-house" personnel) for review of all plans, specifications and working drawings for any Alterations, within thirty (30) days after Tenant's receipt of invoices either from Landlord or such consultants. In addition, Tenant agrees to pay Landlord, within thirty (30) days after completion of any Alterations, a fee to cover Landlord's costs of supervising and administering the installation of such Alterations, in the amount of five percent (5%) of the cost of such Alterations, but in no event less than Two Hundred Fifty Dollars ($250.00) or more than One Thousand Dollars ($1,000.00). (g) PERSONAL PROPERTY. All articles of personal property owned by Tenant or installed by Tenant at its expense in the Premises (including Tenant's business and trade fixtures, furniture, movable partitions and equipment [such as telephones, copy machines, computer terminals, refrigerators and facsimile machines]) will be and remain the property of Tenant, and must be removed by Tenant from the Premises, at Tenant's sole cost and expense, on or before the expiration or earlier termination of this Lease. Tenant agrees to repair any damage caused by such removal at its cost on or before the expiration or earlier termination of this Lease. (h) REMOVAL OF ALTERATIONS. If Tenant fails to remove by the expiration or earlier termination of this Lease all of its personal property, or any Alterations identified by Landlord for removal, Landlord may, at its option, (i) if the failure to remove such property or Alterations materially impairs Landlord's ability to promptly relet the Premises, treat such failure as a hold-over pursuant to Subparagraph 11(b) above, and/or (ii) Landlord may (without liability to Tenant for loss thereof) treat such personal property and/or -8- Alterations as abandoned and, at Tenant's sole cost and expense, and in addition to Landlord's other rights and remedies under this Lease, at law or in equity: (a) remove and store such items; and/or (b) upon ten (10) days prior notice to Tenant, sell, discard or otherwise dispose of all or any such items at private or public sale for such price as Landlord may obtain or by other commercially reasonable means. Tenant shall be liable for all costs of disposition of Tenant's abandoned property and Landlord shall have no liability to Tenant with respect to any such abandoned property. Landlord agrees to apply the proceeds of any sale of any such property to any amounts due to Landlord under this Lease from Tenant (including Landlord's attorneys' fees and other costs incurred in the removal, storage and/or sale of such items), with any remainder to be paid to Tenant. 14. REPAIRS. (a) LANDLORD'S OBLIGATIONS. Landlord agrees to repair and maintain (i) at Landlord's sole cost, the structural portions of the Building which shall include all structural walls, foundations, concrete subflooring, roof replacement and major repair, the plumbing and electrical wiring in or below structural walls and subflooring (except as may have been installed by Tenant), and replacement of substantial portions of the asphalt within the parking/drive areas (except to the extent such replacement is required as a result of Tenant's abuse of such areas), and (ii) as Operating Expenses, the exterior of the Building, landscaping, cleaning, resealing and restriping parking/drive areas, repair of roof leaks, the sprinkler and fire life safety systems, exterior painting, exterior window washing, and exterior lighting and fixtures; unless such maintenance and repairs are caused in part or in whole by the negligence or willful misconduct of Tenant, its agents, servants, employees or invitees, in which case Tenant will pay to Landlord, as additional rent, the reasonable cost of such maintenance and repairs. All repairs and maintenance will be performed in an expeditious and good and workmanlike manner. Landlord will not be liable for any failure to make any such repairs or to perform any maintenance unless such failure shall persist for an unreasonable time after written notice of the need of such repairs or maintenance is given to Landlord by Tenant. In the event Tenant is unable to conduct business from the Premises during customary business hours as a result of damage to the Premises for which Landlord has the responsibility to repair pursuant to this Paragraph 14(a), then Landlord hereby agrees to use its commercially reasonable efforts to promptly and diligently perform such repairs after receiving written notice of the need of such repairs from Tenant. Tenant waives the right to make repairs at Landlord's expense under any law, statute, ordinance, rule, regulation, order or ruling (including, without limitation, to the extent the Premises are located in California, the provisions of California Civil Code Sections 1941 and 1942 and any successor statutes or laws of a similar nature). Notwithstanding anything to the contrary contained in this Paragraph 14(a), if the performing of repairs, alterations or improvements in or to any portion of the Premises by Landlord unreasonably interferes with Tenant's ability to conduct business on the Premises or any substantial portion thereof during customary business hours, such that by reason of such repairs, alterations or improvements, Tenant does not conduct business in the Premises or any substantial portion thereof for more than one (1) business day following written notice to Landlord, then Tenant's rent shall thereafter be abated until the Premises are again usable by Tenant in proportion to the extent to which Tenant's use of the Premises is impeded. This provision shall not apply in case of damage to, or destruction of, the Premises, which situation shall be governed by a separate provision of this Lease. Notwithstanding the foregoing, Tenant may not abate rent if Landlord disputes Tenant's right to abate or the amount thereof until and only to the extent the arbitrator provides that Tenant may do so in accordance with and pursuant to the terms of Paragraph 45 hereof. (b) TENANT'S OBLIGATIONS. Subject to Landlord's obligations under subparagraph (a) above, Tenant agrees to keep, maintain and preserve the Premises (including, without limitation, the plumbing, HVAC, electrical, sprinkler and fire/life safety systems) in good condition and repair and, when and if needed, at Tenant's sole cost and expense, to make all repairs to the Premises and every part thereof; provided, however, during the first (1st) year of the Term of this Lease, Tenant will not be responsible for repairs to HVAC, plumbing, electrical and mechanical systems of the Building to the extent the costs of such repairs are covered by warranty. Tenant agrees to cause any mechanics' liens or other liens arising as a result of work performed by Tenant or at Tenant's direction to be eliminated as provided in Paragraph 15 below. Except as provided in EXHIBIT "C" and Subparagraph 14(a) above, Landlord has no obligation to alter, remodel, improve, repair, decorate or paint the Premises or any part thereof. (c) TENANT'S FAILURE TO REPAIR. If Tenant refuses or neglects to repair and maintain the Premises properly as required hereunder to the reasonable satisfaction of Landlord, Landlord, at any time following thirty (30) days from the date on which Landlord makes a written demand on Tenant to effect such repair and maintenance, may enter upon the Premises and make such repairs and/or maintenance, and upon completion thereof, Tenant agrees to pay to Landlord as additional rent, Landlord's costs for making such repairs, within thirty (30) days of receipt from Landlord of a written itemized bill therefor. Any amounts not reimbursed by Tenant within such thirty (30) day period will bear interest at the Interest Rate until paid by Tenant. (d) SELF-HELP. Notwithstanding anything to the contrary contained in Paragraph 14(a) of this Lease, if Landlord fails to perform any obligation under this Lease which it is obligated to perform within the -9- time periods set forth in Paragraph 23 of this Lease following receipt of written notice from Tenant, and if Landlord does not in good faith dispute that it is supposed to be performing such obligation but fails to diligently attempt to do so, then Tenant shall be permitted to perform such obligations on Landlord's behalf on the Premises, provided Tenant first delivers to Landlord an additional two (2) business days prior written notice that Tenant will be performing such obligations, and provided Landlord fails to commence to perform such obligations within such additional two (2) business day period. Any work performed by or on behalf of Tenant shall be performed in accordance with provisions of clauses (ii), (iii) and (iv) of Paragraph 13(d) of this Lease. Landlord agrees to promptly reimburse Tenant following the receipt of a written statement of all reasonable and actual costs incurred by Tenant in performing such obligations on behalf of Landlord ("Costs"). If Landlord disputes Tenant's entitlement to some or all of the Costs and fails or refuses to reimburse such Costs to Tenant within thirty (30) days after Tenant's written demand therefor, then Tenant may deduct the Costs from rent due under this Lease after and only to the extent Tenant has been authorized to do so by the arbitrator pursuant to and in accordance with the terms of Paragraph 45 hereof. 15. LIENS. Tenant agrees not to permit any mechanic's, materialmen's or other liens to be filed against all or any part of the Building or the Premises, nor against Tenant's leasehold interest in the Premises, by reason of or in connection with any repairs, alterations, improvements or other work contracted for or undertaken by Tenant or any other act or omission of Tenant or Tenant's agents, employees, contractors, licensees or invitees. At Landlord's request, Tenant agrees to provide Landlord with enforceable, conditional and final lien releases (or other evidence reasonably requested by Landlord to demonstrate protection from liens) from all persons furnishing labor and/or materials at the Premises. Landlord will have the right at all reasonable times to post on the Premises and record any notices of non-responsibility which it deems necessary for protection from such liens. If any such liens are filed, Tenant will, at its sole cost, promptly cause such liens to be released of record or bonded so that it no longer affects title to the Building or the Premises. If Tenant fails to cause any such liens to be so released or bonded within fifteen (15) days after receiving notice of the filing thereof, such failure will be deemed a material breach by Tenant under this Lease without the benefit of any additional notice or cure period described in Paragraph 22 below, and Landlord may, without waiving its rights and remedies based on such breach, and without releasing Tenant from any of its obligations, cause such liens to be released by any means it shall deem proper, including payment in satisfaction of the claims giving rise to such liens. Tenant agrees to pay to Landlord within ten (10) days after receipt of invoice from Landlord, any sum paid by Landlord to remove such liens, together with interest at the Interest Rate from the date of such payment by Landlord. 16. ENTRY BY LANDLORD. Landlord and its employees and agents will at all reasonable times during normal business hours (except in emergencies) have the right to enter the Premises to inspect the same, to supply any service to be provided by Landlord to Tenant hereunder, to show the Premises to prospective purchasers or, during the last six (6) months of the Term, to tenants, to post notices of nonresponsibility, and/or to repair the Premises as permitted or required by this Lease. In exercising such entry rights, Landlord will endeavor to minimize, as reasonably practicable, the interference with Tenant's business, and will provide Tenant with reasonable advance notice (not less than 24 hours) of any such entry (except in emergency situations). Landlord may, in order to carry out such purposes, erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed. Landlord will at all times have and retain a key with which to unlock all doors in the Premises, excluding Tenant's vaults and safes. Landlord will have the right to use any and all means which Landlord may reasonably deem proper to open said doors in an emergency in order to obtain entry to the Premises. Any entry to the Premises obtained by Landlord by any of said means, or otherwise, will not be construed or deemed to be a forcible or unlawful entry into the Premises, or an eviction of Tenant from the Premises. 17. UTILITIES AND SERVICES. Tenant shall pay for all water (except for irrigation water which shall be separately metered and an Operating Expense), gas, heat, light, power, telephone, trash disposal, janitorial service and other utilities and services supplied to the Premises, together with any taxes thereon. Landlord will not be liable to Tenant for any failure of Tenant to obtain any of the foregoing utilities and services. In addition, in the event of any stoppage or interruption of services or utilities, Tenant shall not be entitled to any abatement or reduction of rent (except as expressly provided in Subparagraphs 20(f) or 21(b) if such failure results from a damage or taking described therein), no eviction of Tenant will result from such failure and Tenant will not be relieved from the performance of any covenant or agreement in this Lease because of such failure. Notwithstanding anything in this Lease to the contrary, if, as a result of the negligent acts or omissions of Landlord or its agents, contractors or employees, for more than one (1) business day following written notice to Landlord, there is no HVAC or electricity to the Premises, or such an interruption of other essential utilities and Building services, such as fire protection or water, so that any portion of the Premises cannot be and is not used by Tenant, in Tenant's judgment reasonably exercised, then Tenant's rent shall thereafter be abated until the Premises are again usable by Tenant in proportion to the extent to which Tenant's use of the Premises is interfered with; provided, however, that if Landlord is diligently pursuing the repair of such utilities or services and Landlord provides substitute services reasonably suitable for Tenant's purposes, as for example, bringing in portable air-conditioning -10- equipment, then there shall not be an abatement of rent. This paragraph shall not apply in case of damage to, or destruction of, the Building, which shall be governed by a separate provision of this Lease. Notwithstanding the foregoing, Tenant may not abate rent if Landlord disputes Tenant's right to abate or the amount thereof until and only to the extent the arbitrator provides that Tenant may do so in accordance with and pursuant to the terms of Paragraph 45 hereof. 18. ASSUMPTION OF RISK AND INDEMNIFICATION. (a) ASSUMPTION OF RISK. Tenant, as a material part of the consideration to Landlord, hereby agrees that neither Landlord nor any Landlord Indemnified Parties (as defined in Subparagraph 8(c) above) will be liable to Tenant for, and Tenant expressly assumes the risk of and waives any and all claims it may have against Landlord or any Landlord Indemnified Parties with respect to, (i) any and all damage to property in, upon or about the Building or the Premises resulting from any act or omission (except for the negligent or intentionally wrongful act or omission) of Landlord, (ii) any such damage caused by other tenants or persons in or about the Building or the Premises, or caused by quasi-public work, including, without limitation, work performed by utility companies, (iii) any damage to property entrusted to employees of the Building, (iv) any loss of or damage to property by theft or otherwise, or (v) any injury or damage to persons or property resulting from any casualty, explosion, falling plaster or other masonry or glass, steam, gas, electricity, water or rain which may leak from any part of the Building or any other portion of the Premises or from the pipes, appliances or plumbing works therein or from the roof, street or subsurface or from any other place, or resulting from dampness. Notwithstanding anything to the contrary contained in this Lease, neither Landlord nor any Landlord Indemnified Parties will be liable for consequential damages arising out of any loss of the use of the Premises or any equipment or facilities therein by Tenant or any Tenant Parties or for interference with light or other incorporeal hereditaments. Tenant agrees to give prompt notice to Landlord in case of fire or accidents in the Premises or the Building, or of defects therein or in the fixtures or equipment. (b) INDEMNIFICATION. Subject to Paragraph 19(f) hereof, Tenant will be liable for, and agrees, to promptly indemnify, protect, defend and hold harmless Landlord and all Landlord Indemnified Parties, from and against, any and all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs, including attorneys' fees and court costs (collectively, "Indemnified Claims"), arising or resulting from (i) any negligent act or omission of Tenant or any Tenant Parties (as defined in Subparagraph 8(c) above); (ii) the use of the Premises and conduct of Tenant's business by Tenant or any Tenant Parties, or any other activity, work or thing done, permitted or suffered by Tenant or any Tenant Parties, in or about the Building or elsewhere within the Premises; and/or (iii) any default by Tenant of any obligations on Tenant's part to be performed under the terms of this Lease. In case any action or proceeding is brought against Landlord or any Landlord Indemnified Parties by reason of any such Indemnified Claims, Tenant, upon notice from Landlord, agrees to promptly defend the same at Tenant's sole cost and expense by counsel approved in writing by Landlord, which approval Landlord will not unreasonably withhold. (c) SURVIVAL; NO RELEASE OF INSURERS. Tenant's indemnification obligations under Subparagraph 18(b) will survive the expiration or earlier termination of this Lease. Tenant's covenants, agreements and indemnification obligation in Subparagraphs 18(a) and 18(b) above, are not intended to and will not relieve any insurance carrier of its obligations under policies required to be carried by Tenant pursuant to the provisions of this Lease. (d) LANDLORD INDEMNITY. Notwithstanding anything to the contrary contained in Paragraph 18 of, or elsewhere in, this Lease, Tenant shall not be required to indemnify and hold Landlord harmless from any Indemnified Claims resulting from the negligence or willful misconduct of Landlord or Landlord's agents, employees or contractors and, subject to Paragraph 19(f) hereof and the limitations contained in (i) the second to the last sentence of Paragraph 18(a) of this Lease, and (ii) Paragraph 35 of this Lease, Landlord agrees to indemnify and hold Tenant harmless from and against any and all such Indemnified Claims. Landlord's indemnification obligations under this paragraph will survive the expiration or earlier termination of this Lease and are not intended to and will not relieve any insurance carrier of its obligations under policies required to be carried by Landlord and/or by Tenant pursuant to the provisions of this Lease. 