- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Form 10-K
[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
Commission file number 000-30939
----------------
ACTIVE POWER, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2961657
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
11525 Stonehollow Drive, Suite 110, Austin, Texas 78758
(Address of principal executive offices, including Zip Code)
(512) 836-6464
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
(Title of each class)
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. [X]Yes [_] No
Indicated by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 1, 2001, based upon the closing sale price of Common
Stock on such date, as reported on the Nasdaq National Market, was
approximately $581.3 million (affiliates being, for these purposes only,
directors, executive officers and holders of more than 5% of the Registrant's
Common Stock).
As of March 1, 2001, the Registrant had 39,257,420 outstanding shares of
Common Stock.
Documents Incorporated by Reference:
(Specific pages incorporated are indicated under the applicable Item herein)
Incorporated
by Reference
in Part No.
-------------
Our proxy statement filed in connection with our 2001 Annual
Meeting of Stockholders........................................ III
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Active Power, Inc.
Unless otherwise indicated, "we," "us," "our," and "Active Power" mean
Active Power, Inc., including our predecessor Texas corporation. We own the
trademarks CLEANSOURCE(R) and MAKING ELECTRICITY BETTER(R). All other
trademarks, tradenames or service marks referred to in this document are the
property of their respective owners. References in this document to "$" or
"dollars" are to United States of America currency.
----------------
Table of Contents
Table of Contents.......................................................... i
Special Note Regarding Forward-Looking Statements.......................... ii
PART I..................................................................... 1
ITEM 1. Business......................................................... 1
ITEM 2. Properties....................................................... 19
ITEM 3. Legal Proceedings................................................ 19
ITEM 4. Submission of Matters to a Vote of Security Holders.............. 19
PART II.................................................................... 20
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters................................................................. 20
ITEM 6. Selected Financial Data.......................................... 21
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 22
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk...... 25
ITEM 8. Financial Statements and Supplementary Data...................... 25
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.............................................. 25
PART III................................................................... 26
ITEM 10. Executive Officers of the Registrant............................ 26
ITEM 11. Executive Compensation.......................................... 27
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.. 27
ITEM 13. Certain Relationships and Related Transactions.................. 27
PART IV.................................................................... 28
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-
K....................................................................... 28
Note on Incorporation by Reference
Throughout this report, various information and data are incorporated by
reference to portions of our 2001 Proxy Statement. Any reference in this report
to disclosures in our 2001 Proxy Statement shall constitute incorporation by
reference of that specific material into this Form 10-K.
i
Special Note Regarding Forward-Looking Statements
This document contains forward-looking statements that involve substantial
risks and uncertainties, such as statements concerning:
. industry trends;
. customer demand for our products;
. growth and future operating results;
. developments in our markets and strategic focus;
. expansion of and enhancements to our manufacturing and engineering
facilities and product offerings;
. customer benefits attributable to our products;
. potential acquisitions and joint ventures and the integration of acquired
businesses;
. technologies and operations;
. strategic relationships with third parties; and
. future economic, business and regulatory conditions.
You can identify these statements by forward-looking words such as "may,"
"will," "expect," "intend," "anticipate," "believe," "estimate," "continue" and
other similar words. You should read statements that contain these words
carefully because they discuss our future expectations, make projections of our
future results of operations or financial condition, or state other "forward-
looking" information. We believe that it is important to communicate our future
expectations to our investors. However, there may be events in the future that
we are not able to accurately predict or control. The factors listed in the
sections captioned "Additional Factors That May Affect Future Results" in Item
1 of this report and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7 of this report, as well as any
cautionary language in this annual report, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we described in our forward-looking statements.
ii
PART I
ITEM 1. Business.
Overview
We design, manufacture and market battery-free power quality products that
provide the consistent, reliable electric power required by today's digital
economy. We believe that we are the first company to commercialize a flywheel
energy storage system that provides a highly reliable, low-cost and non-toxic
replacement for lead-acid batteries used in conventional power quality
installations. Leveraging our expertise in this technology and in conjunction
with Caterpillar, the leading maker of engine generators for the power
reliability market, we have developed a battery-free power quality system that
is marketed under the Caterpillar brand name. As an extension of these existing
product lines, we are developing a fully integrated continuous power system.
The initial target market for this product is the rapidly growing
telecommunications industry.
Industry Background
Power Requirements of the New Economy
The worldwide demand for high quality electricity has been increasing
rapidly in recent years, driven in large part by growth in the use of
computers, the Internet, on-line transactions and the telecommunications
infrastructure. Industry sources have estimated that the share of all U.S.
electricity consumed by computer-based microprocessors is 13% and that within
the next two decades up to 50% of the nation's electricity supply may support
the direct and indirect needs of the Internet.
As the proliferation of sophisticated digital electronics grows and the
dependence on high performance computing and networked systems increases, the
need for very high levels of quality power and reliable power becomes
paramount. However, despite this increasingly dramatic change in the mix of
electricity demand, the distribution system used to provide power has not
changed. The power delivered over the electric utility grid today is subject to
power disturbances, such as voltage sags and surges, and power outages. These
disturbances, while typically lasting less than two seconds, can have
significant financial and operational effects on companies doing business in
the digital economy.
[GRAPHIC APPEARS HERE]
[Description of Graphic: This graphic depicts sine waves representing both
the types of problems with power supplied from the electric utility grid and the
desired sine wave for "Reliable, Quality Electric Power". The first graphic on
the far left is titled "Reliability Problem" and shows a steady sine wave that
turns into a straight line. Above the straight line is the word "Outage" with an
arrow pointing at the straight line. In the middle of the graphic under "Power
Quality Problems" are two sine waves. The top sine wave has smaller peaks and
valleys in the middle of the sine wave. Above the middle of the sine wave are
the words "Voltage Sag" with an arrow pointing at the center of the sine wave.
The bottom sine wave has larger peaks and valleys in the middle of the sine
wave. Above the middle of the sine wave are the words "Voltage Surges" with an
arrow pointing at the center of the sine wave. On the right side of the diagram
is a smooth, continuous sine wave which is labeled "Reliable, Quality Electric
Power".]
The highly publicized recent power outages in California, as well as in a
number of major cities in the U.S., has highlighted the increasing likelihood
of costly interruptions and the need to seek continuous electric power
protection. Power disturbances are a significant concern for everything from
the computers used in modern commercial and industrial processes to
telecommunications equipment. Leaving these devices unprotected from
disturbances can have significant and negative impacts on the power user. A
1999 study by the Electric Power Research Institute estimated that electric
power problems annually cost U.S. industry more than $30 billion in lost data,
material and productivity. Even the loss of quality power for one second at a
semiconductor manufacturing plant can result in the loss of millions of
dollars. As the digital economy grows, avoiding network and equipment downtime
due to power-related problems will become even more important.
Electric utilities are dependent on the existing utility grid for
transmission and distribution of electric power. The electric utility grid is
unable to provide high quality, uninterrupted power due in large part to being
1
exposed to severe weather, animals, accidents and other external events. While
substantial upgrades and other investment could improve overall utility grid
reliability, the absolute level of power quality required for these
sophisticated electronic applications remains difficult to achieve without
local uninterrupted power protection close to the point of use.
Power Quality Systems: Uninterruptible Power Supplies and Continuous Power
Systems
Currently, there are a variety of approaches that attempt to address the
deficiencies of power delivered by the electric utility grid. Conventional
power quality systems have been constructed from an array of devices, including
batteries for short-term power disturbances, engine generators, commonly
referred to as "gensets," for longer-term outages, and control electronics to
bridge the two. A short-term (seconds to minutes) energy storage device with
control electronics is referred to as an uninterruptible power supply, or UPS.
A UPS coupled with a genset to protect against longer-term outages (minutes to
hours or days) is referred to as a continuous power system, or CPS.
A UPS protects sensitive systems from sags, surges and other temporary
interruptions in utility-supplied power. A UPS consists of solid-state switches
and electronics that are connected to both the electric utility grid and a
back-up power source, typically lead-acid batteries. The UPS electronics
monitor the power from the electric utility grid. If the UPS determines that
the power being supplied from the grid is unacceptable or that insufficient
power is being supplied, it will draw power from the back-up power source to
ensure uninterrupted, quality power. These systems typically provide 5 to 15
minutes of back-up power before the batteries are depleted.
A CPS provides back-up power indefinitely. As described above, if the UPS
determines that there is a power quality or power reliability problem, it
initially turns to the back-up power source. If, however, the disturbance lasts
for an extended period (typically, more than 5 to 10 seconds), the CPS genset
is activated and begins to provide back-up power. Internet service providers,
data processing centers, semiconductor plants, cellular phone sites and fiber
nodes all use CPS to keep critical business equipment operating when electric
utility grid power falters.