19. INSURANCE. (a) TENANT'S INSURANCE. On or before the earlier to occur of (i) the Commencement Date, or (ii) the date Tenant commences any work of any type in the Premises pursuant to this Lease (which may be prior to the Commencement Date), and continuing throughout the entire Term hereof and any other period of occupancy, Tenant agrees to keep in full force and effect, at its sole cost and expense, the following insurance: (i) "All Risks" property insurance including at least the following perils: fire and extended coverage, smoke damage, vandalism, malicious mischief, sprinkler leakage (including earthquake -11- sprinkler leakage). This insurance policy must be upon all property owned by Tenant, for which Tenant is legally liable, or which is installed at Tenant's expense, and which is located in the Building including, without limitation, any Alterations, and all furniture, fittings, installations, fixtures and any other personal property of Tenant, in an amount not less than the full replacement cost thereof. (ii) One (1) year insurance coverage for business interruption and loss of income and extra expense insuring the same perils described in Subparagraph 19(a)(i) above, in such amounts as will reimburse Tenant for any direct or indirect loss of earnings attributable to any such perils including prevention of access to the Premises as a result of any such perils. (iii) Commercial General Liability Insurance or Comprehensive General Liability Insurance (on an occurrence form) insuring bodily injury, personal injury and property damage including the following divisions and extensions of coverage: Premises and Operations; Owners and Contractors protective; blanket contractual liability (including coverage for Tenant's indemnity obligations under this Lease); products and completed operations; and liquor liability (if Tenant serves alcohol on the Premises). Such insurance must have the following minimum limits of liability: bodily injury, personal injury and property damage - $2,000,000 each occurrence, $5,000,000 in the aggregate. (iv) Comprehensive Automobile Liability insuring bodily injury and property damage arising from all owned, non-owned and hired vehicles, if any, with minimum limits of liability of $1,000,000 per accident. (v) Worker's Compensation as required by the laws of the State. (vi) Landlord makes no representation that the limits of liability required to be carried by Tenant under the terms of this Lease are adequate to protect Tenant's interests and Tenant should obtain such additional insurance or increased liability limits as Tenant deems appropriate. (b) SUPPLEMENTAL TENANT INSURANCE REQUIREMENTS. (i) All policies must be in a form reasonably satisfactory to Landlord and issued by an insurer admitted to do business in the State. (ii) All policies must be issued by insurers with a policyholder rating of "A-" and a financial rating of "VII" in the most recent version of Best's Key Rating Guide. (iii) All policies must contain a requirement to notify Landlord (and Landlord's mortgagees who are named as additional insureds, if any) in writing not less than thirty (30) days prior to any material change, reduction in coverage, cancellation or other termination thereof. Tenant agrees to deliver to Landlord, as soon as practicable after placing the required insurance, but in any event within the time frame specified in Subparagraph 19(a) above, certificate(s) of insurance evidencing the existence of such insurance and Tenant's compliance with the provisions of this Paragraph 19. Tenant agrees to cause replacement certificates to be delivered to Landlord not less than thirty (30) days prior to the expiration of any such policy or policies. If any such initial or replacement certificates are not furnished within the time(s) specified herein, Tenant will be deemed to be in material default under this Lease without the benefit of any additional notice or cure period provided in Subparagraph 22(a)(iii) below, and Landlord will have the right, but not the obligation, to procure such insurance as Landlord deems necessary to protect Landlord's interests at Tenant's expense. If Landlord obtains any insurance that is the responsibility of Tenant under this Paragraph 19, Landlord agrees to deliver to Tenant a written statement setting forth the cost of any such insurance and showing in reasonable detail the manner in which it has been computed and Tenant agrees to promptly reimburse Landlord for such costs as additional rent. (iv) General Liability and Automobile Liability policies under Subparagraphs 19(a)(iii) and (iv) must name Landlord and Landlord's mortgagees of which Tenant has been informed in writing) as additional insureds and must also contain a provision that the insurance afforded by such policy is primary insurance and any insurance carried by Landlord and Landlord's mortgagees, if any, will be excess over and non-contributing with Tenant's insurance. (c) TENANT'S USE. Tenant will not keep, use, sell or offer for sale in or upon the Premises any article which may be prohibited by any insurance policy periodically in force covering the Premises. If Tenant's occupancy or business in, or on, the Premises, whether or not Landlord has consented to the same, results in any increase in premiums for the insurance periodically carried by Landlord with respect to the Premises or results in the need for Landlord to maintain special or additional insurance, Tenant agrees to pay Landlord the cost of any such increase in premiums or special or additional coverage as additional rent within thirty (30) days after being billed therefor by Landlord. In determining whether increased premiums are a result of Tenant's use of the Premises, a schedule issued by the organization computing the insurance rate on the Premises, the Building or the Tenant Improvements showing the various components of such rate, will be conclusive evidence of the several items and charges which make up -12- such rate. Tenant agrees to promptly comply with all reasonable requirements of the insurance authority or any present or future insurer relating to the Premises. (d) LANDLORD INSURANCE. Landlord agrees to carry with insurance companies having a Best's rating of A/VII or better "all risk" coverage insurance for the Building in an amount of $3,000,000.00, including coverage for rental income loss in the amount of one (1) year's worth of Monthly Base Rent. Landlord also agrees to carry commercial general liability insurance with limits of not less than $3,000,000.00 per occurrence of bodily injury/property damage with an annual aggregate of $3,000,000.00. Landlord reserves the right to carry such insurance under an "umbrella" or "blanket" policy or policies of insurance. The costs for such insurance as applicable to the Building and the Premises shall constitute an Operating Expense. (e) CANCELLATION OF LANDLORD'S POLICIES. If any of Landlord's insurance policies are canceled or cancellation is threatened or the coverage reduced or threatened to be reduced in any way because of the use of the Premises or any part thereof by Tenant or any assignee or subtenant of Tenant or by anyone Tenant permits on the Premises and, if Tenant fails to remedy the condition giving rise to such cancellation, threatened cancellation, reduction of coverage, threatened reduction of coverage, increase in premiums, or threatened increase in premiums, within ten (10) days after notice thereof, Tenant will be deemed to be in material default of this Lease and Landlord may, at its option, either terminate this Lease or enter upon the Premises and attempt to remedy such condition, and Tenant shall promptly pay Landlord the reasonable costs of such remedy as additional rent. If Landlord is unable, or elects not to remedy such condition, then Landlord will have all of the remedies provided for in this Lease in the event of a default by Tenant. (f) WAIVER OF CLAIMS. Notwithstanding any provision of this Lease to the contrary, whenever (a) any loss, cost, damage or expense (collectively, "damage") resulting from fire, explosion or any other casualty is incurred by either Landlord or by Tenant or by anyone claiming by, through or under Landlord or Tenant in connection with the Premises and its contents and (b) such party is covered in whole or in part by insurance with respect to such damage or is required under this Lease to be so insured, then the party so insured (or so required) hereby waives (on its own behalf and on behalf of its insurer) any claims against and releases the other party from any liability said other party may have on account of such damage. The foregoing is not intended to release Tenant from liability for damage caused by Tenant or any of Tenant's Parties in connection with any such casualty up to the amount of a commercially reasonable insurance deductible considering the relevant marketplace. 20. DAMAGE OR DESTRUCTION. (a) PARTIAL DESTRUCTION. If any portion of the Building is damaged by fire or other casualty to an extent not exceeding twenty-five percent (25%) of the full replacement cost thereof, and Landlord's contractor reasonably estimates in a writing delivered to Landlord and Tenant that the damage thereto may be repaired, reconstructed or restored to substantially its condition immediately prior to such damage within ninety (90) days from the date of such casualty, and Landlord will receive (or would have received if Landlord carried the insurance required of Landlord under this Lease) insurance proceeds sufficient to cover the costs of such repairs, reconstruction and restoration (including proceeds from Tenant and/or Tenant's insurance which Tenant is required to deliver to Landlord pursuant to Subparagraph 20(e) below to cover Tenant's obligation for the costs of repair, reconstruction and restoration of any portion of any Alterations for which Tenant is responsible under this Lease), then Landlord agrees to commence and proceed diligently with the work of repair, reconstruction and restoration and this Lease will continue in full force and effect. (b) SUBSTANTIAL DESTRUCTION. Any damage or destruction to the Building which Landlord is not obligated to repair pursuant to Subparagraph 20(a) above will be deemed a substantial destruction. In the event of a substantial destruction, Landlord may elect to either (i) repair, reconstruct and restore the portion of the Building damaged by such casualty, in which case this Lease will continue in full force and effect, subject to Tenant's termination right contained in Subparagraph 20(d) below; or (ii) terminate this Lease effective as of the date which is thirty (30) days after Tenant's receipt of Landlord's election to so terminate. (c) NOTICE. Under any of the conditions of Subparagraph 20(a) or (b) above, Landlord agrees to give written notice to Tenant of its intention to repair or terminate, as permitted in such paragraphs, within forty-five (45) days after the occurrence of such casualty. (d) TENANT'S TERMINATION RIGHTS. If Landlord elects to repair, reconstruct and restore pursuant to Subparagraph 20(b)(i) hereinabove, and if Landlord's contractor estimates that as a result of such damage, Tenant cannot be given reasonable use of and access to the Building within one hundred eighty (180) days after the date of such damage, then Tenant may terminate this Lease effective upon delivery of written notice to Landlord within ten (10) days after Landlord delivers notice to Tenant of its election to so repair, reconstruct or restore. -13- (e) TENANT'S COSTS AND INSURANCE PROCEEDS. In the event of any damage or destruction of all or any part of the Building, Tenant agrees to immediately (i) notify Landlord thereof, and (ii), if this Lease is not terminated, deliver to Landlord all property insurance proceeds received by Tenant with respect to any Alterations, but excluding proceeds for Tenant's furniture, fixtures, equipment and other personal property, whether or not this Lease is terminated as permitted in this Paragraph 20, and Tenant hereby assigns to Landlord all rights to receive such insurance proceeds. If Tenant fails to carry insurance on its Alterations as required under this Lease, Tenant will be deemed to have self-insured the replacement cost of such items, and, if this Lease is not terminated, upon any damage or destruction thereto, Tenant agrees to immediately pay to Landlord the full replacement cost of such items, less any insurance proceeds actually received by Landlord from Landlord's or Tenant's insurance with respect to such items. (f) ABATEMENT OF RENT. In the event of any damage, repair, reconstruction and/or restoration described in this Paragraph 20, rent will be abated or reduced, as the case may be, from the date of such casualty, in proportion to the degree to which Tenant's use of the Premises is impaired during such period of repair until such use is restored, not to exceed the amount of Landlord's loss of rental income insurance proceeds under Paragraph 19(d) above. (g) INABILITY TO COMPLETE. Notwithstanding anything to the contrary contained in this Paragraph 20, if Landlord is obligated or elects to repair, reconstruct and/or restore the damaged portion of the Building pursuant to Subparagraph 20(a) or 20(b)(i) above, but is delayed from completing such repair, reconstruction and/or restoration beyond the date which is sixty (60) days after the date estimated by Landlord's contractor for completion thereof by reason of any causes (other than delays caused by Tenant, its subtenants, employees, agents or contractors or delays which are beyond the reasonable control of Landlord as described in Paragraph 33), then either Landlord or Tenant may elect to terminate this Lease upon ten (10) days prior written notice given to the other after the expiration of such sixty (60) day period. (h) DAMAGE NEAR END OF TERM. Landlord and Tenant shall each have the right to terminate this Lease if any Material damage to the Building occurs during the last twelve (12) months of the Term (as extended) where the repair, reconstruction or restoration of such damage cannot be completed within sixty (60) days after the date of such casualty. If either party desires to terminate this Lease under this Subparagraph (h), it shall provide written notice to the other party of such election within ten (10) days after becoming aware of the damage to the Building. (i) WAIVER OF TERMINATION RIGHT. Landlord and Tenant agree that the foregoing provisions of this Paragraph 20 are to govern their respective rights and obligations in the event of any damage or destruction and supersede and are in lieu of the provisions of any applicable law, statute, ordinance, rule, regulation, order or ruling now or hereafter in force which provide remedies for damage or destruction of leased premises (including, without limitation, to the extent the Premises are located in California, the provisions of California Civil Code Section 1932, Subsection 2, and Section 1933, Subsection 4 and any successor statute or laws of a similar nature). (j) TERMINATION. Upon any termination of this Lease under any of the provisions of this Paragraph 20, the parties will be released without further obligation to the other from the date possession of the Premises is surrendered to Landlord except for items which have accrued and are unpaid as of the date of termination and matters which are to survive any termination of this Lease as provided in this Lease. 21. EMINENT DOMAIN. (a) SUBSTANTIAL TAKING. If the whole of the Premises, or such part thereof as shall substantially interfere with Tenant's use and occupancy of the Premises as contemplated by this Lease, is taken for any public or quasi-public purpose by any lawful power or authority by exercise of the right of appropriation, condemnation or eminent domain, or sold to prevent such taking, either party will have the right to terminate this Lease effective as of the date possession is required to be surrendered to such authority. (b) PARTIAL TAKING; ABATEMENT OF RENT. In the event of a taking of a portion of the Premises which does not substantially interfere with Tenant's use and occupancy of the Premises, then, neither party will have the right to terminate this Lease and Landlord will thereafter proceed to make a functional unit of the remaining portion of the Premises and rent will be abated with respect to the part of the Premises which Tenant is deprived of on account of such taking. (c) CONDEMNATION AWARD. In connection with any taking of the Premises, Landlord will be entitled to receive the entire amount of any award which may be made or given in such taking or condemnation, without deduction or apportionment for any estate or interest of Tenant, it being expressly understood and agreed by Tenant that no portion of any such award will be allowed or paid to Tenant for any so-called bonus or excess value of this Lease, and such bonus or excess value will be the sole property of Landlord. Tenant agrees not to assert any claim against Landlord or the taking authority for any compensation because of such taking (including any claim for in excess one-half (1/2) of any bonus or excess value of -14- this Lease); provided, however, if any portion of the Premises is taken, Tenant will have the right to recover from the condemning authority any compensation as may be separately awarded or recoverable by Tenant for the taking of Tenant's furniture, fixtures, equipment and other personal property within the Premises, for Tenant's relocation expenses, and for any loss of goodwill or other damage to Tenant's business by reason of such taking. (d) TEMPORARY TAKING. In the event of taking of the Premises or any part thereof for temporary use, (i) this Lease will remain unaffected thereby and rent will abate for the duration of the taking in proportion to the extent Tenant's use of the Premises is interfered with, and (ii) Landlord will be entitled to receive such portion or portions of any award made for such use provided that if such taking remains in force at the expiration or earlier termination of this Lease, Tenant will then pay to Landlord a sum equal to the reasonable cost of performing Tenant's obligations under Paragraph 11 with respect to surrender of the Premises and upon such payment Tenant will be excused from such obligations. For purpose of this Subparagraph 21(d), a temporary taking shall be defined as a taking for a period of ninety (90) days or less. 22. DEFAULTS AND REMEDIES. (a) DEFAULTS. The occurrence of any one or more of the following events will be deemed a default by Tenant: (i) Intentionally omitted. (ii) The failure by Tenant to make any payment of rent or additional rent or any other payment required to be made by Tenant hereunder, as and when due, where such failure continues for a period of five (5) days after written notice thereof from Landlord to Tenant; provided, however, that any such notice will be in lieu of, and not in addition to, any notice required under applicable law (including, without limitation, to the extent the Premises are located in California, the provisions of California Code of Civil Procedure Section 1161 regarding unlawful detainer actions or any successor statute or law of a similar nature). (iii) The failure by Tenant to observe or perform any of the covenants or provisions of this Lease to be observed or performed by Tenant, other than as specified in Subparagraph 22(a)(i) or (ii) above, where such failure continues (where no other period of time is expressly provided) for a period of fifteen (15) days after written notice thereof from Landlord to Tenant. The provisions of any such notice will be in lieu of, and not in addition to, any notice required under applicable law (including, without limitation, to the extent the Premises are located in California, California Code of Civil Procedure Section 1161 regarding unlawful detainer actions and any successor statute or similar law). If the nature of Tenant's default is such that more than fifteen (15) days are reasonably required for its cure, then Tenant will not be deemed to be in default if Tenant, with Landlord's concurrence, commences such cure within such fifteen (15) day period and thereafter diligently prosecutes such cure to completion. (iv) (a) The making by Tenant of any general assignment for the benefit of creditors; (b) the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); (c) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within thirty (30) days; or (d) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease where such seizure is not discharged within thirty (30) days. (b) LANDLORD'S REMEDIES; TERMINATION. In the event of any default by Tenant, in addition to any other remedies available to Landlord at law or in equity under applicable law (including, without limitation, to the extent the Premises are located in California, the remedies of Civil Code Section 1951.4 and any successor statute or similar law providing that Landlord may continue this Lease in effect after Tenant's breach and abandonment and collect rent as it becomes due, provided Tenant has the right to sublet or assign, subject only to reasonable limitations), Landlord will have the immediate right and option to terminate this Lease and all rights of Tenant hereunder. If Landlord elects to terminate this Lease then, to the extent permitted under applicable law, Landlord may recover from Tenant (i) The worth at the time of award of any unpaid rent which had been earned at the time of such termination; plus (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rent loss that Tenant proves could have been reasonably avoided; plus (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the Term after the time of award exceeds the amount of such rent loss that Tenant proves could be reasonably avoided; plus (iv) any other amount reasonably necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which, in the ordinary course of things, results therefrom including, but not limited to: attorneys' fees and costs; brokers' commissions; the costs of refurbishment, alterations, renovation and repair of the -15- Premises, and removal (including the repair of any damage caused by such removal) and storage (or disposal) of Tenant's personal property, equipment, fixtures, Alterations, the Tenant Improvements and any other items which Tenant is required under this Lease to remove but does not remove, as well as the unamortized value of $400,000 of the Tenant Improvement Allowance as well as the full unamortized value of the Used Excess Allowance described in the Work Letter Agreement. The unamortized value of such allowance(s) shall be determined by taking the total value of such amount(s) and multiplying such amount(s) by a fraction, the numerator of which is the number of months of the Lease Term not yet elapsed as of the date on which the Lease is terminated, and the denominator of which is the total number of months of the Lease Term. As used in Subparagraphs 22(b)(i) and (ii) above, the "worth at the time of award" is computed by allowing interest at the Interest Rate. As used in Subparagraph 22(b)(iii) above, the "worth at the time of award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). (c) LANDLORD'S REMEDIES; RE-ENTRY RIGHTS. In the event of any default by Tenant, in addition to any other remedies available to Landlord under this Lease, at law or in equity, Landlord will also have the right, with or without terminating this Lease, to re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere and/or disposed of at the sole cost and expense of and for the account of Tenant in accordance with the provisions of Subparagraph 13(h) of this Lease or any other procedures permitted by applicable law. No re-entry or taking possession of the Premises by Landlord pursuant to this Subparagraph 22(c) will be construed as an election to terminate this Lease unless a written notice of such intention is given to Tenant or unless the termination thereof is decreed by a court of competent jurisdiction. (d) LANDLORD'S REMEDIES; RE-LETTING. In the event of the abandonment of the Premises by Tenant or in the event that Landlord elects to re-enter the Premises or takes possession of the Premises pursuant to legal proceeding or pursuant to any notice provided by law, then if Landlord does not elect to terminate this Lease, Landlord may from time to time, without terminating this Lease, either recover all rent as it becomes due or relet the Premises or any part thereof on terms and conditions as Landlord in its sole and absolute discretion may deem advisable with the right to make alterations and repairs to the Premises in connection with such reletting. If Landlord elects to relet the Premises, then rents received by Landlord from such reletting will be applied: first, to the payment of any indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any cost of such reletting; third, to the payment of the cost of any alterations and repairs to the Premises incurred in connection with such reletting; fourth, to the payment of rent due and unpaid hereunder and the residue, if any, will be held by Landlord and applied to payment of future rent as the same may become due and payable hereunder. Should that portion of such rents received from such reletting during any month, which is applied to the payment of rent hereunder, be less than the rent payable during that month by Tenant hereunder, then Tenant agrees to pay such deficiency to Landlord immediately upon demand therefor by Landlord. Such deficiency will be calculated and paid monthly. (e) LANDLORD'S REMEDIES; PERFORMANCE FOR TENANT. All covenants and agreements to be performed by Tenant under any of the terms of this Lease are to be performed by Tenant at Tenant's sole cost and expense and without any abatement of rent. If Tenant fails to pay any sum of money owed to any party other than Landlord, for which it is liable under this Lease, or if Tenant fails to perform any other act on its part to be performed hereunder, and such failure continues for fifteen (15) days after notice thereof by Landlord, Landlord may, without waiving or releasing Tenant from its obligations, but shall not be obligated to, make any such payment or perform any such other act to be made or performed by Tenant; provided, however if the nature of such failure is such that more than fifteen (15) days are reasonably required for its cure, then Tenant will not be deemed in default if Tenant commences such cure within such fifteen (15) day period of time and thereafter diligently prosecutes such cure to completion. Tenant agrees to reimburse Landlord upon demand for all sums so paid by Landlord and all necessary incidental costs, together with interest thereon at the Interest Rate, from the date of such payment by Landlord until reimbursed by Tenant. This remedy shall be in addition to any other right or remedy of Landlord set forth in this Paragraph 22. (f) LATE PAYMENT. If Tenant fails to pay any installment of rent within thirty (30) days of when due or if Tenant fails to make any other payment for which Tenant is obligated under this Lease within thirty (30) days of when due, such late amount will accrue interest at the Interest Rate and Tenant agrees to pay Landlord as additional rent such interest on such amount from the date such amount becomes due until such amount is paid. In addition, if Tenant fails to pay any installment of rent within ten (10) days of when due, Tenant agrees to pay to Landlord concurrently with such late payment amount, as additional rent, a late charge equal to five percent (5%) of the amount due to compensate Landlord for the extra costs Landlord will incur as a result of such late payment; provided, however, Landlord hereby agrees to waive the late charge payable by Tenant with respect to the first two (2) late payments made by Tenant during the Term of this Lease and any extension thereof, provided that such late payment is received by Landlord within twenty (20) days after such payment becomes due. The parties agree that (i) it would be impractical and extremely difficult to fix the actual damage Landlord will suffer in the event of Tenant's late payment, (ii) such interest and late charge represents a fair and reasonable estimate of the detriment -16- that Landlord will suffer by reason of late payment by Tenant, and (iii) the payment of interest and late charges are distinct and separate in that the payment of interest is to compensate Landlord for the use of Landlord's money by Tenant, while the payment of late charges is to compensate Landlord for Landlord's processing, administrative and other costs incurred by Landlord as a result of Tenant's delinquent payments. Acceptance of any such interest and late charge will not constitute a waiver of the Tenant's default with respect to the overdue amount, or prevent Landlord from exercising any of the other rights and remedies available to Landlord. (g) RIGHTS AND REMEDIES CUMULATIVE. All rights, options and remedies of Landlord contained in this Lease will be construed and held to be cumulative, and no one of them will be exclusive of the other, and Landlord shall have the right to pursue any one or all of such remedies or any other remedy or relief which may be provided by law or in equity, whether or not stated in this Lease. Nothing in this Paragraph 22 will be deemed to limit or otherwise affect Tenant's indemnification of Landlord pursuant to any provision of this Lease. 23. LANDLORD'S DEFAULT. Landlord will not be in default in the performance of any obligation required to be performed by Landlord under this Lease unless Landlord fails to perform such obligation within fifteen (15) days after the receipt of written notice from Tenant specifying in detail Landlord's failure to perform; provided however, that if the nature of Landlord's obligation is such that more than fifteen (15) days are required for performance, then Landlord will not be deemed in default if it commences such performance within such fifteen (15) day period and thereafter diligently pursues the same to completion. Upon any default by Landlord, Tenant may exercise any of its rights provided at law or in equity, subject to the limitations on liability set forth in Paragraph 35 of this Lease. 24. ASSIGNMENT AND SUBLETTING. (a) RESTRICTION ON TRANSFER. Except as expressly provided in this Paragraph 24, Tenant will not, either voluntarily or by operation of law, assign or encumber this Lease or any interest herein or sublet the Premises or any part thereof, or permit the use or occupancy of the Premises by any party other than Tenant (any such assignment, encumbrance, sublease or the like will sometimes be referred to as a "Transfer"), without the prior written consent of Landlord, which consent Landlord will not unreasonably withhold. (b) CORPORATE AND PARTNERSHIP TRANSFERS. For purposes of this Paragraph 24, if Tenant is a corporation, partnership or other entity, any transfer, assignment, encumbrance or hypothecation of fifty percent (50%) or more (individually or in the aggregate) of any stock or other ownership interest in such entity, and/or any transfer, assignment, hypothecation or encumbrance of any controlling ownership or voting interest in such entity, will be deemed a Transfer and will be subject to all of the restrictions and provisions contained in this Paragraph 24. Notwithstanding the foregoing, the immediately preceding sentence will not apply to any transfers of stock of Tenant if Tenant is a publicly-held corporation and such stock is transferred publicly over a recognized security exchange or over-the-counter market. (c) PERMITTED CONTROLLED TRANSFERS. Notwithstanding the provisions of this Paragraph 24 to the contrary, Tenant may assign this Lease or sublet the Premises or any portion thereof ("Permitted Transfer"), without Landlord's consent and without extending any sublease termination option to Landlord, to any parent, subsidiary or affiliate corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from a merger or consolidation with Tenant, or to any person or entity which acquires all the assets of Tenant's business as a going concern, provided that: (i) at least ten (10) days prior to such assignment or sublease, Tenant delivers to Landlord the financial statements and other financial and background information of the assignee or sublessee described in Subparagraph 24(d) below; (ii) if an assignment, the assignee assumes, in full, the obligations of Tenant under this Lease (or if a sublease, the sublessee of a portion of the Premises or Term assumes, in full, the obligations of Tenant with respect to such portion); (iii) the financial net worth of the assignee or sublessee as of the time of the proposed assignment or sublease equals or exceeds that of Tenant as of the date of execution of this Lease; (iv) Tenant remains fully liable under this Lease; and (v) the use of the Premises under Paragraph 8 remains unchanged. (d) TRANSFER NOTICE. If Tenant desires to effect a Transfer, then at least twenty (20) days prior to the date when Tenant desires the Transfer to be effective (the "Transfer Date"), Tenant agrees to give Landlord a notice (the "Transfer Notice"), stating the name, address and business of the proposed assignee, sublessee or other transferee (sometimes referred to hereinafter as "Transferee"), reasonable information (including references) concerning the character, ownership, and financial condition of the proposed Transferee, the Transfer Date, any ownership or commercial relationship between Tenant and the proposed Transferee, and the consideration and all other material terms and conditions of the proposed Transfer, all in such detail as Landlord may reasonably require. If Landlord reasonably requests additional detail, the Transfer Notice will not be deemed to have been received until Landlord receives such additional detail, and Landlord may withhold consent to any Transfer until such information is provided to it. -17- (e) LANDLORD'S OPTIONS. Within fifteen (15) days of Landlord's receipt of any Transfer Notice, and any additional information requested by Landlord concerning the proposed Transferee's financial responsibility, Landlord will elect to do one of the following (i) consent to the proposed Transfer; or (ii) refuse such consent, which refusal shall be on reasonable grounds including, without limitation, those set forth in Subparagraph 24(f) below. If Tenant's Transfer Notice states in bold and all capital letters that Landlord's failure to respond within such fifteen (15) day period of time will constitute Landlord's approval of the Transfer (with an appropriate reference to this Subparagraph 24(e)), then Landlord's failure to respond within such fifteen (15) day period of time shall constitute Landlord's approval of the applicable Transfer. (f) REASONABLE DISAPPROVAL. Landlord and Tenant hereby acknowledge that Landlord's disapproval of any proposed Transfer pursuant to Subparagraph 24(e) will be deemed reasonably withheld if based upon any reasonable factor, including, without limitation, any or all of the following factors: (i) the proposed Transferee is a governmental entity; (ii) the portion of the Premises to be sublet or assigned violates any laws, rules, regulations or ordinances with respect to shape with inadequate means of ingress and egress; (iii) the use of the Premises by the Transferee is not permitted by the use provisions in Paragraph 8 hereof; and (iv) the Transferee does not have the financial capability to fulfill the obligations imposed by the Transfer and this Lease. (g) ADDITIONAL CONDITIONS. A condition to Landlord's consent to any Transfer of this Lease will be the delivery to Landlord of a true copy of the fully executed instrument of assignment, sublease, transfer or hypothecation, and, in the case of an assignment, the delivery to Landlord of an agreement executed by the Transferee in form and substance reasonably satisfactory to Landlord, whereby the Transferee assumes and agrees to be bound by all of the terms and provisions of this Lease and to perform all of the obligations of Tenant hereunder. As a condition for