The following diagrams depict a conventional UPS and CPS:
[GRAPHIC APPEARS HERE]
[Description of graphic: The graphic on the left depicts a "Conventional UPS
System". From the left side of the graphic is an arrow pointed to the center of
the graphic with the caption "Electric Power from Utility" beneath the arrow.
The arrow points to a box in the center of the graphic with the caption
"Uninterruptible Power Supply Electronics" inside the box. Beneath the box and
connected to the box with a line is another box with the caption "Lead Acid
Battery for short term power (seconds to minutes)" inside the box. From the
center box is an arrow pointed to the right side of the graphic with the caption
"Uninterruptible Power to Customer" beneath the arrow. Beneath this graphic is
the following text "Electric power from the electric utility passes through the
UPS to the customer. If this power is interrupted or is disturbed, the UPS
immediately draws power from the battery to supply uninterrupted power to
customer".
The graphic on the right depicts a "Conventional CPS System". From the left
side of the graphic is an arrow pointed to the center of the graphic with the
caption "Electric Power from Utility" beneath the arrow. The arrow points to a
box in the center of the graphic with the caption "Uninterruptible Power Supply
Electronics" inside the box. Above the box and connected to the center box with
a line is an oval with the caption "Generator" inside the oval and the caption
"long term power (minutes to days)" to the left of the oval. Beneath the center
box and connected to the center box with a line is another box with the caption
"Lead Acid Battery for short term power (seconds to minutes)" inside the box.
From the center box is an arrow pointed to the right side of the graphic with
the caption "Uninterruptible Power to customer" beneath the arrow. Beneath this
graphic is the following text: "In a CPS configuration, if the power disturbance
lasts longer than a few seconds, the standby generator is started to provide
electric power for as long as required."]
Electric power from the In a CPS configuration, if the
electric utility passes power disturbance lasts longer
through the UPS to the than a few seconds, the standby
customer. If this power is generator is started to provide
interrupted or is electric power for as long as
disturbed, the UPS required.
immediately draws power
from the battery to supply
uninterrupted power to the
customer.
2
Limitations of Conventional UPS and CPS
Conventional battery-based UPS and CPS devices have evolved out of a
makeshift combination of diesel engines, generators, automobile batteries and
UPS electronics. We believe that this patchwork approach to UPS and CPS has
resulted in systems that are less efficient, less reliable and more expensive
than they otherwise could be. The lead-acid batteries that provide ride-
through, or temporary, power for the UPS and CPS, are viewed as the most
unreliable and most costly element of conventional power quality and
reliability solutions. Lead-acid batteries have numerous problems, including:
Reliability
. Relatively high failure rate--Batteries are prone to heat buildup and
acid leaks that lead to battery failure.
. Limited life based on usage--When batteries are repeatedly used at close
to their maximum power output, their power output capacity can rapidly
decrease, reducing the batteries' effectiveness over time.
Cost
. High maintenance--Batteries must be regularly inspected, generally every
three months, to detect problems. Batteries also require periodic testing
to determine their power output capacity, which degrades over time.
. Bulky--Generally, multiple batteries forming banks or strings must be
used to support UPS functions. They also must be spaced apart to prevent
uncontrolled heating. Batteries therefore consume valuable space which
otherwise could be allocated to revenue generating equipment.
. Frequent replacement required--Regardless of usage, batteries have a
limited useful life and must be replaced every 2 to 6 years, depending
upon the type of use, environment and other factors.
. Temperature sensitivity--Unless cooled by costly air conditioning
systems, battery life will rapidly degrade.
Environmental
. Toxicity--Batteries contain toxic materials such as lead and sulfuric
acid.
. Disposal--State and federal environmental regulations governing battery
disposal are rigorous and costly.
Beyond the specific problems associated with lead-acid batteries, existing
UPS and CPS contain inefficiencies inherent in any system that was not designed
as an integrated solution. Specifically, the major components of these systems
do not come from a single reliable source. This lack of a single-source
supplier makes installation, maintenance and failure analysis more difficult,
costly and complex. Typically, separate companies manufacture, market and
service the genset, UPS electronics and batteries. The end user must often
assume the responsibility to integrate and monitor the system.
Active Power's Products--Making Electricity Better
Rather than adopt conventional approaches to power quality systems, we
design new solutions specifically for the power quality market. As a result, we
believe that we create products that are less expensive, more efficient and
more reliable than other systems presently available.
CleanSource DC
CleanSource DC is the first commercially viable, non-chemical replacement
for lead-acid batteries used for short-term power in power quality
installations. As opposed to the chemical energy stored by batteries, our
3
patented flywheel energy storage system stores kinetic energy by spinning
constantly in a patented low-friction environment. When the UPS electronics
detect a power disturbance, CleanSource DC draws upon the power stored as
kinetic energy to generate back-up power. Our CleanSource flywheel energy
storage system is compact, quiet and has demonstrated field proven reliability.
CleanSource DC can run in conjunction with or can replace battery strings
used in UPS and CPS systems and can replace the batteries now used with fuel
cells and microturbines to meet peak power demands. This system is available in
a variety of delivered power ratings up to 480 kW per flywheel system. We also
can configure the units in parallel to achieve higher power. CleanSource DC has
been designed for much longer service intervals and more extreme environments
than typical lead-acid battery installations. Our first CleanSource DC unit was
placed in service in March 1997. Our installed CleanSource DC units have
accumulated over 400,000 hours of field operation.
CleanSource UPS
Building on the technological success of CleanSource DC, we created a
battery-free UPS, CleanSource UPS, which is the primary focus of our current
sales efforts. Historically, a UPS is created by coupling together two
components--a string or strings of batteries and control electronics.
CleanSource UPS integrates UPS electronics and our flywheel energy storage
system into a single power quality solution. CleanSource UPS is contrasted with
a conventional battery-based system in the illustration below.
[GRAPHIC APPEARS HERE]
[Description of graphic: This graphic depicts a comparison of a "Conventional
Battery-Based UPS" and a "CleanSource UPS". The Traditional Battery-Based UPS is
pictured on the left side of the graphic. The left portion of the Traditional
Battery-Based UPS is labeled "battery cabinets" and the right side of the
Traditional Battery-Based UPS is labeled "UPS electronics". Beneath the picture
of the Traditional Battery-Based UPS is the following information: "240 KW UPS
with minimum battery cabinet; Footprint - 37.5 sq. ft., Weight - 13,000 lbs.,
Electrical Efficiency - 92%". The CleanSource UPS is pictured on the right side
of the graphic. Beneath the picture of the CleanSource UPS is the following
information: "250 KW UPS with energy storage; Footprint - 10 sq. ft., Weight -
3,250 lbs., Electrical Efficiency - 98%".]
The CleanSource UPS design takes advantage of the many component
similarities between CleanSource DC and standard UPS electronics. Each system
requires power conversion electronics, fans for cooling, a frame for structural
support, a user display and data reporting capability, and other overlapping
functions. By combining these functions into a single system, as shown in the
figure below, we can provide a highly reliable power quality solution while
achieving significant cost savings.
4
[GRAPHIC APPEARS HERE]
[Description of graphic: This graphic depicts "CleanSource UPS System
Efficiencies". The graphic is a ven diagram consisting of two circles which
partially overlap in the middle of the graphic. The circle on the left side of
the graphic is labeled "Energy Storage" at the bottom left. Inside the left
circle on the left side of the circle are the words "flywheel puck". In the
middle of the left circle is the caption "Flywheel Electronics". In the middle
of the graphic where the circles overlap from top to bottom are the words "heat
sinks & fans", "cabinet frame & skins" and "monitoring & display". Above the
overlapping portion of the circles is the caption "System Efficiencies" with an
arrow pointed toward the overlapping portion of the diagram. The circle on the
right side of the graphic is labeled "UPS" at the bottom right. Inside the right
circle on the right side of the circle are the words "bypass switch contactors".
In the middle of the right circle is the caption "UPS Electronics".]
Due to its unique design, CleanSource UPS can typically match the installed
cost of a conventional battery-based UPS. Due to its high efficiency and long
service life, we believe that the total cost of ownership of CleanSource UPS,
which includes the purchase price, installation, maintenance and energy costs
accumulated over a ten year period, is less than half of that of conventional
battery-free systems. In conjunction with Caterpillar, we designed CleanSource
UPS to be compatible with new and installed standby generators, extending their
application to CPS. As of the end of 2000, we are currently delivering
CleanSource UPS units that span the power range from 250kVA up to 900kVA. We
have plans to further expand the power range of the CleanSource UPS product up
to 3000kVA. Availability of these higher power systems is targeted for the
third quarter of 2001.