granting its consent to any assignment or sublease, Landlord may require that, while Tenant is in default under this Lease, the assignee or sublessee remit directly to Landlord on a monthly basis, all monies due to Tenant by said assignee or sublessee. As a condition to Landlord's consent to any sublease, such sublease must provide that it is subject and subordinate to this Lease and to all mortgages; that Landlord may enforce the provisions of the sublease, including collection of rent; that in the event of termination of this Lease for any reason, including without limitation a voluntary surrender by Tenant, or in the event of any reentry or repossession of the Premises by Landlord, Landlord may, at its option, either (i) terminate the sublease, or (ii) take over all of the right, title and interest of Tenant, as sublessor, under such sublease, in which case such sublessee will attorn to Landlord, but that nevertheless Landlord will not (1) be liable for any previous act or omission of Tenant under such sublease, (2) be subject to any defense or offset previously accrued in favor of the sublessee against Tenant, or (3) be bound by any previous modification of any sublease made without Landlord's written consent, or by any previous prepayment by sublessee of more than one month's rent. (h) EXCESS RENT. If Landlord consents to any assignment of this Lease, Tenant agrees to pay to Landlord, as additional rent, fifty percent (50%) of all sums and other consideration payable to and for the benefit of Tenant by the assignee on account of the assignment, as and when such sums and other consideration are due and payable by the assignee to or for the benefit of Tenant (or, if Landlord so requires, and without any release of Tenant's liability for the same, Tenant agrees to instruct the assignee to pay such sums and other consideration directly to Landlord). If for any sublease, Tenant receives rent or other consideration, either initially or over the term of the sublease, in excess of the rent fairly allocable to the portion of the Premises which is subleased based on square footage, Tenant agrees to pay to Landlord as additional rent fifty percent (50%) of the excess of each such payment of rent or other consideration received by Tenant promptly after its receipt. In calculating excess rent or other consideration which may be payable to Landlord under this paragraph, Tenant will be entitled to deduct commercially reasonable third party brokerage commissions and attorneys' fees and other amounts reasonably and actually expended by Tenant in connection with such assignment or subletting if acceptable written evidence of such expenditures is provided to Landlord. (i) NO RELEASE. No Transfer will release Tenant of Tenant's obligations under this Lease or alter the primary liability of Tenant to pay the rent and to perform all other obligations to be performed by Tenant hereunder. The acceptance of rent by Landlord from any other person will not be deemed to be a waiver by Landlord of any provision hereof. Consent by Landlord to one Transfer will not be deemed consent to any subsequent Transfer. In the event of default by any Transferee of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such Transferee or successor. Landlord may consent to subsequent assignments of this Lease or sublettings or amendments or modifications to this Lease with assignees of Tenant, without notifying Tenant, or any successor of Tenant, and without obtaining its or their consent thereto and any such actions will not relieve Tenant of liability under this Lease. Notwithstanding the immediately preceding sentence, no subsequent assignments, sublettings, amendments or modifications made without Tenant's consent will serve to increase Tenant's liability under this Lease or to extend the period of time during which Tenant's obligations under this Lease are to be discharged. -18- (j) ADMINISTRATIVE AND ATTORNEYS' FEES. If Tenant effects a Transfer or requests the consent of Landlord to any Transfer (whether or not such Transfer is consummated), then, upon demand, Tenant agrees to pay Landlord a non-refundable administrative fee of Two Hundred Fifty Dollars ($250.00), plus any reasonable attorneys' and paralegal fees incurred by Landlord in connection with such Transfer or request for consent. Acceptance of the Two Hundred Fifty Dollar ($250.00) administrative fee and/or reimbursement of Landlord's attorneys' and paralegal fees will in no event obligate Landlord to consent to any proposed Transfer. 25. SUBORDINATION. Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, and at the election of Landlord or any mortgagee or beneficiary with a deed of trust encumbering the Premises, or any lessor of a ground or underlying lease with respect to the Building, this Lease will be subject and subordinate at all times to: (i) all ground leases or underlying leases which may now exist or hereafter be executed affecting the Premises; and (ii) the lien of any mortgage or deed of trust which may now exist or hereafter be executed for which Premises or any leases thereof, or Landlord's interest and estate in any of said items, is specified as security. Notwithstanding the foregoing, Landlord reserves the right to subordinate any such ground leases or underlying leases or any such liens to this Lease. If any such ground lease or underlying lease terminates for any reason or any such mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, at the election of Landlord's successor in interest, Tenant agrees to attorn to and become the tenant of such successor in which event Tenant's right to possession of the Premises will not be disturbed as long as Tenant is not in default under this Lease. Tenant covenants and agrees to execute and deliver, upon demand by Landlord and in the form reasonably required by Landlord, any additional documents evidencing the priority or subordination of this Lease and Tenant's attornment agreement with respect to any such ground lease or underlying leases or the lien of any such mortgage or deed of trust. If Tenant fails to sign and return any such documents within ten (10) days of receipt, Tenant will be in default hereunder. Landlord shall use reasonable efforts to cause (i) any current deed of trust beneficiaries of the Building to execute a subordination, attornment and non-disturbance agreement ("SNDA") on such beneficiaries' standard form within sixty (60) days after the date of this Lease, and (ii) any future deed of trust beneficiaries of the Building who later provide a loan secured by the Premises to execute a SNDA on such beneficiaries' standard form; provided, however, any failure by Landlord to obtain such SNDA shall not constitute any default by Landlord under this Lease nor entitle Tenant to terminate this Lease or result in any liability of Landlord to Tenant for any loss or damage resulting therefrom. 26. ESTOPPEL CERTIFICATE. (a) TENANT'S OBLIGATIONS. Within fifteen (15) days following any written request which Landlord may make from time to time, Tenant agrees to execute and deliver to Landlord a statement, in a form substantially similar to the form of EXHIBIT "G" attached hereto or another reasonable form, certifying: (i) the date of commencement of this Lease; (ii) the fact that this Lease is unmodified and in full force and effect (or, if there have been modifications, that this Lease is in full force and effect, and stating the date and nature of such modifications); (iii) the date to which the rent and other sums payable under this Lease have been paid; (iv) that there are no current defaults under this Lease by either Landlord or Tenant except as specified in Tenant's statement; and (v) such other matters reasonably requested by Landlord. Landlord and Tenant intend that any statement delivered pursuant to this Paragraph 26 may be relied upon by any mortgagee, beneficiary, purchaser or prospective purchaser of the Building or any interest therein. (b) TENANT'S FAILURE TO DELIVER. Tenant's failure to deliver such statement within such time will be conclusive upon Tenant (i) that this Lease is in full force and effect, without modification except as may be represented by Landlord, (ii) that there are no uncured defaults in Landlord's performance, and (iii) that not more than one (1) month's rent has been paid in advance. Without limiting the foregoing, if Tenant fails to deliver any such statement within such fifteen (15) day period, Landlord may deliver to Tenant an additional request for such statement and Tenant's failure to deliver such statement to Landlord within ten (10) days after delivery of such additional request will constitute a default under this Lease. Tenant agrees to indemnify and protect Landlord from and against any and all claims, damages, losses, liabilities and expenses (including attorneys' fees and costs) attributable to any failure by Tenant to timely deliver any such estoppel certificate to Landlord as required by this Paragraph 26. 27. INTENTIONALLY OMITTED. 28. RULES AND REGULATIONS. Tenant agrees to faithfully observe and comply with the "Rules and Regulations," a copy of which is attached hereto and incorporated herein by this reference as EXHIBIT "H", and all reasonable and nondiscriminatory modifications thereof and additions thereto from time to time put into effect by Landlord. 29. MODIFICATION AND CURE RIGHTS OF LANDLORD'S MORTGAGEES AND LESSORS. -19- (a) MODIFICATIONS. If, in connection with Landlord's obtaining or entering into any financing or ground lease for any portion of the Premises, the lender or ground lessor requests modifications to this Lease, Tenant, within ten (10) days after request therefor, agrees to execute an amendment to this Lease incorporating such modifications, provided such modifications are reasonable and do not increase the obligations of Tenant under this Lease or adversely affect the leasehold estate created by this Lease. (b) CURE RIGHTS. In the event of any default on the part of Landlord, Tenant will give notice by registered or certified mail to any beneficiary of a deed of trust or mortgage covering the Premises or ground lessor of Landlord whose address has been furnished to Tenant, and Tenant agrees to offer such beneficiary, mortgagee or ground lessor a reasonable opportunity to cure the default (including with respect to any such beneficiary or mortgagee, time to obtain possession of the Premises, subject to this Lease and Tenant's rights hereunder, by power of sale or a judicial foreclosure, if such should prove necessary to effect a cure). 30. DEFINITION OF LANDLORD. The term "Landlord," as used in this Lease, so far as covenants or obligations on the part of Landlord are concerned, means and includes only the owner or owners, at the time in question, of the fee title of the Premises or the lessees under any ground lease, if any. In the event of any transfer, assignment or other conveyance or transfers of any such title (other than a transfer for security purposes only), Landlord herein named (and in case of any subsequent transfers or conveyances, the then grantor) will be automatically relieved from and after the date of such transfer, assignment or conveyance of all liability as respects the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed, so long as the transferee assumes in writing all such covenants and obligations of Landlord arising after the date of such transfer. Landlord and Landlord's transferees and assignees have the absolute right to transfer all or any portion of their respective title and interest in the Premises and/or this Lease without the consent of Tenant, and such transfer or subsequent transfer will not be deemed a violation on Landlord's part of any of the terms and conditions of this Lease. 31. WAIVER. The waiver by either party of any breach of any term, covenant or condition herein contained will not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant or condition herein contained, nor will any custom or practice which may develop between the parties in the administration of the terms hereof be deemed a waiver of or in any way affect the right of either party to insist upon performance in strict accordance with said terms. The subsequent acceptance of rent or any other payment hereunder by Landlord will not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. No acceptance by Landlord of a lesser sum than the basic rent and additional rent or other sum then due will be deemed to be other than on account of the earliest installment of such rent or other amount due, nor will any endorsement or statement on any check or any letter accompanying any check be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such installment or other amount or pursue any other remedy provided in this Lease. The consent or approval of Landlord to or of any act by Tenant requiring Landlord's consent or approval will not be deemed to waive or render unnecessary Landlord's consent or approval to or of any subsequent similar acts by Tenant. 32. PARKING. So long as this Lease is in effect, Tenant shall be allotted all parking spaces located on the Premises. In addition, subject to compliance with any applicable codes, Tenant may designate that certain of such parking spaces be identified as "visitor parking" which shall be used exclusively for visitors and guests of Tenant, and marked accordingly. 33. FORCE MAJEURE. If either Landlord or Tenant is delayed, hindered in or prevented from the performance of any act required under this Lease by reason of strikes, lock-outs, labor troubles, inability to procure standard materials, failure of power, restrictive governmental laws, regulations or orders or governmental action or inaction (including failure, refusal or delay in issuing permits, approvals and/or authorizations which is not the result of the action or inaction of the party claiming such delay), riots, civil unrest or insurrection, war, fire, earthquake, flood or other natural disaster, unusual and unforeseeable delay which results from an interruption of any public utilities (e.g., electricity, gas, water, telephone) or other unusual and unforeseeable delay not within the reasonable control of the party delayed in performing work or doing acts required under the provisions of this Lease, then performance of such act will be excused for the period of the delay and the period for the performance of any such act will be extended for a period equivalent to the period of such delay. The provisions of this Paragraph 33 will not operate to excuse Tenant from prompt payment of rent or any other payments required under the provisions of this Lease. 34. SIGNS. Tenant shall be allowed to install one (1) or more building signs on the main fascia of the exterior of the Building (the "Tenant Identification Signs"). Landlord and Tenant shall mutually agree to designate the precise location for said signs. Tenant agrees to install and maintain the Tenant Identification Signs in such designated locations in accordance with this Paragraph 34 at Tenant's sole -20- cost and expense. Tenant will not display any other signs that are visible from the exterior of the Building without Landlord's prior written consent. The right to, size, design, color and other physical aspects of any and all permitted sign(s) will be subject to (i) Landlord's written approval prior to installation, which approval will not be unreasonably withheld, (ii) any covenants, conditions or restrictions governing the Premises, and (iii) any applicable municipal or governmental permits and approvals from the City of San Diego. Tenant will be solely responsible for all costs for installation, maintenance, repair and removal of the Tenant Identification Signs. If Tenant fails to remove Tenant's sign(s) upon termination of this Lease and repair any damage caused by such removal, Landlord may do so at Tenant's sole cost and expense. Tenant agrees to reimburse Landlord for all costs incurred by Landlord to effect any installation, maintenance or removal on Tenant's account, which amount will be deemed additional rent, and may include, without limitation, all sums disbursed, incurred or deposited by Landlord including Landlord's costs, expenses and actual attorneys' fees with interest thereon at the Interest Rate from the date of Landlord's demand until paid by Tenant. 35. LIMITATION ON LIABILITY. In consideration of the benefits accruing hereunder, Tenant on behalf of itself and all successors and assigns of Tenant covenants and agrees that, in the event of any actual or alleged failure, breach or default hereunder by Landlord: (a) Tenant's recourse against Landlord for monetary damages will be limited to Landlord's interest in the Building including, subject to the prior rights of any Mortgagee, Landlord's interest in the rents of the Building and any insurance proceeds payable to Landlord; (b) Except as may be necessary to secure jurisdiction of the partnership or company, no partner or member of Landlord shall be sued or named as a party in any suit or action and no service of process shall be made against any partner or member of Landlord; (c) No partner or member of Landlord shall be required to answer or otherwise plead to any service of process; (d) No judgment will be taken against any partner or member of Landlord and any judgment taken against any partner or member of Landlord may be vacated and set aside at any time after the fact; (e) No writ of execution will be levied against the assets of any partner or member of Landlord; (f) The obligations under this Lease do not constitute personal obligations of the individual members, partners, directors, officers or shareholders of Landlord, and Tenant shall not seek recourse against the individual members, partners, directors, officers or shareholders of Landlord or any of their personal assets for satisfaction of any liability in respect to this Lease; and (g) These covenants and agreements are enforceable both by Landlord and also by any partner or member of Landlord. 36. FINANCIAL STATEMENTS. Prior to the execution of this Lease by Landlord and at any time during the Term of this Lease upon ten (10) days prior written notice from Landlord, Tenant agrees to provide Landlord with a current financial statement for Tenant and financial statements for the two (2) years prior to the current financial statement year for Tenant. Such statements are to be prepared in accordance with generally accepted accounting principles and, if such is the normal practice of Tenant, audited by an independent certified public accountant. Notwithstanding the foregoing, to the extent Tenant is a publicly traded company, Tenant may satisfy the foregoing obligations by delivering the most recently published annual and quarterly reports of Tenant. 37. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant that upon Tenant paying the rent required under this Lease and paying all other charges and performing all of the covenants and provisions on Tenant's part to be observed and performed under this Lease, Tenant may peaceably and quietly have, hold and enjoy the Premises in accordance with this Lease without hindrance or molestation by Landlord or its employees or agents. 38. MISCELLANEOUS. (a) CONFLICT OF LAWS. This Lease shall be governed by and construed solely pursuant to the laws of the State of California, without giving effect to choice of law principles thereunder. (b) SUCCESSORS AND ASSIGNS. Except as otherwise provided in this Lease, all of the covenants, conditions and provisions of this Lease shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns. (c) PROFESSIONAL FEES AND COSTS. If either Landlord or Tenant should bring suit against the other with respect to this Lease, then all costs and expenses, including without limitation, actual professional fees and costs such as appraisers', accountants' and attorneys' fees and costs, incurred by the party which prevails in such action, whether by final judgment or out of court settlement, shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgment. As used herein, attorneys' fees and costs shall include, without limitation, attorneys' fees, costs and expenses incurred in connection with any (i) postjudgment motions; (ii) contempt proceedings; (iii) garnishment, levy, and debtor and third party examination; (iv) discovery; and (v) bankruptcy litigation. -21- (d) TERMS AND HEADINGS. The words "Landlord" and "Tenant" as used herein shall include the plural as well as the singular. Words used in any gender include other genders. The paragraph headings of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. (e) TIME. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor. (f) PRIOR AGREEMENT; AMENDMENTS. This Lease constitutes and is intended by the parties to be a final, complete and exclusive statement of their entire agreement with respect to the subject matter of this Lease. This Lease supersedes any and all prior and contemporaneous agreements and understandings of any kind relating to the subject matter of this Lease excepting the prior written agreement(s) of the parties pertaining to resolution of environmental issues. There are no other agreements, understandings, representations, warranties, or statements, either oral or in written form, concerning the subject matter of this Lease. No alteration, modification, amendment or interpretation of this Lease shall be binding on the parties unless contained in a writing which is signed by both parties. (g) SEPARABILITY. The provisions of this Lease shall be considered separable such that if any provision or part of this Lease is ever held to be invalid, void or illegal under any law or ruling, all remaining provisions of this Lease shall remain in full force and effect to the maximum extent permitted by law. (h) RECORDING. Neither Landlord nor Tenant shall record this Lease nor a short form memorandum thereof without the consent of the other. (i) COUNTERPARTS. This Lease may be executed in one or more counterparts, each of which shall constitute an original and all of which shall be one and the same agreement. 39. EXECUTION OF LEASE. (a) TENANT AS CORPORATION OR PARTNERSHIP. If Tenant executes this Lease as a corporation or partnership, then Tenant and the persons executing this Lease on behalf of Tenant represent and warrant that such entity is duly qualified and in good standing to do business in California and that the individuals executing this Lease on Tenant's behalf are duly authorized to execute and deliver this Lease on its behalf, and in the case of a corporation, in accordance with a duly adopted resolution of the board of directors of Tenant, a copy of which is to be delivered to Landlord on execution hereof, if requested by Landlord, and in accordance with the by-laws of Tenant, and, in the case of a partnership, in accordance with the partnership agreement and the most current amendments thereto, if any, copies of which are to be delivered to Landlord on execution hereof, if requested by Landlord, and that this Lease is binding upon Tenant in accordance with its terms. (b) EXAMINATION OF LEASE. Submission of this instrument by Landlord to Tenant for examination or signature by Tenant does not constitute a reservation of or option for lease, and it is not effective as a lease or otherwise until execution by and delivery to both Landlord and Tenant. [SEE ADDENDUM FOR ADDITIONAL NUMBERED SECTIONS 40 THROUGH 45] IN WITNESS WHEREOF, the parties have caused this Lease to be duly executed by their duly authorized representatives as of the date first above written. TENANT: LANDLORD: MAXWELL TECHNOLOGIES, INC., BALBOA BOULEVARD BUILDING, G.P., a Delaware corporation a general partnership By: By: -------------------------------------- ----------------------------- Print Name: Philip MacDonald --------------------------- Its: Managing General Partner Print Title: -------------------------- By: -------------------------------------- Print Name: --------------------------- Print Title: -------------------------- -22- ADDENDUM This Addendum is attached to, made a part of, incorporated into, and amends and supplements, that certain Office Building Lease dated March 28, 2000 (the "Lease"), by and between BALBOA BOULEVARD BUILDING, G.P., a general partnership ("Landlord"), and MAXWELL TECHNOLOGIES, INC., a Delaware corporation ("Tenant"). Landlord and Tenant agree that, notwithstanding anything contained in the Lease to the contrary, the provisions set forth in this Addendum will be deemed to be a part of the Lease and will supersede any contrary provisions in the Lease and shall prevail and control for all purposes. All references in the Lease and in this Addendum to the defined term "Lease" are to be construed to mean the Lease as amended and supplemented by this Addendum. Capitalized terms which are not defined in this Addendum have the meanings given to them in the Lease. The paragraphs below are numbered consecutively with those of the Lease. 40. OPTIONS TO EXTEND. (a) Subject to the terms of this Paragraph 40 and Paragraph 42, entitled "Options," Landlord hereby grants to Tenant two (2) consecutive options (the "Extension Options") to extend the Term of this Lease with respect to only the entire Premises for additional periods of three (3) years each (the "Option Terms"), on the same terms, covenants and conditions as provided for in this Lease during the initial Lease Term, except that Tenant shall have no further extension options and Monthly Base Rent and all other economic terms shall be based on the "fair market rental rate" for the Premises for each Option Term as defined and determined in accordance with the provisions of this Paragraph 40 below. Notwithstanding the foregoing, Monthly Base Rent at the beginning of each Option Term will be ninety-five percent (95%) of the fair market rental rate, but in no event shall the Monthly Base Rent at the beginning of the Option Term be less than the Monthly Base Rent for the final Lease Year of the immediately preceding Term. (b) Each Extension Option must be exercised, if at all, by written notice ("Extension Notice") delivered by Tenant to Landlord no later than the date which is nine (9) months, and no earlier than the date which is one (1) year, prior to the expiration of the then current Term of this Lease. (c) The term "fair market rental rate" as used in this Addendum shall mean the annual amount per rentable square foot, projected during the relevant period, that a willing, financially comparable, non-equity, tenant (excluding sublease and assignment transactions) would pay, and a willing, institutional landlord of a comparable quality building project, located in the San Diego-Kearny Mesa area ("Comparison Area") would accept, at arm's length, for space comparable in size and quality as the leased area at issue taking into account the age, quality and layout of the existing improvements (excluding those paid for solely by Tenant) in the leased area at issue and taking into account items that professional real estate brokers customarily consider, including, but not limited to, rental rates, space availability, tenant size and financial strength, tenant improvement allowances, operating expenses and allowance, parking charges and any other charges then being levied by Landlord or the lessors of such similar buildings. (d) Landlord's determination of fair market rental rate shall be delivered to Tenant in writing not later than thirty (30) days following Landlord's receipt of Tenant's Extension Notice. Tenant will have thirty (30) days ("Tenant's Review Period") after receipt of Landlord's notice of the fair market rental rate within which to accept such fair market rental rate or to object thereto in writing. Tenant's failure to accept the fair market rental rate submitted by Landlord in writing within Tenant's Review Period will conclusively be deemed Tenant's rejection thereof. If Tenant objects (or is deemed to have rejected) to the fair market rental rate submitted by Landlord within Tenant's Review Period, then Landlord and Tenant will attempt in good faith to agree upon such fair market rental rate using their best good faith efforts. If Landlord and Tenant fail to reach agreement on such fair market rental rate within fifteen (15) days following the expiration of Tenant's Review Period (the "Outside Agreement Date"), then each party's determination will be submitted to appraisal in accordance with the provisions below. (e) (i) Landlord and Tenant shall each appoint one independent, unaffiliated appraiser who shall by profession be a real estate broker who has been active over the five (5) year period ending on the date of such appointment in the leasing of comparable properties in the Comparison Area. Each such appraiser will be appointed within thirty (30) days after the Outside Agreement Date. (ii) The two (2) appraisers so appointed will within fifteen (15) days of the date of the appointment of the last appointed appraiser agree upon and appoint a third appraiser who shall be qualified under the same criteria set forth herein above for qualification of the initial two (2) appraisers. (iii) The determination of the appraisers shall be limited solely to the issue of whether Landlord's or Tenant's last proposed (as of the Outside Agreement Date) new Monthly Base Rent for the Premises is the ADDENDUM Page 1 closest to the actual new Monthly Base Rent for the Premises as determined by the appraisers, taking into account the requirements of Paragraph (c) and this Paragraph (e) regarding same. (iv) The three (3) appraisers shall within thirty (30) days of the appointment of the third appraiser reach a decision as to whether the parties shall use Landlord's or Tenant's submitted new Monthly Base Rent, and shall notify Landlord and Tenant thereof. (v) The decision of the majority of the three (3) appraisers shall be binding upon Landlord and Tenant and neither party will have the right to undo the exercise of the Extension Option or reject the appraisers' determination. The cost of each party's appraiser shall be the responsibility of the party selecting such appraiser, and the cost of the third appraiser (or arbitration, if necessary) shall be shared equally by Landlord and Tenant. (vi) If either Landlord or Tenant fails to appoint an appraiser within the time period in Paragraph (e)(i) herein above, the appraiser appointed by one of them shall reach a decision, notify Landlord and Tenant thereof and such appraiser's decision shall be binding upon Landlord and Tenant and neither party will have the right to undo the exercise of the Extension Option or reject the appraiser's determination. (vii) If the two (2) appraisers fail to agree upon and appoint a third appraiser, both appraisers shall be dismissed and the matter to be decided shall be forthwith submitted to arbitration under the provisions of the American Arbitration Association. (viii) In the event that the new Monthly Base Rent is not established prior to end of the then current Term of the Lease, the Monthly Base Rent immediately payable at the commencement of the Option Term shall be the Monthly Base Rent determined by Landlord under subparagraph (d) above. Notwithstanding the above, once the fair market rental is determined in accordance with this section, the parties shall settle any overpayment on the next Monthly Base Rent payment date falling not less than thirty (30) days after such determination. (f) Effective as of each anniversary of the commencement of each Option Term, the Monthly Base Rent shall be increased by the percentage increase in the Index (as defined and described in Paragraph 1(k) of this Lease), not to exceed five percent (5%) per year nor be less than three percent (3%) per year of the Monthly Base Rent in effect immediately preceding such increase. 41. SATELLITE DISH. Subject to Tenant's compliance with the terms of Paragraph 13 of this Lease, Tenant shall have the right to place one (1) satellite dish, one (1) microwave dish and one (1) antenna (collectively, the "Transmission Devices") on the roof of the Building for Tenant's use only provided that: (a) Tenant is not in default under this Lease beyond any applicable notice and cure period and this Lease has not been terminated; (b) Landlord approves the size, location, configuration and plans and specifications of the Transmission Devices; (c) Tenant shall install such Transmission Devices in accordance with such approved plans and specifications and all applicable laws; (d) Tenant shall bear all expenses in connection therewith; (e) Tenant shall be responsible for all roof problems attributable or related to or connected with the Transmission Devices; (f) all utilities consumed in connection therewith shall be the sole responsible of Tenant; and (g) Tenant acknowledges that Landlord has made no warranty or representation that the Transmission Devices are permissible and Tenant assumes all liability and risk in obtaining all permits and approvals necessary for the installation and use of the Transmission Devices. Tenant shall maintain and repair the Transmission Devices (and all related facilities) in good condition and shall cause the same to be removed on or before the expiration of the Term of this Lease and shall repair all damage resulting therefrom at Tenant's sole cost and expense. 42. OPTIONS. (a) As used in this Paragraph, the word "Option" means the Extension Options pursuant to Paragraph 40 herein. (b) Tenant shall have no right to exercise any Option, notwithstanding any provision of the grant of Option to the contrary, and Tenant's exercise of any Option may be nullified by Landlord and deemed of no further force or effect, if Tenant shall be in default of any monetary obligation or material non-monetary obligation under the terms of this Lease as of Tenant's exercise of the Option in question or at any time after the exercise of such Option and prior to the commencement of the Option event. 43. EARLY ENTRY. Notwithstanding the fact that the Lease Term has not commenced, Landlord agrees to allow Tenant to enter the Premises prior to the anticipated Commencement Date in order to install the Tenant Improvements and furniture, fixtures and equipment or for any purpose related to (but not for the conduct of) Tenant's business or occupancy of the Premises. Such entry shall be subject to all of the conditions set forth in this Paragraph 43 below. Tenant agrees that any such early entry is subject to all of the terms and conditions of this Lease, except for those relating to the payment of rent and other recurring monetary obligations which have a specific commencement time, which provisions will become ADDENDUM Page 2 applicable in accordance with the terms of this Lease. Without limiting the generality of the foregoing, such early occupancy shall be conditioned upon Tenant first delivering to Landlord the items described in Paragraph 4(a) of this Lease and Tenant shall be specifically bound by the provisions of Paragraphs 8 (Use), 18 (Assumption of Risk and Indemnification) and 19 (Insurance) of this Lease during such early entry period. 44. TENANT'S PAYMENT OF CERTAIN TAX EXPENSES. Notwithstanding anything to the contrary contained in this Lease, in the event that during the first forty-eight (48) months of the original Lease Term, the Building is sold, and as a result thereof, and to the extent that in connection therewith, the Building is reassessed (the "Reassessment") for real estate tax purposes by the appropriate governmental authority pursuant to the terms of Proposition 13 (as adopted by the voters of the State of California in the June, 1978 election), then the terms of this Paragraph 44 shall apply. (a) For purposes of this Paragraph 44, the term "Tax Increase" shall mean that portion of the Real Property Taxes and Assessments, as calculated immediately following the Reassessment, which is attributable solely to the Reassessment. Accordingly, the term Tax Increase shall not include any portion of the Real Property Taxes and Assessments, as calculated immediately following the Reassessment, which (i) is attributable to the assessment of the value of the Building immediately prior to the Reassessment, or (ii) is attributable to the annual inflationary increase to real estate taxes of approximately two percent (2%). (b) During the first forty-eight (48) months of the original Lease Term, Tenant shall not be obligated to pay any portion of the Tax Increase relating to a Reassessment. (c) During months 49 through 72 of the original Lease Term, Tenant shall be obligated to pay the entire Tax Increase relating to a Reassessment, except to the extent the assessed value of the Building as a result of such Reassessment exceeds $5,500,000. 