Future Products--Fully Integrated Continuous Power System
We are developing an advanced continuous power system for the distributed
telecommunications market that combines short and long-term energy storage and
power electronics functionality into one fully integrated system. We believe
the benefits of this fully integrated CPS product will include increased
reliability, lower cost and less maintenance relative to the piecemeal systems
in use today. We anticipate commercial availability of our first CPS product by
the end of 2001.
Our Business Strategy
Our goal is to become the leading supplier of battery-free power quality and
reliability equipment. Key elements of our strategy include:
Design, Manufacture And Market Optimal Solutions For Targeted Markets
We design products for specific markets. Our first products, CleanSource DC
and CleanSource UPS, put this principle into practice. With CleanSource DC, we
created a flywheel product to meet the specific needs of the UPS market. In so
doing, we overcame the design constraints that had hampered preceding flywheel
programs to produce the first commercially viable alternative to lead-acid
batteries. Building on that success, we developed our second product, the
CleanSource UPS, the world's most efficient and compact UPS to specifically
address the market's growing desire for compact and reliable power protection.
We intend to continue to identify market needs for the power industry and
design products to address those specific needs.
Leverage Our Core Technologies to Develop Next Generation Products
We intend to continue to use our expertise in advanced electromechanical
technologies, combined with an integrated solutions approach, to create
innovative products that lower the cost and increase the quality of
5
electric power. We are designing a fully integrated CPS with applications in
the distributed telecommunications power quality and reliability market.
Distribute and Market our Products through Established OEM Channels
We believe that working with leading original equipment manufacturers, or
OEMs, enables us to rapidly introduce our products into established customer
and dealer networks and promote the adoption of new technologies. To date, our
most important OEM relationship is with Caterpillar, a worldwide distributor of
the CleanSource UPS product line. Additionally, we have established distributor
relationships with leading UPS OEMs Liebert, Powerware and MGE UPS Systems for
our CleanSource DC product. We intend to continue to use development and
distribution relationships for our future products to achieve rapid market
penetration.
Leverage Our Relationship with Caterpillar to Achieve Rapid Market Penetration
We believe that our distribution agreement with Caterpillar allows us to
rapidly penetrate the power quality and reliability market through
Caterpillar's worldwide network of over 200 dealers and over 1,500 branch
outlets. A portion of Caterpillar's large installed base of over 300,000
gensets also provides a significant retrofit opportunity by converting
installed standby systems to CPS with the addition of our CleanSource UPS. Our
relationship with Caterpillar should enhance our credibility among the
generally conservative customers within the power quality and reliability
market. We will continue to examine additional ways to leverage our
relationship with Caterpillar.
Outsource Components to Rapidly Scale Manufacturing
We intend to continue to outsource all non-proprietary hardware and
electronics by maintaining and building on multiple supplier relationships so
that we can respond quickly to significant quantity increases. We intend to
focus on the final assembly and testing of our products, decreasing production
cycle times and increasing volume production capability.
Aggressively Protect Our Intellectual Property
We seek to aggressively identify and protect our key intellectual property,
primarily through the use of patents. We believe that a policy of actively
protecting intellectual property is an important component of our strategy to
serve as a leading innovator in power quality technology and will provide us
with a long-term competitive advantage.
Market Opportunities
The Electric Power Research Institute estimates that power disturbances cost
U.S. businesses more than $30 billion each year. According to industry sources,
in 1999 businesses spent in excess of $11.0 billion globally on power quality
and reliability products in an attempt to reduce these losses. Our current
products, CleanSource DC and CleanSource UPS, are targeted at the $5.5 billion
market for UPS. We believe that our products are superior alternatives to
conventional UPS and CPS products and should be able to rapidly penetrate this
growing segment of the power quality industry. With future products, we
anticipate that we will be able to compete in most segments of this market.
With our current and future products we intend to focus on the following
market opportunities:
Internet Data Center Market
A 1999 study conducted by the University of Texas and released by Cisco
Systems, Inc. found that the U.S. Internet economy grew at an estimated average
annual rate of 175% from 1995 to 1998. The June 2000 update to this study also
projected that the Internet economy would grow to $850 billion in 2000, up 62%
from 1999. To support this growth, businesses must construct new advanced data
centers to house the computers and
6
communications systems required to provide around-the-clock service to their
customers. To ensure continuous 24 x 7 service, power quality equipment
protection is essential.
Telecommunications Market
To ensure uninterrupted service, reliable backup power is critical for
wireless base stations, remote switching centers and broadband communications
such as fiber-to-cable and DSL distribution. This market for back-up
telecommunications power systems represented approximately $4.0 billion of the
$11.0 billion power quality market in 1999. Conventional CPS systems currently
satisfy market demand using a patchwork of gensets, lead-acid batteries and
power electronics. We are designing our next generation product, a fully
integrated CPS, to service the specific needs of this market, although we
expect broader market applications in the future. We believe that our fully
integrated CPS will be well positioned to serve this market and will achieve
rapid market penetration.
Other Power Quality and Reliability Markets
Industrial. An Electric Power Research Institute study on recurring U.S.
power problems estimated that the average U.S. manufacturing facility
experienced in excess of 20 power disturbances annually. Exacerbating this
problem, manufacturing organizations are employing increasing levels of
automation, especially process and machine control, communications and
computerized optimization of material flow. Even brief power disturbances,
which result in lost material, lost data and worker and plant down time, can be
very expensive. Industries with the potential to suffer significant loss from
power disturbances include semiconductor and pharmaceutical manufacturing,
textiles and precision machining.
Commercial Facilities. Many commercial facilities such as office buildings,
hotels and university facilities now have a large number of computers or
servers. Historically, these businesses and their personal computer networks
have been unprotected from power disturbances or have only been spot-protected
with a small PC UPS under each person's desk. A single CleanSource UPS system
can protect as few as 200 PCs more cost effectively than many small PC UPS
products.
Retrofit Market. Caterpillar has the largest installed base of standby
generators, or generators that are not coupled with a UPS, in the world. As
even a brief power outage can cause an extended shutdown of sensitive
electronic equipment, many of the customers that rely on standby generators for
long-term power outages can no longer afford the five to ten second outage
while the generator starts and therefore need to add a UPS for short-term
protection. While a lead-acid battery based UPS can be used to upgrade a
standby generator into a CPS, Caterpillar sells our CleanSource UPS and does
not offer a battery-based UPS. We believe that upgrading, or retrofitting, a
portion of Caterpillar's approximately 300,000 installed gensets worldwide by
adding our CleanSource UPS, thereby creating a CPS, represents a significant
market opportunity.
Distributed Generation
Fuel cells and microturbines, which allow users to bypass the electric
utility grid by generating power locally, represent potential markets for our
CleanSource products. These distributed generation technologies currently
cannot respond effectively to rapid changes in electric power demands, or
loads, due to their slow response capability. CleanSource DC can absorb sharp
peaks in electrical demand, allowing a relatively expensive microturbine or
fuel cell to be sized for the average power requirement of the customer. This
combination provides a cost competitive alternative to sizing the fuel cell or
microturbine to handle both peak and average electrical demands. In addition,
CleanSource UPS can seamlessly transfer a customer load from electric utility
grid power to fuel cell or microturbine standby power in the event of a utility
outage.
7
Our Relationship with Caterpillar
We have established a strategic relationship with Caterpillar, granting
Caterpillar the world wide right to distribute CleanSource UPS, which is
marketed as "Cat UPS." Caterpillar is a market leader in new genset sales and
has the largest installed base of existing standby generators in the world. By
offering the Cat UPS with a standby genset, Caterpillar can transform a standby
power system into a CPS. The combined solution reduces maintenance cost and
increases reliability relative to traditional CPS products. Moreover, because
Caterpillar's product line now includes both a UPS and a genset, Caterpillar is
now selling, installing and servicing a complete CPS under a single brand name.
We believe that this total solution gives both Caterpillar and us a significant
competitive advantage in the power quality market. Through Caterpillar's
worldwide dealership and sales force network and its market reputation, we
believe that we will be able to rapidly penetrate the market for our products.
UPS Development Agreement. We entered into a development agreement with
Caterpillar in January 1999 for the creation and distribution of Cat UPS
marketed under the Caterpillar brand name. Under the development agreement,
Caterpillar provided $5.0 million in funding to support the development of Cat
UPS.
While we retained sole ownership of the underlying flywheel energy storage
technology, we jointly own with Caterpillar intellectual property associated
with the integration of UPS electronics with CleanSource DC. Either we or
Caterpillar may license to other entities the intellectual property that we
jointly own without seeking the consent of the other and all licensing revenue
generated by licensing the joint intellectual property will be solely retained
by the licensing party. However, we may not license the joint intellectual
property to specifically identified competitors of Caterpillar until January 1,
2005.