45. ARBITRATION. If any claim, controversy or dispute related to or arising out of this Lease arises ("Dispute"), and if no other specific procedure is included in this Lease to resolve such Dispute, then such Dispute, if either party timely demands arbitration pursuant to Subparagraph (a) below, shall be resolved and adjudicated by binding arbitration in accordance with Title 9 of the California Code of Civil Procedure, Section 1280, et seq., except to the extent otherwise specified herein (neither party being obligated to arbitrate if neither party desires to do so). The arbitrator shall be a neutral, disinterested retired judge selected by the parties from a panel of retired judges available through the Judicial Arbitration and Mediation Service ("JAMS") or, if JAMS or its successor does not then exist, by any other arbitrator or retired judge affiliated with a private, disinterested association providing arbitration services. Should the parties fail to agree on the selection of a disinterested, neutral arbitrator within twenty (20) days of written demand accompanied by written notice of the Dispute by either party, either party may petition a California court of competent jurisdiction and proper venue to appoint an arbitrator pursuant to Code of Civil Procedure Section 1281.6. The arbitration shall be held within sixty (60) days after the selection of the arbitrator. The provisions of Code of Civil Procedure Section 1283.05, allowing for the taking of depositions for discovery purposes in arbitration proceedings, are hereby expressly adopted and agreed to by the parties. Any hearings required for purposes of the arbitration shall be in San Diego County, California, at the offices of the arbitrator or such other place designated by the arbitrator. The arbitration procedure shall be subject to the following: (a) Any demand for arbitration shall be in writing and must be made and served on the other party within a reasonable time after the Dispute has arisen and in no event shall the demand for arbitration be made after the earlier of the date which is (i) thirty (30) days after service by either party of summons and complaint, the subject matter of which is essentially identical with the subject matter of the demand for arbitration, or (ii) the date that institution of legal or equitable proceedings based on such Dispute would be barred by the applicable statute of limitations. (b) The provisions of this Paragraph 45 are not intended to require Landlord to arbitrate any matters relating to a default by Tenant under this Lease, which matters shall, at the election of Landlord, be governed by the applicable provisions of this Lease and/or applicable law. (c) All proceedings involving the parties shall be reported by a certified shorthand court reporter and written transcripts of the proceedings shall be prepared and made available to the parties. (d) The arbitrator shall prepare and deliver to the parties factual findings in writing which shall include the reasons on which the decision of the arbitrator is based. The arbitrator shall be bound by the provisions of this Lease, and shall not add to, subtract from or otherwise modify such provisions. (e) Final decision by the arbitrator must be provided to the parties within thirty (30) days from the date on which the matter is submitted to the arbitrator. ADDENDUM Page 3 (f) The prevailing party (as defined below) shall be awarded interest on the amount awarded (at the Interest Rate), reasonable attorneys' fees, expert and nonexpert witness costs and expenses (including without limitation the fees and costs of the court reporter described in Subparagraph (c) above), and other costs and expenses incurred in connection with the arbitration, unless the arbitrator for good cause determines otherwise. (g) As used herein, the term "prevailing party" shall mean the party, if any, that the arbitrator determines is "clearly the prevailing party." (h) Costs and fees of the arbitrator shall be borne by the nonprevailing party, unless the arbitrator for good cause determines otherwise. If there is no prevailing party, the parties shall bear their own fees and costs and split the fees and costs of the arbitrator and court reporter. (i) The award or decision of the arbitrator, which may include equitable relief, shall be final and judgment may be entered on it in accordance with applicable law in any court having jurisdiction over the matter. The provisions of this Paragraph 45 are not intended to alter the applicable provisions of law which provide the grounds on which a court may vacate an arbitration award. TENANT: LANDLORD: MAXWELL TECHNOLOGIES, INC., BALBOA BOULEVARD BUILDING, G.P., a Delaware corporation a general partnership By: By: ------------------------------ ------------------------------ Print Name: Philip MacDonald ------------------- Its: Managing General Partner Print Title: ------------------ By: ------------------------------ Print Name: ------------------- Print Title: ------------------ ADDENDUM Page 4 SITE PLAN OF PREMISES [To be supplied] EXHIBIT A-I LEGAL DESCRIPTION OF LAND Tax Assessor Parcel No. 369-161-11 Tract 004650 except the westerly 175' of Lot 12. EXHIBIT A-II WORK LETTER This WORK LETTER ("Work Letter") is entered into as of the 28th day of March, 2000, by and between BALBOA BOULEVARD BUILDING, G.P., a general partnership ("Landlord"), and MAXWELL TECHNOLOGIES, INC., a Delaware corporation ("Tenant"). R E C I T A L S : - - - - - - - - A. Concurrently with the execution of this Work Letter, Landlord and Tenant have entered into a lease (the "Lease") covering certain premises (the "Premises") more particularly described in EXHIBIT "A-I" attached to the Lease. All terms not defined herein have the same meaning as set forth in the Lease. To the extent applicable, the provisions of the Lease are incorporated herein by this reference. B. In order to induce Tenant to enter into the Lease and in consideration of the mutual covenants hereinafter contained, Landlord and Tenant agree as follows: 1. TENANT IMPROVEMENTS. As used in the Lease and this Work Letter, the term "Tenant Improvements" or "Tenant's Work" means those items of general tenant improvement construction shown on the Final Plans (described in Paragraph 4 below), more particularly described in Paragraph 5 below. 2. LANDLORD WORK. On the Commencement Date, Landlord warrants that (a) to the extent furnished by Landlord, all Building systems (including the fire sprinkler system), power and the roof shall be in good condition, except to the extent any of the same are not in good condition due to the acts or omissions of Tenant or anyone for whose acts or omissions Tenant is responsible, and (b) the Exterior Areas (as such term is defined in Subparagraph 4(b) of the Lease) shall be in compliance with all laws, including ADA and Title 24. 3. CONSTRUCTION REPRESENTATIVES. Landlord hereby appoints the following person(s) as Landlord's representative ("Landlord's Representative") to act for Landlord in all matters covered by this Work Letter: Philip MacDonald (Telephone: 714/241-7705). Tenant hereby appoints the following person(s) as Tenant's representative ("Tenant's Representative") to act for Tenant in all matters covered by this Work Letter: Paul Cayere. All communications with respect to the matters covered by this Work Letter are to made to Landlord's Representative or Tenant's Representative, as the case may be, in writing in compliance with the notice provisions of the Lease. Either party may change its representative under this Work Letter at any time by written notice to the other party in compliance with the notice provisions of the Lease. 4. TENANT IMPROVEMENT PLANS. (a) PREPARATION OF SPACE PLANS. Tenant shall cause its architect ("Tenant's Architect") to promptly prepare preliminary space plans for the layout of Premises ("Space Plans"). The Space Plans are to be sufficient to convey the architectural design of the Premises and layout of the Tenant Improvements therein and are to be submitted to Landlord for Landlord's approval. If Landlord reasonably disapproves any aspect of the Space Plans, Landlord will advise Tenant in writing of such disapproval and the reasons therefor within ten (10) days after receipt by Landlord. Tenant will then submit to Landlord for Landlord's approval a redesign of the Space Plans incorporating the revisions reasonably required by Landlord. (b) PREPARATION OF FINAL PLANS. Based on the approved Space Plans, Tenant's Architect will prepare complete architectural plans, drawings and specifications and complete engineered mechanical, structural and electrical working drawings for all of the Tenant Improvements for the Premises (collectively, the "Final Plans"). The Final Plans will show: (a) the subdivision (including partitions and walls), layout, lighting, finish and decoration work (including carpeting and other floor coverings) for the Premises; (b) all internal and external communications and utility facilities which will require conduiting or other improvements from the base Building shell work and/or within common areas; and (c) all other specifications for the Tenant Improvements. The Final Plans will be submitted to Landlord for approval. If Landlord reasonably disapproves any aspect of the Final Plans, Landlord shall advise Tenant in writing of such disapproval and the reasons therefor within ten (10) days after receipt by Landlord. Tenant will then cause Tenant's Architect to redesign the Final Plans incorporating the revisions reasonably requested by Landlord. EXHIBIT "C" Page 1 (c) REQUIREMENTS OF TENANT'S FINAL PLANS. Tenant's Final Plans will include locations and complete dimensions, and the Tenant Improvements, as shown on the Final Plans, will: (i) be compatible with the Building shell and with the design, construction and equipment of the Building; (ii) comply with all applicable laws, ordinances, rules and regulations of all governmental authorities having jurisdiction; and (iii) not overload the Building floors. (d) SUBMITTAL OF FINAL PLANS. Once approved by Landlord and Tenant, Tenant's Architect will submit the Final Plans to the appropriate governmental agencies for plan checking and the issuance of a building permit. Tenant's Architect, subject to Landlord's approval, will make any changes to the Final Plans which are requested by the applicable governmental authorities to obtain the building permit. After approval of the Final Plans no further changes may be made without the prior written approval of both Landlord and Tenant, and then only after agreement by Tenant to pay any excess costs resulting from the design and/or construction of such changes. (e) WORK COST ESTIMATE AND STATEMENT. Prior to the commencement of construction of any of the Tenant Improvements shown on the Final Plans, Tenant will obtain a written estimate of the cost to complete the Tenant Improvement Work, which written estimate will be based on competitive bidding of the Final Plans (by at least 3 subcontractors on trades exceeding $25,000 in contract value) taking into account any modifications which may be required to reflect changes in the Final Plans required by the City or County in which the Premises are located (the "Work Cost Estimate"). Landlord and Tenant will either approve the Work Cost Estimate or disapprove specific items in which event Tenant will cause its Architect to revise the Final Plans to reflect deletions of and/or substitutions for such disapproved items. Upon approval of the Work Cost Estimate by Landlord and Tenant (such approved Work Cost Estimate to be hereinafter known as the "Work Cost Statement"), Tenant shall cause its contractor to commence the construction of the items included in the Work Cost Statement pursuant to Paragraph 6 hereof. If the total costs reflected in the Work Cost Statement exceed the Allowance described in Paragraph 5 below, such excess shall be paid by Tenant on a pro-rata basis concurrently with Landlord's disbursement of the Allowance. Throughout the course of construction, any differences between the estimated Work Cost in the Work Cost Statement and the actual Work Cost will be reasonably determined by Landlord and Tenant and appropriate adjustments and payments by Landlord or Tenant, as the case may be, will be made promptly thereafter. 5. PAYMENT FOR THE TENANT IMPROVEMENTS. (a) ALLOWANCE. Landlord hereby grants to Tenant a tenant improvement allowance of $1,365,900 (the "Allowance"). The Allowance is to be used only for: (i) Payment of the cost of preparing the Space Plans and the Final Plans, including mechanical, electrical, plumbing and structural drawings and of all other aspects necessary to complete the Final Plans. (ii) The payment of plan check, permit and license fees relating to construction of the Tenant Improvements. (iii) Construction of the Tenant Improvements occurring after execution of the Lease, including, without limitation, the following: (aa) Installation within the Premises of all partitioning, doors, floor coverings, ceilings, wall coverings and painting, millwork and similar items; (bb) All electrical wiring, lighting fixtures, outlets and switches, and other electrical work necessary for the Premises; (cc) The furnishing and installation of all duct work, terminal boxes, diffusers and accessories necessary for the heating, ventilation and air conditioning systems within the Premises; (dd) Any additional improvements to the Premises required for Tenant's use of the Premises including, but not limited to, odor control, special heating, ventilation and air conditioning, noise or vibration control or other special systems or improvements; (ee) All fire and life safety control systems such as fire walls, sprinklers, halon, fire alarms, including piping, wiring and accessories, necessary for the Premises which are not Landlord's responsibility under the Lease; (ff) All plumbing, fixtures, pipes and accessories necessary for the Premises which are not Landlord's responsibility under the Lease; (gg) Testing and inspection costs; and EXHIBIT "C" Page 2 (hh) Fees for the contractor including, but not limited to, fees and costs attributable to general conditions associated with the construction of the Tenant Improvements. (iv) Certain improvements to be shown on the Final Plans specific to Tenant's operations but not necessarily typical, reusable improvements, such as a clean room and a raised floor manufacturing test area (the "Tenant Specific Items"). Tenant may not expend more than $365,000 of the Allowance on the Tenant Specific Items. If Tenant desires to spend more than $365,000 on the Tenant Specific Items, then Tenant may either directly pay to Landlord the excess or amortize the additional amount as rent as provided in Paragraph 5(b) below. (b) EXCESS COSTS. The cost of each item referenced in Paragraph 5(a) above shall be charged against the Allowance. If the Work Cost exceeds the Allowance, Tenant agrees to pay to Landlord such excess upon completion of construction (less any sums previously paid by Tenant for such excess pursuant to the Work Cost Estimate). In no event will the Allowance be used to pay for Tenant's furniture, artifacts, equipment, telephone systems or any other item of personal property which is not affixed to the Premises. Notwithstanding the foregoing, Tenant may amortize over the original Lease Term up to $5.00 per Rentable Square Foot of excess costs as additional Monthly Base Rent, with interest at the rate of eleven percent (11%) per annum (the "Used Excess Allowance"). (c) DISBURSEMENT OF CONSTRUCTION ALLOWANCE. Provided Tenant is not in default under the Lease or this Work Letter, Landlord shall disburse the Allowance to Tenant to reimburse Tenant for the actual construction costs which Tenant incurs in connection with the construction of the Tenant Improvements in accordance with the following: (i) Tenant shall cause its contractor to deliver to Landlord, by the fifth (5th) day of each month (the "Current Month"), an application for payment in the form of a typed, itemized, reasonably detailed AIA G701 statement (the "Statement"). The Statement shall be applicable to the period commencing on the first (1st) day of the month preceding the Current Month and ending on the last day of such month (the "Payment Request Period"). Delivered with the Statement shall be (a) conditional lien releases applicable to all work performed during the Payment Request Period and unconditional lien releases applicable to all work performed prior to the Payment Request Period, and (b) invoices, receipts and bills evidencing the costs which are the subject of the Statement (collectively, the "Supporting Items"). The Statement shall constitute a representation by Tenant that the work identified therein as having been performed has been approved by Tenant and performed in a good and workmanlike manner and in accordance with the requirements of the Lease and this Work Letter. (ii) Landlord will review the Statement for each Payment Request Period and will, within ten (10) days after receipt of said Statement and the Supporting Items, pay to Tenant, who shall pay to Tenant's contractor, ninety percent (90%) of the amount Landlord reasonably approves; in the event Landlord does not approve a Statement for reasons related to defective or unsatisfactory work, Landlord will only be obligated to pay ninety percent (90%) of the portion it approves. Within fifteen (15) days after receipt of a Statement, Landlord shall notify Tenant in writing of the reason for withholding any portion of the amount set forth in such Statement. Any single payment, or series of payments, by Landlord in excess of said ninety percent (90%) sum shall not constitute a waiver of Landlord's right to pay only ninety percent (90%) in the future. Except for sums withheld for defective or unsatisfactory work that is later remedied to Landlord's reasonable satisfaction, no portion of the sums retained by Landlord pursuant to this subparagraph shall be payable until the final payment by Landlord is made pursuant to this Work Letter. (iii) Final payment, including the retainer, shall be due and payable thirty-five (35) days after recordation of a valid Notice of Completion with respect to the Tenant Improvement Work, provided Tenant's contractor has timely delivered to Landlord the last Statement and Supporting Items. (iv) Each Statement shall only include amounts for work authorized under this Work Letter and actually performed. (v) Notwithstanding anything to the contrary set forth above, Landlord shall not be required to make final payment until (a) Tenant's Architect has certified to Landlord that the Tenant Improvements have been substantially completed in accordance with the Final Plans, (b) Tenant has delivered to Landlord one (1) set of reproducible "as-built" plans for the Tenant Improvements as prepared by Tenant's Architect, and (c) Tenant has accepted possession of the Premises and opened for business therein in accordance with the Lease. (d) BOOKS AND RECORDS. Tenant shall cause its contractor to maintain complete and accurate books and records in accordance with generally accepted accounting principles of these expenditures for at least two (2) years. Tenant shall cause its contractor to make available to Landlord within fifteen (15) business days following Landlord's notice requiring the audit, all books and records maintained by Tenant's contractor pertaining to the construction and completion of the Tenant Improvements. EXHIBIT "C" Page 3 (e) CHANGES. If, after the Final Plans have been prepared and the Work Cost Statement has been established, Tenant requires any changes or substitutions to the Final Plans, any additional costs related thereto which cause the aggregate cost of the Tenant Improvements to exceed the Allowance shall be paid by Tenant as provided above. Any changes to the Final Plans will be approved by Landlord and Tenant in the manner set forth in Paragraph 4 above and will, if necessary, require the Work Cost Statement to be revised and agreed upon between Landlord and Tenant in the manner set forth in Subparagraph 4(e) above. Landlord will have the right to decline Tenant's request for a change to the Final Plans if such changes are inconsistent with the provisions of Paragraph 4 above. (f) UNUSED ALLOWANCE AMOUNTS. Any unused portion of the Allowance upon completion of the Tenant Improvements will, at Tenant's option, either be amortized over the initial Lease Term in the form of reduced Monthly Base Rent or be available to Tenant as a credit against Tenant's rental obligations first accruing under the Lease. 