Distribution Agreement. We also have a distribution agreement with
Caterpillar. During 2000, we received approximately $4.7 million, or 96% of our
product revenue, from Caterpillar and its dealer network under this agreement.
The principal provisions of this agreement are summarized below:
. Caterpillar has semi-exclusive worldwide rights to distribute Cat UPS
under the Caterpillar brand name;
. As long as Caterpillar meets minimum annual sales requirements, we will
not sell Cat UPS to specifically identified competitors of Caterpillar
until January 1, 2005 or the termination of the distribution agreement;
and
. We will provide Caterpillar the same warranty Caterpillar provides its
customers procuring electric power generation products (one year from
delivery).
Caterpillar may continue to distribute Cat UPS until January 1, 2005. At
such time the agreement will continue for additional six-month periods unless
either party provides written notice to the other within ninety days of the end
of the current period of its decision not to renew the agreement. The agreement
may also be terminated by Caterpillar for any uncured material breach by us, if
Cat UPS consistently and materially fails to meet our published specifications,
or if we substantially and continuously fail to meet agreed shipment dates for
products ordered by Caterpillar. Finally, either party may terminate in the
event of a change in control of the other.
Sales, Marketing and Support
Sales and Marketing
In the power quality industry, we believe that partnering with established
companies with significant relationships and service capabilities enables us to
promote the adoption of new technology that otherwise would take significantly
longer for wide application. Our sales activity has focused principally on OEM
adoption of our products through extensive OEM testing, product qualification
and early product placement with select end users. We intend to continue to
sell through OEMs to gain acceptance of our proprietary and innovative power
technologies. We believe that focusing on product acceptance and support from
OEMs
8
provides the greatest opportunity for market penetration and sales growth with
minimal resources. We are also expanding our international sales activities
through our multinational OEM sales channels. We employ a small, geographically
dispersed sales force to develop leads and educate our OEM customers in their
sales efforts.
Our marketing efforts are geared toward developing and sustaining key
relationships with OEMs, participating in tradeshows to promote and launch our
products, and training for the salespeople within the OEM channels. We also
work with OEM partners on promotional activities such as advertising
development, direct mail and telemarketing strategies. We use our marketing
resources to stimulate end user sales through trade press articles,
participation in industry conferences and limited direct mail to specific power
quality customers.
Service and Support
We continue to transition the primary service and maintenance of our
products from our own service personnel to the OEMs who sell our products. We
believe that this will reduce the need for a large end user support
organization by enabling our OEMs to provide installation, service and primary
support to their customers. Our service personnel will remain as a back-up for
difficult situations or where no trained personnel are immediately available
and will support initial applications of the products. Our customer service and
support organization also provides comprehensive training programs to our OEM
customers.
Our Customers
Our primary customers are OEMs. To date, our most significant OEM is
Caterpillar, which distributes CleanSource UPS under its brand name. We intend
to continue to use selected development and distribution partnerships to
develop and distribute our future products into selected markets and achieve
rapid market penetration.
End use industries for our products include advanced data centers,
semiconductor manufacturers, telecommunication providers, pharmaceutical
manufacturers, hospitals, electric utilities and broadcasters.
During 2000, Caterpillar and its dealer network accounted for 96% of our
total revenue. No other customer accounted for more than 1% of our revenue
during 2000. Due to Caterpillar's semi-exclusive CleanSource UPS distribution
rights, we anticipate that revenue from Caterpillar will comprise a majority of
our revenue in 2001.
Technology
Flywheel Energy Storage System
Our patented flywheel energy storage system stores kinetic energy -- energy
produced by motion -- by spinning a compact rotor constantly in a low-friction
environment. When the user requires short-term back-up power -- i.e. when the
electric power used to spin the flywheel fluctuates or is lost -- the wheel's
inertia causes it to continue spinning. The resulting kinetic energy of the
spinning flywheel generates electricity for short periods. We believe that
relative to other energy storage alternatives, our system provides high
quality, reliable power at the lowest cost.
Over the past 20 years, attempts at commercializing flywheel systems have
been based on technology used in aerospace applications, such as satellite
momentum control, that attempt to maximize the amount of stored energy with the
absolute minimum system weight. Cost has been a secondary concern for such
applications. As a result of these design goals, these flywheel designs require
extremely high rotational speeds in excess of 50,000 rotations per minute. In
order to achieve such high speeds, the flywheel must be made of expensive
materials, such as composite carbon fiber. As a result, high-speed flywheel
concepts require a number of
9
expensive safety systems, including extensive inertial containment and "active"
magnetic bearing systems that use sophisticated computer controls to
continuously monitor the position and balance of the flywheel.
Rather than rely on the flywheel concepts developed for other applications,
we focused our development efforts on providing products that meet the specific
needs of the power quality and reliability market. Users requiring back-up
power products want products that can deliver high quality, reliable power at
the lowest cost. As a result of these needs, we developed a flywheel system
that operates at significantly lower speeds, under 8,000 rotations per minute.
These speeds are comparable to those of automobile engines and industrial
machinery. This lower flywheel speed has allowed us to develop a lower cost
design by using an inexpensive bearing system and conventional steel in place
of expensive composite materials.
The design of our flywheel system, which is displayed below, integrates the
function of a motor (which utilizes electric current from the electric utility
grid to provide the energy to rotate the flywheel), flywheel rotor (which spins
constantly to maintain a ready source of kinetic energy) and generator (which
converts the kinetic energy of the flywheel into electricity) into a single
integrated system. This integration further reduces the cost of our product and
increases its efficiency.
[GRAPHIC APPEARS HERE]
[Description of graphic: This graphic depicts "The CleanSource Flywheel
Technology" and lists the patents we have obtained or filed on the specific
parts of the flywheel system. From the top of the left side of the flywheel to
the bottom, we have listed the following patents: "Magnetic bearing integrated
into field circuit, Patent# US5920138", "Constant voltage regulation, Patent#
US5932935", "Smooth air-gap armature, Patent Pending", High-Power
motor-generator, Patent# US5905321". From the top of the right side of the
flywheel to the bottom, we have listed the following patents: "Ball bearing
cartridge for easy replacement, Patent# US6029538", High inertia motor-generator
rotor, Patent# US5929548" and "Slotless motor-generator stator, Patent#
US5731654, Patent# 5969457".]
The flywheel rotor is designed to spin in a near frictionless environment by
the use of a low-cost, combination magnetic and mechanical bearing system. The
friction in the spinning chamber is further reduced by the creation of a
partial vacuum, which reduces the amount of air in the chamber that otherwise
creates drag on the flywheel rotor. The flywheel rotor stores energy in the
form of kinetic energy by constantly rotating within the vacuum container. As
the flywheel rotor slows down when a user requires power, the rotor's magnetism
is increased as it rotates past copper coils contained in the armature to
generate constant output power. This enables the flywheel system to provide
between ten and sixty seconds of electricity during power disturbances. While a
lead-acid battery can typically provide back-up power for a much longer period,
this capability usually is not required. Our flywheel-based system can provide
ride-through, or temporary, power for the majority of power disturbances, such
as voltage sags and surges, and can bridge the gap between a power outage and
the time required to switch to generator power.
We have verified our flywheel design with both internal and external three-
dimensional finite element analysis, as well as tests designed to determine the
flywheel's safety at varying speeds. We test each flywheel rotor with stringent
quality control methods. These tests have demonstrated a factor of safety
consistent with common industrial machines such as large motors and generators.
10
The CleanSource Family of Products
Our unique flywheel energy storage system device is being used in our two
currently offered products: CleanSource DC and CleanSource UPS. The CleanSource
UPS design takes advantage of the many component similarities between the
CleanSource DC and a traditional UPS system. Both products require power
conversion electronics, fans for cooling, a frame for structural support,
telemetry, data reporting, a user display and other overlapping functions. By
combining these functions into a single system, we achieved significant cost
efficiencies.
The UPS electronics we use in the CleanSource UPS product line are the
latest in power semiconductor devices using highly reliable and efficient
insulated gate bipolar transistors. This results in an efficient, highly
responsive power conditioning system that can protect sensitive customer power
requirements from even the briefest of electric power anomalies. Tightly
integrating these power electronics with our flywheel energy storage system
results in an efficient, compact and cost effective UPS system.
Generator Start Enhancement
To enhance the overall system reliability of CleanSource UPS, we have
patented a method to draw power from the flywheel to supply 24 volts of
starting power to a genset to augment or replace the typical starter battery,
which is the cause of most generator start failures. When taking advantage of
this flywheel-sourced starting power, the reliability of the entire CPS
solution is significantly enhanced.
Research and Development
We believe that our research and development efforts are essential to our
ability to successfully deliver innovative products that address the needs of
our customers as the market for power quality products evolves. Our research
and development team works closely with our marketing and sales team and OEMs
to define product requirements to address the specific needs of the power
quality market. Our research and development expenses were $4.0 million, $4.4
million and $9.9 million in 1998, 1999 and 2000, respectively. We anticipate
maintaining significant levels of research and development expenditures in the
future. At December 31, 2000, our research, development and engineering team
consisted of 54 engineers and technicians.
Manufacturing
We source all of our components from contract manufacturers to enhance our
ability to scale our operations and minimize cost. This approach allows us to
respond quickly to customer orders while maintaining high quality standards.
Our internal manufacturing process consists of assembly, functional testing
and quality control of our products. We also test components, parts and
subassemblies obtained from suppliers for quality control purposes.
We are in the process of implementing long-term agreements with our
suppliers, but currently purchase most of our components on a purchase order
basis. Although we use standard parts and components for our products where
possible, we purchase a particular type of power module from Semikron
International and a microprocessor from Motorola, both of whom are single
source suppliers. If we were unable to obtain these components, we believe it
would take approximately six months to develop a substitute power module and
approximately four months to develop a substitute microprocessor. The power
module from Semikron International is now covered by a long-term agreement and
requires the supplier to maintain a safety stock of power modules in the United
States. We further maintain a two month inventory of such component. Our
requirements for the Motorola microprocessor are covered by purchase orders
into the third quarter of 2001. We further maintain approximately three months
of inventory of the Motorola microprocessor.
11
We plan to substantially expand our manufacturing facilities and capacity in
order to support projected volume demand for our products.
Proprietary Rights
We rely on a combination of patents and trademarks, as well as
confidentiality agreements and other contractual restrictions with employees
and third parties, to establish and protect our proprietary rights. We have
filed over 30 patent applications before the United States Patent and Trademark
Office, 26 of which have issued into patents. Additionally, we have made a
concerted effort to obtain patent protection abroad for Active Power's
technology by continuing to file patent applications in Europe and Asia. Our
patent strategy is critical for preserving our rights in and to the
intellectual property embodied in our CleanSource product line. As a
manufactured, tangible device that is sold rather than licensed, the
CleanSource product line does not qualify for copyright or trade secret
protection. To enforce our ownership of such technology, we principally rely on
the protection obtained through the patents we own, as well as state unfair
competition laws. We intend to aggressively protect our patents, including by
bringing legal actions if we deem it necessary.
We own the registered trademarks CLEANSOURCE(R) and MAKING ELECTRICITY
BETTER(R) in the United States and have applied for a trademark on our logo.
All other trademarks, service marks or trade names referred to in this report
are the property of their respective owners.
Competition
The power quality and power reliability markets are intensely competitive.
The principal bases of competition are system reliability, availability, cost,
including initial cost and total cost of ownership, and OEM endorsement and
brand recognition.
Our CleanSource DC product competes with makers of lead-acid batteries and
groups that are developing their own battery-free technologies. Industry
sources estimate that the U.S. UPS lead-acid battery market was approximately
$400 million in 2000, substantially all of which will be comprised of sales of
lead-acid batteries rather than battery-free technologies designed to replace
lead-acid batteries, such as CleanSource DC. Of the makers of battery-free
products, Piller and International Computer Power are the only companies
currently offering flywheel energy storage systems that directly compete with
the CleanSource DC. The Piller flywheel is only available with Piller's
proprietary UPS system. In the 500 kW and under power range, we believe that we
have a substantial majority of the installed base of flywheel products. In the
overall flywheel market, we believe that we and Piller each have approximately
half of the installed flywheel units. The CleanSource DC is the only flywheel
system that is sold and serviced by the major UPS manufacturers--Powerware,
Liebert and MGE UPS Systems. Examples of other technologies potentially
competitive with CleanSource DC include high-speed composite flywheels, ultra
capacitors and superconducting magnetic energy storage. To date, however, we
believe that none of these technologies has achieved a sufficient presence in
our market to be considered a competitor.
The CleanSource UPS as distributed by Caterpillar competes with UPS
manufacturers such as Powerware, Liebert and MGE UPS Systems, who also are
CleanSource DC distributors. When sold in conjunction with a standby generator,
the CleanSource UPS competes with battery-free systems from Piller, Hitec and
EuroDiesel. While CleanSource UPS is a new product and we therefore have not
sold a significant number of units, we believe that the high efficiency, broad
power range and compact footprint of the CleanSource UPS, coupled with
Caterpillar's brand recognition and support, will allow us to compete
successfully with these alternatives.
We expect our future CPS product to compete with batteries, flywheels and
gensets that are used in the telecommunications market from such companies as
C&D Technologies, Beacon, Yuasa, Panasonic, the Hawker division of Invensys and
Generac. While we believe that our future CPS product will offer the
telecommunications market a superior technology to what currently exists, we
may have difficulty competing with the existing product offerings in this
market and may never develop a competitive product offering.
12
Employees
At December 31, 2000, we had 167 employees, with 54 engaged in research,
development and engineering, 64 in manufacturing, 19 in sales, 4 in marketing
and customer support, and 26 in administration, information technology and
finance. None of our employees are represented by a labor union. We have not
experienced any work stoppages and consider our relations with our employees to
be good.
13
Additional Factors That May Affect Future Results
You should carefully consider the following risks and all other information
contained in this prospectus before deciding to invest in our common stock.
Additional risks and uncertainties that we are unaware of or that we currently
deem immaterial also may become important factors that affect us.
We have incurred significant losses and anticipate losses for the next several
years.
We have incurred operating losses since our inception and expect to continue
to incur losses in the foreseeable future. As of December 31, 2000, we had an
accumulated deficit of $52.7 million. To date, our product revenue has been
insignificant, and we have funded our operations through sales of our stock and
a $5.0 million development funding payment from Caterpillar. We will need to
generate significant revenue to achieve profitability, and we cannot assure you
that we will ever realize sufficient revenue to achieve profitability. We also
expect to incur significant product development, sales and marketing and
administrative expenses and, as a result, we expect to continue to incur
losses.
Due to our limited operating history and the uncertain market acceptance of our
products, we may never achieve significant revenue and may have difficulty
accurately predicting revenue for future periods and appropriately budgeting
for expenses.
We have generated a total of $6.8 million in product revenue over the past
three years, and we have sold fewer than 160 CleanSource DC and CleanSource UPS
products. We are uncertain whether our products will achieve market acceptance
such that our revenues will increase or whether we will be able to achieve
significant revenue. Therefore, we have a very limited ability to predict
future revenue. Our limited operating experience, the uncertain market
acceptance for our products, and other factors that are beyond our control make
it difficult for us to accurately forecast our quarterly and annual revenue.
However, we use our forecasted revenue to establish our expense budget. Most of
our expenses are fixed in the short term or incurred in advance of anticipated
revenue. As a result, we may not be able to decrease our expenses in a timely
manner to offset any revenue shortfall. Further, we are expanding our staff and
facilities and increasing our expense levels in anticipation of future revenue
growth. If our revenue does not increase as anticipated, we will incur
significant losses.
Our business is subject to fluctuations in operating results, which could
negatively impact the price of our stock.
Our product revenue, expense and operating results have varied in the past
and may fluctuate significantly in the future due to a variety of factors, many
of which are outside of our control. These factors include, among others:
. the timing of orders from our customers and the possibility that these
customers may change their order requirements with little or no advance
notice to us;
. the rate of adoption of our flywheel-based energy storage system as an
alternative to lead-acid batteries;
. the deferral of customer orders in anticipation of new products from us
or other providers of power quality systems;
. the ongoing need for short-term power outage protection in traditional
UPS systems;
. the uncertainty regarding the adoption of our current and future
products, including our recently introduced CleanSource UPS product and
our fully integrated CPS, which we expect to commercially introduce by
the end of 2001; and
. the rate of growth of the markets for our products.
14
Our business is dependent on the market for power quality products, and if this
market does not expand as we anticipate, or if alternatives to our products are
successful, our business will suffer.
The market for power quality products is rapidly evolving and it is
difficult to predict its potential size or future growth rate. Most of the
organizations that may purchase our products have invested substantial
resources in their existing power systems and, as a result, may be reluctant or
slow to adopt a new approach. Moreover, our products are alternatives to
existing UPS and CPS systems and may never be accepted by our customers or may
be made obsolete by other advances in power quality technologies. Improvements
may also be made to the existing alternatives to our products that could render
them less desirable or obsolete.
We have limited product offerings, and our success depends on our ability to
develop in a timely manner new and enhanced products that achieve market
acceptance.