6. CONSTRUCTION OF TENANT IMPROVEMENTS. Tenant shall enter into a construction contract (the "Construction Contract") with a contractor reasonably acceptable to Landlord, on a form and in substance reasonably acceptable to Landlord and Tenant, for the installation of the Tenant Improvements in accordance with the Final Plans. Tenant shall supervise the completion of such work and shall use diligent efforts to secure completion of the Tenant Improvements in a good and workmanlike manner in accordance with the Final Plans and the Construction Contract. Landlord shall have the right to approve all material changes; provided Landlord responds to a change order request within three (3) business days of request. Tenant agrees to use diligent efforts to cause construction of the Tenant Improvements to commence promptly following the issuance of a building permit for the Tenant Improvements. 7. COMMENCEMENT DATE AND SUBSTANTIAL COMPLETION. (a) COMMENCEMENT DATE. The Term of the Lease will commence on the date (the "Commencement Date") which is the earlier of: (i) the date Tenant moves into the Premises to commence operation of its business in all or any portion of the Premises; (ii) the date the Tenant Improvements have been "substantially completed" (as defined below); or (iii) August 1, 2000, subject to Landlord Delays (as defined in Paragraph 9 below). (b) SUBSTANTIAL COMPLETION; PUNCH-LIST. For purposes of Subparagraph 7(a)(ii) above, the Tenant Improvements will be deemed to be "substantially completed" when Tenant's Architect certifies in writing to Landlord and Tenant that: (a) all of the Tenant Improvement Work to be performed under this Work Letter has been completed, other than decoration and minor "punch-list" type items and adjustments which do not materially interfere with Tenant's access to or use of the Premises; and (b) has obtained a temporary certificate of occupancy or other required equivalent approval from the local governmental authority permitting occupancy of the Premises. 8. MISCELLANEOUS CONSTRUCTION COVENANTS. (a) NO LIENS. At no time shall Tenant do or permit anything to be done whereby the Tenant Improvements or the Premises may be subjected to any mechanic's, materialmen's or other liens or encumbrances arising out of the construction of the Tenant Improvements, and if any mechanic or materialmen liens are filed against the Tenant Improvements or the Premises as a result of or in connection with the construction of the Tenant Improvements, Tenant shall immediately cause such liens to be removed of record by either paying off the lien or procuring and recording a release bond in accordance with California Civil Code Section 3143 and Section 3171. If Tenant fails to remove such lien, and such failure continues for ten (10) days after written demand by Landlord to do so, Landlord shall have the right, but not the obligation, in addition to all other rights and remedies available to Landlord under the Lease and this Work Letter, to procure and cause to be recorded a statutory lien release bond and to deduct from the Allowance all costs incurred in procuring such bond. Landlord shall have the right at any time and from time to time to post and maintain on the Premises such notices as may be necessary to protect the Tenant Improvements and the Premises and Landlord from mechanic's liens, materialmen's liens or liens of a similar nature. Tenant shall give notice to Landlord not later than ten (10) days prior to the commencement of any work of any nature contemplated by the Lease. (b) DILIGENT CONSTRUCTION. Tenant will promptly, diligently and continuously pursue construction of the Tenant Improvements to successful completion in full compliance with the Final Plans, the Construction Contract, and this Work Letter. Landlord and Tenant shall cooperate with one another during the performance of Tenant's Work to effectuate such work in a timely and compatible manner. (c) COMPLIANCE WITH LAWS. Tenant will construct the Tenant Improvements in a safe and lawful manner. Tenant shall, at its sole cost and expense, subject to proper application of the Allowance as provided herein, comply with all applicable laws and all regulations and requirements of, and all licenses and permits issued by, all municipal or other governmental bodies with jurisdiction. Copies of all filed EXHIBIT "C" Page 4 documents and all permits and licenses shall be provided to Landlord. Any portion of the Tenant Improvements which is not acceptable to any applicable governmental body, agency or department, or not reasonably satisfactory to Landlord, shall be promptly repaired or replaced by Tenant at Tenant's expense. Notwithstanding any failure by Landlord to object to any such Tenant Improvements, Landlord shall have no responsibility therefor. Tenant shall notify Landlord in writing not less than ten (10) days prior to the commencement of the construction of any portion of the Tenant Improvements as to name, telephone number and responsible party for each and every contractor and/or subcontractor who is about to commence work at the Premises. (d) INDEMNIFICATION. Tenant hereby indemnifies and agrees to defend and hold Landlord and the Premises harmless from and against any and all suits, claims, actions, losses, costs or expenses (including, without limitation, claims for workers' compensation) of any nature whatsoever, together with reasonable attorneys' fees for counsel of Landlord's choice, arising out of or in connection with the Tenant Improvements or the performance of Tenant's Work (including, but not limited to, claims for breach of warranty, personal injury or property damage), except for claims arising out of any breach by Landlord of its obligations under this Work Letter or any negligent act or omission of Landlord or its agents or employees. (e) INSURANCE. Construction of the Tenant Improvements shall not proceed without Tenant causing its contractor to first acquire workers' compensation and comprehensive general public liability insurance and property damage insurance as well as "All Risks" builders' risk insurance, with minimum coverage of $3,000,000 or such other amount as may be approved by Landlord in writing and issued by an insurance company reasonably satisfactory to Landlord. Not less than thirty (30) days before commencing the construction of the Tenant Improvements, certificates of such insurance shall be furnished to Landlord or, if requested, the original policies thereof shall be submitted for Landlord's approval. All such policies shall provide that thirty (30) days prior notice must be given to Landlord before modification, termination or cancellation. All insurance policies maintained pursuant to this Work Letter shall name Landlord and any lender with an interest in the Premises as additional insureds and comply with all of the applicable terms and provisions of the Lease relating to insurance. (f) CONSTRUCTION DEFECTS. Landlord shall have no responsibility for the Tenant Improvements and Tenant will remedy, at Tenant's own expense, and be responsible for any and all defects in the Tenant Improvements that may appear during or after the completion thereof. Tenant shall reimburse Landlord for any costs or expenses incurred by Landlord during the Term of the Lease by reason of any defect in any portion of the Tenant Improvements constructed by Tenant or the contractor or subcontractors, or by reason of inadequate cleanup following completion of the Tenant Improvements. (g) OMITTED. (h) OMITTED. (i) SYSTEMS. Tenant agrees to be entirely responsible for the balancing of all heating, ventilating or air conditioning in the Premises and/or the balancing and maintenance of all independent heating, ventilating or air conditioning in the Premises and/or the maintenance of the electrical or plumbing work installed by Tenant or its contractor and/or the maintenance of lighting fixtures, partitions, doors, hardware or any other installations made by Tenant or its contractor. (j) COORDINATION WITH LEASE. Nothing herein contained shall be construed as (i) constituting Tenant as Landlord's agent for any purpose whatsoever, or (ii) a waiver by Landlord of any of the terms or provisions of the Lease. Any default by Tenant or Landlord with respect to any portion of this Work Letter shall be deemed a breach of the Lease for which the non-defaulting party shall have all the rights and remedies as in the case of a breach of said Lease. (k) APPROVAL OF PLANS. Landlord will not check Tenant drawings for building code compliance. Approval of the Final Plans by Landlord is not a representation that the drawings are in compliance with the requirements of governing authorities, and it shall be Tenant's responsibility to meet and comply with all Federal, state, and local code requirements. Approval of the Final Plans does not constitute assumption of responsibility by Landlord or its architect for their accuracy, sufficiency or efficiency. (l) TENANT'S DELIVERIES. Tenant shall deliver to Landlord, at least five (5) days prior to the commencement of construction of Tenant's Work, the following information: (i) The names and addresses of the general, mechanical and electrical contractors Tenant intends to engage in the performance of Tenant's Work; (ii) The date on which Tenant's Work will commence, together with the estimated dates of completion of Tenant's construction and fixturing work, and the date on which Tenant expects to be ready to open for business in the Building; EXHIBIT "C" Page 5 (iii) A copy of the fully executed Construction Contract; and (iv) An itemized statement of estimated construction costs, including architectural, engineering and contractors' fees. (m) QUALIFICATION OF CONTRACTORS. All contractors engaged by Tenant shall be bondable, licensed contractors, capable of performing quality workmanship. (n) WARRANTIES. Tenant shall cause its contractor to provide warranties for not less than one (1) year against defects in workmanship, materials and equipment, which warranties shall run to the benefit of Landlord or shall be assignable to Landlord. (o) AS-BUILT DRAWINGS. Tenant shall cause "As-Built Drawings" (excluding furniture, fixtures and equipment) to be delivered to Landlord by the date set forth in Paragraph 5(c)(v) above. In the event these drawings are not received by such date, Landlord may, at its election, cause said drawings to be obtained and Tenant shall pay to Landlord, as additional rent, the cost of producing these drawings. 9. LANDLORD DELAYS. For purposes of this Work Letter Agreement, "Landlord Delays" means any delay in the completion of the Tenant Improvements resulting from any or all of the following: (a) Landlord's failure to timely perform any of its obligations pursuant to the Lease or this Work Letter Agreement; or (b) Landlord's changes to Space Plans or Final Plans after Landlord's approval thereof; or (c) Landlord's failure to make the Premises available to Tenant for construction of the Tenant Improvements. If substantial completion of the Tenant Improvements is delayed as a result of any Landlord Delays as described in this Paragraph 9, then the Commencement Date as would otherwise have been established pursuant to Subparagraph 7(a) above will be postponed by the number of days of such Landlord Delays. No Landlord Delays shall be deemed to occur unless Tenant has provided Landlord notice, in compliance with the notice provisions of the Lease, specifying (i) that a Landlord Delay will be deemed to have occurred because of a specified action or inaction on the part of Landlord, and, (ii) to the extent reasonably ascertainable, the anticipated amount of such delay if such action or inaction is not promptly cured. If such action or inaction is not cured by Landlord within one (1) business day of receipt of such notice (a "Count Day") and if such action or inaction actually causes a delay, then the delay actually caused by such action or inaction shall be deemed to have occurred commencing as of the Count Day and continuing for the number of days the action or inaction claimed by Tenant in such notice actually and directly causes a delay. IN WITNESS WHEREOF, the undersigned Landlord and Tenant have caused this Work Letter to be duly executed by their duly authorized representatives as of the date of the Lease. TENANT: LANDLORD: MAXWELL TECHNOLOGIES, INC., BALBOA BOULEVARD BUILDING, G.P., a Delaware corporation a general partnership By: By: ------------------------------ ------------------------------ Print Name: Philip MacDonald ------------------- Its: Managing General Partner Print Title: ------------------ By: ------------------------------ Print Name: ------------------- Print Title: ------------------ EXHIBIT "C" Page 6 NOTICE OF LEASE TERM DATES To: _____________________________________________ _____________________________________________ Date: _____________________________________________ Re: Lease dated _____________ (the "Lease"), between Balboa Boulevard Building, G.P., Landlord, and __________________________, Tenant, concerning the building and the legal parcel and all improvements thereon located at 9244 Balboa Avenue, San Diego, California (the "Premises"). To Whom It May Concern: In accordance with the subject Lease, we wish to advise and/or confirm as follows: 1. That Tenant has substantially completed construction of the Tenant Improvements in accordance with the subject Lease. 2. That Tenant acknowledges that under the provisions of the Lease, the Commencement Date is _________________, and the Term of the Lease will expire on _________________. 3. That in accordance with the Lease, rent commenced to accrue on _________________________. 4. If the Commencement Date of the Lease is other than the first day of the month, the first billing will contain a pro rata adjustment. Each billing thereafter will be for the full amount of the monthly installment as provided for in the Lease. 5. Rent is due and payable in advance on the first day of each and every month during the Term of the Lease. Your rent checks should be made payable to ___________________________________________________________________________ at _______________________________________________________________________. LANDLORD: BALBOA BOULEVARD BUILDING, G.P., a general partnership By:___________________________________ Philip MacDonald Its: Managing General Partner SAMPLE ONLY [NOT FOR EXECUTION] EXHIBIT "D" DEFINITION OF OPERATING EXPENSES 1. ITEMS INCLUDED IN OPERATING EXPENSES. The term "Operating Expenses" as used in the Lease to which this EXHIBIT "E" is attached means: all costs and expenses incurred by Landlord in the operation and maintenance of the exterior of the Building, landscaping and parking/drive areas, as determined by standard accounting practices, including the following costs by way of illustration but not limitation, but excluding those items specifically set forth in Paragraph 3 below: (a) Real Property Taxes and Assessments (as defined in Paragraph 2 below) and any taxes or assessments imposed in lieu thereof; (b) premiums for insurance obtained by Landlord as required by Paragraph 19(d) of this Lease; (c) costs incurred in the management of the Building, including, without limitation: (i) supplies, (ii) wages and salaries (and payroll taxes and similar governmental charges related thereto) of employees used in the management, operation and maintenance of the Premises, and (iii) a management fee determined as a percentage of the Monthly Base Rent of the Building, not to exceed 3% of annual Monthly Base Rent; (d) supplies, materials, equipment and tools including rental of personal property used for maintenance; (e) maintenance, costs and upkeep of all parking; (f) amortization on a straight line basis over the useful life [together with interest at the Interest Rate on the unamortized balance] of all capitalized expenditures which are: (i) reasonably intended to produce a reduction in operating charges or energy consumption; or (ii) required under any governmental law or regulation that was not applicable to the Building on the Commencement Date; or (iii) for replacement of any equipment needed to operate the areas to be maintained by Landlord hereunder at the same quality levels as prior to the replacement; (g) costs and expenses of gardening and landscaping; (h) personal property taxes levied on or attributable to personal property used by Landlord exclusively on the Premises in connection with its duties hereunder; (i) reasonable accounting fees; and (j) costs and expenses of repairs, resurfacing, repairing, maintenance, painting, lighting, cleaning, refuse removal (other than as required of Tenant under the Lease), but excluding those costs listed as Landlord's sole cost in Paragraph 14(a) of the Lease. When calculating Base Year Operating Expenses, Base Year Operating Expenses shall not include Real Property Taxes and Assessments attributable to special assessments, charges, costs, or fees or due to modifications or changes in governmental laws or regulations, and shall exclude market-wide labor-rate increases due to extraordinary circumstances including, but not limited to, boycotts and strikes and utility increases due to extraordinary circumstances including, but not limited to, conservation surcharges, boycotts, embargoes or other shortages. 