We have only one principal product that has any significant operating
history at customer sites, CleanSource DC, and we have only recently introduced
our CleanSource UPS product. To grow our revenue, we must rely on Caterpillar
to successfully market our CleanSource UPS product, and we must develop and
introduce to market new products and product enhancements in a timely manner.
Even if we are able to develop and commercially introduce new products and
enhancements, they may not achieve market acceptance. This would substantially
impair our revenue prospects.
Failure to expand our distribution channels and manage our distribution
relationships could impede our future growth.
The future growth of our business will depend in part on our ability to
expand our existing relationships with OEMs, to identify and develop additional
channels for the distribution and sale of our products and to manage these
relationships. As part of our growth strategy, we intend to expand our
relationships with OEMs and to develop relationships with new OEMs. We will
also look to identify and develop relationships with additional partners that
could serve as distributors for our products. Our inability to successfully
execute this strategy and to reduce our reliance on Caterpillar could impede
our future growth.
We are heavily dependent on our relationship with Caterpillar. If our
relationship is unsuccessful, our business and revenue will suffer.
If our relationship with Caterpillar is not successful, or if Caterpillar's
distribution of our CleanSource UPS product is not successful, our business and
revenue will suffer. Pursuant to a development agreement, Caterpillar provided
us with $5.0 million in funding to support the development of our CleanSource
UPS product. In exchange for this payment, Caterpillar received co-ownership of
the proprietary rights in this product. Either we or Caterpillar may license to
other entities the intellectual property that we jointly own without seeking
the consent of the other and all licensing revenue generated by licensing this
intellectual property will be solely retained by the licensing party. However,
we may not license the joint intellectual property to specifically identified
competitors of Caterpillar until January 1, 2005. Caterpillar may terminate
this agreement at any time by giving us 90 days' advance written notice. We
also have a distribution agreement with Caterpillar. During 2000, we received
approximately $4.7 million, or 96% of our product revenue from Caterpillar.
Pursuant to the distribution agreement with Caterpillar, they are the exclusive
distributor, subject to limited exceptions, of our CleanSource UPS product.
Caterpillar is not obligated to purchase any CleanSource UPS units.
We depend on a limited number of OEM customers for the vast majority of our
revenue and service and support functions. The loss or significant reduction in
orders, or the failure to provide adequate service and support to the end users
of our products, from any key OEM customer, particularly Caterpillar, would
significantly reduce our revenue.
We rely on OEMs as a primary distribution channel because they are able to
sell our products to a large number of end user organizations. We further rely
on our OEMs to provide service and support to the end users
15
of our products because they have the experience and personnel to perform such
activities. We believe that the use of OEM channels will enable our products to
achieve broad market penetration, while we devote a limited amount of our
resources to sales, marketing and customer service and support. Our operating
results in the foreseeable future will continue to depend on sales to a
relatively small number of OEM customers, primarily Caterpillar. For example,
in 2000, sales to Caterpillar and its dealer network accounted for 96% of our
revenue. Therefore, the loss of our key OEM customer, Caterpillar, or a
significant reduction in sales to Caterpillar and its dealers, would
significantly reduce our revenue. We also have granted Caterpillar semi-
exclusive worldwide rights to distribute our CleanSource UPS product, provided
that they meet minimum annual sales requirements. These restrictions will
further increase our dependence upon Caterpillar. However, Caterpillar is not
obligated to purchase any CleanSource UPS units under this agreement.
We may have difficulty managing the expansion of our operations.
We are undergoing rapid growth in the number of our employees, the size of
our physical facilities and the scope of our operations. For example, we had 38
employees on January 1, 1998, 126 employees on June 30, 2000 and 167 employees
on December 31, 2000. Such rapid expansion is likely to place a significant
strain on our senior management team and other resources. Our business,
prospects, results of operations or financial condition could be harmed if we
encounter difficulties in effectively managing the budgeting, forecasting and
other process control issues presented by such a rapid expansion.
We have no experience manufacturing our products in the quantities we expect to
sell in the future.
To be financially successful, we will have to manufacture our products in
commercial quantities at acceptable costs while also preserving the quality
levels achieved in manufacturing these products in more limited quantities.
This presents a number of technological and engineering challenges for us. We
cannot assure you that we will be successful in executing the planned expansion
of our manufacturing activities. We have not previously manufactured our
products in high volume. We do not know whether or when we will be able to
develop efficient, low-cost manufacturing capability and processes that will
enable us to meet the quality, price, engineering, design and product standards
or production volumes required to successfully manufacture large quantities of
our products. Even if we are successful in developing our manufacturing
capability and processes, we do not know whether we will do so in time to meet
our product commercialization schedule or to satisfy the requirements of our
customers.
We are subject to increased inventory risks and costs because we outsource the
manufacturing of components of our products in advance of binding commitments
from our customers to purchase our products.
To assure the availability of our products to our OEM customers, we
outsource the manufacturing of components prior to the receipt of purchase
orders from OEM customers based on their forecasts of their product needs.
However, these forecasts do not represent binding purchase commitments, and we
do not recognize revenue for such products until the product is shipped to the
OEM. As a result, we incur inventory and manufacturing costs in advance of
anticipated revenue. As demand for our products may not materialize, this
product delivery method subjects us to increased risks of high inventory
carrying costs and obsolescence and may increase our operating costs. In
addition, we may from time to time make design changes to our products, which
could lead to obsolescence of inventory.
We depend on sole source and limited source suppliers for certain key
components, and if we are unable to buy these components on a timely basis, our
delayed ability to deliver our products to our customers may result in reduced
revenue and lost sales.
We purchase a power module and a microprocessor for our products from sole
sources. We do not have long-term contracts with most of our suppliers, and to
date most of our component purchases have been made in relatively small
volumes. As a result, if our suppliers receive excess demand for their
products, we may
16
receive a low priority for order fulfillment as large volume customers will
receive priority. If we are delayed in acquiring components for our products,
the manufacture and shipment of our products also will be delayed. We generally
use a twelve-month forecast of our future product sales to determine our
component requirements. Lead times for ordering materials and components vary
significantly and depend on factors such as specific supplier requirements,
contract terms, the extensive production time required and current market
demand for such components. Some of these delays may be substantial. As a
result, we purchase these components in large quantities to protect our ability
to deliver finished products. If we overestimate our component requirements, we
may have excess inventory, which will increase our costs. If we underestimate
our component requirements, we will have inadequate inventory, which will delay
our manufacturing and render us unable to deliver products to customers on
scheduled delivery dates. If we are unable to obtain a component from a
supplier or if the price of a component has increased substantially, we will be
required to manufacture the component internally, which will result in delays.
Manufacturing delays could negatively impact our ability to sell our products
and could damage our customer relationships.
We depend on key personnel to manage our business and develop new products in a
rapidly changing market, and if we are unable to retain our current personnel
and hire additional personnel, our ability to develop and sell our products
could be impaired.
We believe our future success will depend in large part upon our ability to
attract and retain highly skilled managerial, engineering and sales and
marketing personnel. In particular, due to the relatively early stage of our
business, we believe that our future success is highly dependent on Joseph F.
Pinkerton, III, our founder, chief executive officer and president, to provide
continuity in the execution of our growth plans. While we have severance
arrangements in place with Mr. Pinkerton and with David S. Gino, our chief
financial officer, we do not have long-term employment agreements in place with
any of our employees. The loss of the services of any of our key employees, the
inability to attract or retain qualified personnel in the future or delays in
hiring required personnel, particularly engineers and sales personnel, could
delay the development and introduction of, and negatively impact our ability to
sell, our products.
We are a relatively small company with limited resources compared to some of
our current and potential competitors, and competition within our markets may
limit our sales growth.
The markets for power quality and power reliability are intensely
competitive. There are many companies engaged in all areas of traditional and
alternative UPS and CPS systems in the United States, Canada and abroad,
including, among others, major electric and specialized electronics firms, as
well as universities, research institutions and foreign government-sponsored
companies. There are many companies located in the United States, Canada and
abroad that are developing flywheel-based energy storage systems and flywheel-
based power quality systems. We also compete indirectly with companies that are
developing other types of power technologies, such as superconducting magnetic
energy storage, ultra-capacitors and dynamic voltage restorers.
Many of our current and potential competitors have longer operating
histories, significantly greater resources, broader name recognition and a
larger customer base than we have. As a result, these competitors may have
greater credibility with our existing and potential customers. They also may be
able to adopt more aggressive pricing policies and devote greater resources to
the development, promotion and sale of their products than we can to ours,
which would allow them to respond more quickly than us to new or emerging
technologies or changes in customer requirements. In addition, some of our
current and potential competitors have established supplier or joint
development relationships with our current or potential customers. These
competitors may be able to leverage their existing relationships to discourage
these customers from purchasing products from us or to persuade them to replace
our products with their products. Increased competition could decrease our
prices, reduce our sales, lower our margins, or decrease our market share.
These and other competitive pressures could prevent us from competing
successfully against current or future competitors and could materially harm
our business.
17
If we are unable to protect our intellectual property, we may be unable to
compete.
Our products rely on our proprietary technology, and we expect that future
technological advancements made by us will be critical to sustain market
acceptance of our products. Therefore, we believe that the protection of our
intellectual property rights is, and will continue to be, important to the
success of our business. We rely on a combination of patent, copyright,
trademark and trade secret laws and restrictions on disclosure to protect our
intellectual property rights. We also enter into confidentiality or license
agreements with our employees, consultants and business partners and control
access to and distribution of our software, documentation and other proprietary
information. Despite these efforts, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. Monitoring unauthorized
use of our products is difficult, and we cannot be certain that the steps we
have taken will prevent unauthorized use of our technology, particularly in
foreign countries where applicable laws may not protect our proprietary rights
as fully as in the United States. In addition, the measures we undertake may
not be sufficient to adequately protect our proprietary technology and may not
preclude competitors from independently developing products with functionality
or features similar to those of our products.
Our efforts to protect our intellectual property may cause us to become
involved in costly and lengthy litigation, which could seriously harm our
business.
In recent years, there has been significant litigation in the United States
involving patents, trademarks and other intellectual property rights. Although
we have not been involved in intellectual property litigation, we may become
involved in litigation in the future to protect our intellectual property or
defend allegations of infringement asserted by others. Legal proceedings could
subject us to significant liability for damages or invalidate our intellectual
property rights. Any litigation, regardless of its outcome, would likely be
time consuming and expensive to resolve and would divert management's time and
attention. Any potential intellectual property litigation also could force us
to take specific actions, including:
. cease selling our products that use the challenged intellectual property;
. obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology or trademark, which
license may not be available on reasonable terms, or at all; or
. redesign those products that use infringing intellectual property or
cease to use an infringing trademark.
Any acquisitions we make could disrupt our business and harm our financial
condition.
Although we are not currently negotiating any material business or
technology acquisitions, as part of our growth strategy, we intend to review
opportunities to acquire other businesses or technologies that would complement
our current products, expand the breadth of our markets or enhance our
technical capabilities. We have no experience in making acquisitions.
Acquisitions entail a number of risks that could materially and adversely
affect our business and operating results, including:
. problems integrating the acquired operations, technologies or products
with our existing business and products;
. potential disruption of our ongoing business and distraction of our
management;
. difficulties in retaining business relationships with suppliers and
customers of the acquired companies;
. difficulties in coordinating and integrating overall business strategies,
sales and marketing, and research and development efforts;
. the maintenance of corporate cultures, controls, procedures and policies;
. risks associated with entering markets in which we lack prior experience;
and
. potential loss of key employees.
18
We may require substantial additional funds in the future to finance our
product development and commercialization plans.
Our product development and commercialization schedule could be delayed if
we are unable to fund our research and development activities or the
development of our manufacturing capabilities with our revenue, cash on hand
and proceeds from our initial public offering. We expect that our current cash
and investments, together with our other available sources of working capital,
will be sufficient to fund development activities for at least 24 months.
However, unforeseen delays or difficulties in these activities could increase
costs and exhaust our resources prior to the full commercialization of our
products under development. We do not know whether we will be able to secure
additional funding, or funding on terms acceptable to us, to continue our
operations as planned. If financing is not available, we may be required to
reduce, delay or eliminate certain activities or to license or sell to others
some of our proprietary technology.
Our stock price may be volatile.
During 2000, we experienced significant volatility in our stock price. The
market price of our common stock may fluctuate significantly in response to
numerous factors, some of which are beyond our control, including the
following:
. actual or anticipated fluctuations in our operating results;
. changes in financial estimates by securities analysts or our failure to
perform in line with such estimates;
. changes in market valuations of other technology companies, particularly
those that sell products used in power quality systems;
. announcements by us or our competitors of significant technical
innovations, acquisitions, strategic partnerships, joint ventures or
capital commitments;
. introduction of technologies or product enhancements that reduce the need
for flywheel energy storage systems;
. the loss of one or more key OEM customers; and
. departures of key personnel.
ITEM 2. Properties.
As of December 31, 2000, our corporate headquarters facility, which houses
our administrative, advanced development, engineering, information systems,
marketing, sales and service and support groups, consists of approximately
27,550 square feet in Austin, Texas. We lease our corporate headquarters
facility pursuant to an agreement that expires in March 2003. Our current
manufacturing facility of approximately 42,300 square feet is also located in
Austin, Texas; however, the lease on this facility will expire in September
2001. The total monthly lease payments due for these facilities is
approximately $61,000. Additionally, we have recently signed a lease, which
will be effective in May 2001, for an additional 86,000 square feet of
manufacturing space to replace our existing manufacturing facility. The size of
this facility will increase to approximately 127,000 square feet by the end of
the lease term in May 2005. Our total monthly lease payments will increase by
$40,800 when the lease for this new facility becomes effective.
ITEM 3. Legal Proceedings.
We are not party to any legal proceedings.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
19
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Our common stock has been quoted on the Nasdaq National Market under the
symbol "ACPW" since our initial public offering on August 7, 2000. Prior to the
initial public offering, there had been no public market for our common stock.
The following table lists the high and low per share sales price for our common
stock as reported by the Nasdaq National Market for the periods indicated:
High Low
------ ------
Year Ended December 31, 2000
Third Quarter (from August 7, 2000.......................... $79.75 $17.00
Fourth Quarter.............................................. $63.50 $12.75
As of March 1, 2001, there were 39,257,420 shares of our common stock
outstanding held by 771 stockholders of record.
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain any earnings for use in our business and do not
anticipate paying any cash dividends in the foreseeable future. Future
dividends, if any, will be determined by our board of directors.
Our registration statement (Registration No. 333-36946) under the Securities
Act of 1933, as amended, relating to our initial public offering of our common
stock became effective on August 7, 2000. A total of 9,200,000 shares of common
stock were registered. We sold a total of 8,900,000 shares of our common stock
and a selling shareholder sold 300,000 shares to an underwriting syndicate. The
managing underwriters were Goldman, Sachs & Co., Merrill Lynch, Pierce Fenner &
Smith Incorporated, Morgan Stanley & Co. Incorporated and CIBC World Markets
Corp. The offering commenced and was completed on August 8, 2000, at a price to
the public of $17.00 per share. The initial public offering resulted in net
proceeds to us of $139.0 million after deducting underwriting commissions of
$10.6 million and offering expenses of $1.6 million. As of January 31, 2001, we
have used $12 million of our available funds. The remaining proceeds from the
IPO were invested in government securities and other short-term, investment-
grade, interest bearing instruments.
20
ITEM 6. Selected Financial Data.
SELECTED FINANCIAL DATA
The following tables set forth our selected financial data. The data for the
three years ended December 31, 2000, 1999 and 1998 has been derived from the
audited financial statements appearing elsewhere in this document. The data for
the years ended December 31, 1997 and 1996 has been derived from audited
financial statements not appearing in this document. You should read the
selected financial data set forth below in conjunction with our financial
statements and the notes thereto, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and other financial information
appearing elsewhere in this document.
Results of Operations:
Year ended December 31,
------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ---------- ---------- ----------
(In thousands, except per share data)
Product revenue......... $ 4,872 $ 1,047 $ 915 $ 138 --
Cost of goods sold...... 7,966 3,006 1,238 158 --
----------- ----------- ---------- ---------- ----------
Product margin.......... $ (3,094) $ (1,959) $ (323) $ (20) --
Development funding..... -- 5,000 -- -- --
Operating expenses:
Research and
development.......... 9,864 4,441 4,045 2,598 $ 968
Selling, general &
administrative....... 6,205 3,972 1,925 1,264 483
Amortization of
deferred stock
compensation......... 6,692 1,631 -- -- --
----------- ----------- ---------- ---------- ----------
Total operating
expenses........... 22,761 10,044 5,970 3,862 1,451
----------- ----------- ---------- ---------- ----------
Operating loss.......... (25,855) (7,003) (6,294) (3,882) (1,451)
Interest income/expense,
net.................... 4,363 421 305 144 109
Change in fair value of
warrants with
redemption rights...... (1,562) (3,614) -- -- --
Other income............ (50) 8 10 -- --
----------- ----------- ---------- ---------- ----------
Net loss................ $ (23,104) $ (10,188) $ (5,979) $ (3,738) $ (1,342)
Preferred stock
dividends, accretion, &
conversion............. 19,079 29,660 2,789 826 293
Net loss to common
stockholders........... $ (42,183) $ (39,848) $ (8,767) $ (4,564) $ (1,635)
=========== =========== ========== ========== ==========
Net loss per share,
basic and diluted...... $ (1.92) $ (3.98) $ (0.90) $ (0.48) $ (0.17)
Shares used in computing
net loss per share,
basic and diluted...... 21,928,874 10,009,554 9,789,407 9,589,462 9,426,456
Balance Sheet Data:
As of December 31,
---------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- ------- -------
(thousands)
Cash, cash equivalents and
investments................... $146,209 $ 26,265 $ 7,536 $ 4,340 $ 2,434
Working capital................ 136,972 26,394 8,008 4,565 2,470
Total assets................... 156,132 28,366 9,734 5,921 3,002
Long-term obligations, less
current portion............... -- -- 55 170 --
Redeemable convertible
preferred stock............... -- 54,235 24,575 11,786 4,960
Total stockholders' equity
(deficit)..................... 152,389 (30,338) (15,524) (6,742) (2,167)
21
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the financial
statements appearing elsewhere in this Form 10-K. This report contains 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, that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those discussed below and elsewhere in this report, particularly
under the heading "Risk Factors." Please also see "Special Note Regarding
Forward Looking Statements."