2. REAL PROPERTY TAXES AND ASSESSMENTS. The term "Real Property Taxes and Assessments", as used in this EXHIBIT "E", means: any form of assessment, business license fee, commercial rental tax, levy, charge, tax or similar imposition imposed by any authority having the direct power to tax, including the city, county, state or federal government, or any school, agricultural, lighting, drainage or other improvement or special assessment district thereof, as against any legal interest of Landlord in the Premises, Building, adjusted to reflect an assumption that the Building is fully assessed for real property tax purposes as a completed building ready for occupancy, including the following by way of illustration but not limitation: (a) any tax on Landlord's "right" to rent or "right" to other income from the Premises or as against Landlord's business of leasing the Premises; (b) except as provided in Paragraph 44 of this Lease, all taxes resulting from a sale, refinancing, or change in ownership of the Building pursuant to the terms of Proposition 13 (as adopted by the voters of the State of California in the June, 1978 election); (c) any assessment, tax, fee, levy or charge allocable to or measured by the area of the Premises the rent payable by Tenant hereunder, including, without limitation, any gross receipts tax or excise tax levied EXHIBIT "E" Page 1 by state, city or federal government, or any political subdivision thereof, with respect to the receipt of such rent, or upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises, or any portion thereof but not on Landlord's other operations; (d) any assessment, tax, fee, levy or charge upon this transaction or any document to which Tenant is a party, creating or transferring an interest or an estate in the Premises; and/or (e) any assessment, tax, fee, levy or charge by any governmental agency related to any transportation plan, fund or system (including assessment districts) instituted within the geographic area of which the Building is a part. Notwithstanding the foregoing, if at any time after the Commencement Date, the amount of Real Property Taxes and Assessments decreases, then for purposes of all subsequent years, including the year in which such decrease in Real Property Taxes and Assessments occurs, the Base Year Operating Expenses shall be decreased by an amount equal to such decrease in Real Property Taxes and Assessments. 3. ITEMS EXCLUDED FROM OPERATING EXPENSES. Notwithstanding the provisions of Paragraphs 1 and 2 above to the contrary, "Operating Expenses" will not include: (a) Landlord's federal or state income, franchise, inheritance or estate taxes; (b) any ground lease rental; (c) costs incurred by Landlord for the repair of damage to the Premises to the extent that Landlord is reimbursed by insurance or condemnation proceeds or by tenants, warrantors or other third persons; (d) depreciation, amortization and interest payments, except as specifically provided herein, and except on materials, tools, supplies and vendor-type equipment purchased by Landlord to enable Landlord to supply services Landlord might otherwise contract for with a third party, where such depreciation, amortization and interest payments would otherwise have been included in the charge for such third party's services, all as determined in accordance with standard accounting practices; (e) brokerage commissions, finders' fees, attorneys' fees, space planning costs and other costs incurred by Landlord in leasing or attempting to lease space in the Premises; (f) costs of a capital nature, including, without limitation, capital improvements, capital replacements, capital repairs, capital equipment and capital tools, all as determined in accordance with standard accounting practices; provided, however, the capital expenditures set forth in Subparagraph 1(f) above will in any event be included in the definition of Operating Expenses; (g) interest, principal, points and fees on debt or amortization on any mortgage, deed of trust or other debt encumbering the Premises; (h) costs, including permit, license and inspection costs, incurred with respect to the installation of tenant improvements for tenants in the Building (including the original Tenant Improvements for the Premises), including space planning and interior design costs and fees; (i) attorneys' fees and other costs and expenses incurred in connection with negotiations or disputes with present or prospective tenants or other occupants of the Building; (j) except for the management fees described in Subparagraph 1(c) above, costs of Landlord's general corporate overhead; (k) all items and services for which Tenant is required to reimburse Landlord pursuant to the Lease or for which Tenant is otherwise responsible pursuant to the Lease; (l) costs arising from Landlord's charitable or political contributions; (m) Costs of repairs or other work occasioned by fire, windstorm or other casualty, condemnation or eminent domain (other than the commercially reasonable deductible for applicable insurance), to the extent Landlord is reimbursed therefor; (n) Costs of constructing the Premises; (o) Any costs representing an amount paid to any person, firm, corporation or other entity as a result of a non-competitive selection process, which is in excess of the fair market value of such materials or services if said material or services had been rendered by an unrelated comparably qualified third party on a competitive basis; EXHIBIT "E" Page 2 (p) Any expenses for repairs or maintenance which are reimbursed through warranties or service contracts; (q) Any bad debt loss or expense, rent loss, or reserves for bad debt or rent loss; (r) Fines, penalties, late payment charges and interest, except to the extent such costs are attributable to Tenant's breach under this Lease; (s) Fees or dues payable to trade associations, industry associations, or similar organizations; (t) The cost of acquiring, leasing, installing or moving sculptures, paintings and other objects of art; (u) Costs necessitated by or resulting from the gross negligence or misconduct of Landlord, its agents, employees, vendors and/or contractors; (v) Any entertainment, dining or travel expenses for any purpose and the costs of any flowers, gifts, balloons, etc., provided to any entity whatsoever, to include, but not limited to, Tenant, other tenants, employees, vendors, contractors, prospective tenants and agents; (w) Any compensation paid to clerks, attendants or other persons in commercial concessions operated by Landlord or whenever Tenant is granted its parking privileges and/or all fees paid to any parking facility operator (on or offsite) (provided, however, if Landlord provides such parking free of charge to Tenant, these expenses may be included as a part of Operating Expenses); and (x) Costs attributable to any new or significantly modified items or categories of maintenance, operation or repair to the extent such new or modified items are not included in the Base Year Operating Expenses. Any new or significantly modified items incurred in the introductory year (grossed up to a full twelve (12) month period) shall be included in the Base Year Operating Expenses (grossed up) for the purpose of calculating increased Operating Expenses in subsequent years; provided, however, the capital expenditures set forth in Subparagraph 1(f) above will in any event be included in the definition of Operating Expenses. EXHIBIT "E" Page 3 ESTOPPEL CERTIFICATE The undersigned, _____________________ ("Tenant"), hereby certifies to ________________________________________________________________________ , as follows: 1. Attached hereto is a true, correct and complete copy of that certain lease dated __________________, 2000, between _____________________________________, a ("Landlord") and Tenant (the "Lease"), regarding the premises located at __________________________________ (the "Premises"). The Lease is now in full force and effect and has not been amended, modified or supplemented, except as set forth in Paragraph 4 below. 2. The Term of the Lease commenced on ___________________, 20 _____. 3. The Term of the Lease will expire on _________________, 20 _____. 4. The Lease has: (Initial one) (__________________________) not been amended, modified, supplemented, extended, renewed or assigned. (__________________________) been amended, modified, supplemented, extended, renewed or assigned by the following described terms or agreements, copies of which are attached hereto: _______________________________________________________________________________ _______________________________________________________________________________ 5. Tenant has accepted and is now in possession of the Premises. 6. Tenant and Landlord acknowledge that Landlord's interest in the Lease will be assigned to __________________________________________________ and that no modification, adjustment, revision or cancellation of the Lease or amendments thereto shall be effective unless written consent of is obtained, and that until further notice, payments under the Lease _____________________________________ may continue as heretofore. 7. The amount of Monthly Base Rent is $ __________________________________. 8. The amount of Security Deposit (if any) is $ _____________________. No other security deposits have been made except as follows: _________________________________________________________. 9. Tenant is paying the full lease rental which has been paid in full as of the date hereof. No rent or other charges under the Lease have been paid for more than thirty (30) days in advance of its due date except as follows: ___________________________________. 10. All work required to be performed by Landlord under the Lease has been completed except as follows: ____________________________. 11. There are no defaults on the part of the Landlord or Tenant under the Lease except as follows: ____________________________. 12. Neither Landlord nor Tenant has any defense as to its obligations under the Lease and claims no set-off or counterclaim against the other party except as follows: ____________________________. 13. Tenant has no right to any concession (rental or otherwise) or similar compensation in connection with renting the space it occupies other than as provided in the Lease except as follows: ____________________________. Exhibit "G" Page 1 All provisions of the Lease and the amendments thereto (if any) referred to above are hereby ratified. The foregoing certification is made with the knowledge that ________________ is relying upon the representations herein made in funding a loan to Landlord in purchasing the Premises. IN WITNESS WHEREOF, this certificate has been duly executed and delivered by the authorized officers of the undersigned as of __________________________________, 20 ____. TENANT: _______________________________________________________________ a ____________________________________________________________. By:___________________________________________________________ Print Name:_____________________________________________ Title:__________________________________________________ By:___________________________________________________________ Print Name:_____________________________________________ Title:__________________________________________________ SAMPLE ONLY [NOT FOR EXECUTION] Exhibit "G" Page 2 RULES AND REGULATIONS A. GENERAL RULES AND REGULATIONS. The following rules and regulations govern the use of the Building and the Premises. Tenant will be bound by such rules and regulations and agrees to cause Tenant's Authorized Users, its employees, subtenants, assignees, contractors, suppliers, customers and invitees to observe the same. 1. Except as specifically provided in the Lease to which these Rules and Regulations are attached, no sign, placard, picture, advertisement, name or notice may be installed or displayed on any part of the outside of the Building or the Premises without the prior written consent of Landlord, which consent will not be unreasonably withheld. Landlord will have the right to remove, at Tenant's expense and without notice, any sign installed or displayed in violation of this rule. All approved signs or lettering on doors and walls are to be printed, painted, affixed or inscribed at the expense of Tenant. 2. If Landlord objects in writing to any curtains, blinds, shades, screens or hanging plants or other similar objects attached to or used in connection with any window or door of the Premises, or placed on any windowsill, which is visible from the exterior of the Premises, Tenant will immediately discontinue such use. Tenant agrees not to place anything against or near glass partitions or doors or windows which may appear unsightly from outside the Premises. 3. Landlord will in all cases retain the right to control and prevent access thereto of all persons whose presence in the reasonable judgment of Landlord would be prejudicial to the safety, character, reputation and interest of the Premises and its tenants, provided that nothing herein contained will be construed to prevent such access to persons with whom any tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal or unlawful activities. 4. Landlord expressly reserves the right to absolutely prohibit solicitation, canvassing, distribution of handbills or any other written material, peddling, sales and displays of products, goods and wares in all portions of the Premises except as may be expressly permitted under the Lease. 5. Omitted. 6. Landlord will not be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. Landlord reserves the right to prevent access to the Building in case of invasion, mob, riot, public excitement or other commotion by closing the doors or by other appropriate action. 7. Tenant will not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry and which is allowed by law. Tenant will be responsible for all structural engineering required to determine structural load, as well as the expense thereof. Landlord will not be responsible for loss of, or damage to, any equipment or other property from any cause, and all damage done to the Building by maintaining or moving such equipment or other property will be repaired at the expense of Tenant. 8. Omitted. 9. Omitted. 10. The toilet rooms, toilets, urinals, wash bowls and other apparatus will not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage or damage resulting from any violation of this rule will be borne by the tenant who, or whose employees or invitees, break this rule. 11. Tenant may install an antenna, satellite dish, microwave dish or other device on the roof of the Building in accordance with the provisions of the Lease. 12. Tenant will store all its trash and garbage within its Premises or in other facilities provided by Landlord. Landlord shall provide a dumpster for Tenant's use during the Term of the Lease. Tenant will not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. All garbage and refuse disposal is to be made in accordance with directions issued from time to time by Landlord. 13. Neither Tenant nor any of its employees, agents, customers and invitees may use in any space or in the public halls of the Building or the Premises any hand truck except those equipped with rubber tires and side guards or such other material-handling equipment as may be appropriate to avoid damage to the Building. EXHIBIT "H" Page 1 14. Tenant agrees to comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. 15. Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed. 16. Omitted. 17. These Rules and Regulations are in addition to, and will not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of the Lease. Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant, but no such waiver by Landlord will be construed as a waiver of such Rules and Regulations in favor of Tenant, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against Tenant. 18. Landlord reserves the right to make such other and reasonable and non-discriminatory Rules and Regulations as, in its judgment, may from time to time be needed for safety and security, for care and cleanliness of the Premises and for the preservation of good order therein. Tenant agrees to abide by all such Rules and Regulations herein above stated. Tenant is responsible for the observance of all of the foregoing rules by Tenant's employees, agents, clients, customers, invitees and guests. EX-21.1 8 a2042380zex-21_1.txt EXHIBIT 21.1 Exhibit 21.1 SUBSIDIARIES OF MAXWELL TECHNOLOGIES, INC.
ENTITY STATE/COUNTRY OF INCORPORATION Maxwell Technologies Systems Division, Inc. California PurePulse Technologies, Inc. Delaware Maxwell Electronic Components Group, Inc. California I-Bus/Phoenix, Inc. California * MML Acquisition Corp. Delaware * I-Bus/Phoenix (UK) Ltd. United Kingdom * I-Bus (UK) Ltd. United Kingdom * Calphobytax, Ltd. United Kingdom * Portwell UK, Ltd. United Kingdom * I-Bus Manufacturing Ltd. United Kingdom * Graphic Vision, Ltd. United Kingdom * Tri-Map Ltd. United Kingdom * I-Bus/Phoenix France SA France * I-Bus/Phoenix GmbH Germany * Indirect Subsidiary
EX-23.1 9 a2042380zex-23_1.txt EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG, LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 333-07835, 333-07831, 333-28455, 333-28457, 333-63815, 333-63813, 333-41634, 333-41670, 333-41632 and 333-53278) of Maxwell Technologies, Inc. of our report dated February 9, 2001, except for Note 4, as to which the date is February 26, 2001 and Note 12, as to which the date is March 16, 2001, with respect to the consolidated financial statements of Maxwell Technologies, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2000. San Diego, California March 16, 2001 -----END PRIVACY-ENHANCED MESSAGE-----