Overview
We design, manufacture and market power quality products that provide the
consistent, reliable electric power required by today's digital economy. We
believe that we are the first company to commercialize a flywheel energy
storage system that provides a highly reliable, low-cost and non-toxic
replacement for lead-acid batteries used in conventional power quality
installations. Leveraging our expertise in this technology and in conjunction
with Caterpillar, the leading maker of engine generators for the power
reliability market, we have developed a battery-free power quality system,
which is marketed under the Caterpillar brand name (Cat UPS). Our products are
sold for use in the facilities of companies in many different industries that
all share a critical need for reliable, high-quality power, such as Internet
service providers, semiconductor manufacturers, telecommunications providers,
hospitals, electric utilities and broadcasters. As an extension of these
existing product lines, we are developing a fully integrated continuous power
system. The initial target market for this product is the rapidly growing
telecommunications industry.
Since 1996, we have focused our efforts and financial resources primarily on
the design and development of our CleanSource line of power quality products
and on establishing effective OEM channels to market our products. As of
December 31, 2000, we had generated an accumulated deficit of $52.7 million and
expect to continue to sustain operating losses for the next several years. We
initially funded our operations primarily through sales of shares of our
preferred stock, which have resulted in gross proceeds of approximately
$42.6 million. We believe the proceeds from our August 2000 initial public
offering, approximately $139.0 million net of commissions and issuance costs,
together with cash balances on hand prior to August 2000 will be sufficient to
meet our capital requirements through at least the next 24 months. Our cash and
investments position at December 31, 2000 was $146.2 million.
Since our inception, a small number of customers have accounted for the
majority of our annual sales. During 1999, our four largest customers accounted
for 89% of our sales, with our largest customer, Caterpillar and its dealer
network, accounting for 39%. In 2000, our business level with Caterpillar and
its dealer network grew substantially accounting for 96% of our revenue due to
the commercial introduction of the CleanSource UPS product line. We expect to
continue to be dependent on a few OEM customers, primarily Caterpillar, for the
majority of our sales for the foreseeable future.
With the commercial release of our second generation product line,
CleanSource UPS, in May 2000 under the Caterpillar brand name, and a growing
market demand for power quality equipment, we believe the demand for our
products will increase significantly. To prepare for this anticipated growth in
demand and to position us for future growth, we have increased and expect to
continue to increase the scale of our operations in the following ways:
. expand our manufacturing facilities and add manufacturing personnel to
address anticipated increases in product demand;
. increase our personnel levels in product development and engineering to
accelerate time to market on new products and enhance existing product
lines; and
. add sales and marketing personnel to support our OEM customers.
22
We believe that although these efforts will increase our operating expenses,
they will also enable us to realize significant revenue growth.
Results of Operations
Comparison of 2000, 1999 and 1998
Product Revenue. Product revenue primarily consists of sales of our
CleanSource power quality products. Sales increased $3.9 million, or 365%, to
$4.9 million in 2000 from $1.0 million in 1999. Sales increased $131,000, or
14%, to $1.05 million in 1999 from $915,000 in 1998. Both the 2000 and 1999
increases are attributable to an increase in the sales of our recently launched
CleanSource UPS product line, with initial sales of this new product line
beginning in the fourth quarter of 1999. During 2000 we sold 118 of our
quarter-megawatt flywheel units, compared to 24 in 1999 and 23 in 1998.
Cost of goods sold. Cost of goods sold includes the cost of component parts
of our product that are sourced from suppliers, personnel, equipment and other
costs associated with our assembly and test operations, shipping costs, and the
costs of manufacturing support functions such as logistics and quality
assurance. Cost of goods sold increased $5.0 million, or 165%, to $8.0 million
in 2000 from $3.0 million in 1999. Cost of goods sold increased $1.8 million,
or 143%, to $3.0 million in 1999 from $1.2 million in 1998. Both the 2000 and
1999 increases were primarily attributable to increases in manufacturing
capacity to support an increase in sales volume and an anticipated increase in
demand for our products. We expect that as our product volumes increase over
time, unit production costs will tend to decrease as we achieve greater
economies of scale in production and in purchasing component parts.
Development funding. Development funding consists of funds received from
Caterpillar to support the development of the CleanSource UPS product. In 1999,
we received $5.0 million in development funding from Caterpillar. We did not
receive any development funding in 2000 or 1998. We do not currently have any
other development funding contracts.
Research and development. Research and development expense primarily
consists of compensation and related costs of employees engaged in research,
development and engineering activities, third party consulting and development
activities, as well as an allocated portion of our occupancy costs. Research
and development expense increased $5.5 million, or 122%, to $9.9 million in
2000 from $4.4 million in 1999. Research and development expense increased
$396,000, or 10%, to $4.4 million in 1999 from $4.0 million in 1998. The
increase in research and development expense was primarily due to the increased
product development of CleanSource UPS and other products including our 6
kilowatt continuous power system. We believe that research and development
expense will continue to increase significantly in 2001 and thereafter as we
continue to develop new products and enhance existing product lines.
Selling, general and administrative. Selling, general and administrative
expense is primarily comprised of compensation and related costs for sales,
marketing and administrative personnel, selling and marketing expenses,
professional fees and reserves for bad debt. Selling, general and
administrative expense increased approximately $2.2 million, or 56%, to $6.2
million in 2000 from $4.0 million in 1999. Selling, general and administrative
expense increased approximately $2.0 million, or 106%, to $4.0 million in 1999
from $1.9 million in 1998. The 1999 increase in selling, general and
administrative expense was principally due to a charge of $1.4 million related
to warrants we issued to stockholders in conjunction with strategic alliance
agreements we entered into with them relating to their use, evaluation and
feedback of products they agreed to purchase and other business assistance. In
2000, we increased personnel in our sales organization in order to support our
OEM channel partners and to address opportunities for sales of our CleanSource
UPS product line. We believe that selling, general and administrative expense
will increase in future periods as we add sales, marketing and administrative
personnel to position us for future sales growth and to assist in the
administration of an expanding work force and the additional activities
associated with becoming a public company.
23
Amortization of deferred stock compensation. Deferred stock compensation is
a non-cash expense that reflects the difference between the exercise price of
option grants to employees and the estimated fair value determined subsequently
by us of our common stock at the date of grant. We are amortizing deferred
stock compensation as an operating expense over the vesting periods of the
applicable options, which resulted in amortization expense of $1.6 million in
1999. No amortization of deferred stock compensation occurred in 1998 as, prior
to 1999, we believe that all options were granted at exercise prices equal to
the fair value of the underlying stock on the date of grant. This amortization
expense increased in 2000 to $6.7 million due to the vesting of options that
were granted in 1999 and 2000. However, we expect the amortization expense to
decrease after 2000, as the options on which we are amortizing deferred stock
compensation become fully vested.
Interest income/expense. Interest income net of interest expense increased
$3.9 million, or 936%, to $4.4 million in 2000 from approximately $421,000 in
1999. Net interest income/expense increased $116,000, or 38%, to $421,000 in
1999 from $305,000 in 1998. The significant increase in 2000 is primarily due
to increases in our average cash, cash equivalent and investment balances
associated with the approximately $139.0 million raised as part of our August
2000 initial public offering.
Change in fair value of warrants. Due to the redemption feature of warrants
we had outstanding until the initial public offering, we recorded a liability
associated with the fair value of the warrants on the balance sheet and
recorded changes in fair value of the warrants in earnings. We calculated the
fair value of the warrants using a Black-Scholes pricing model. In 1999 and
2000 the fair value of the underlying common stock increased substantially,
resulting in an increase in the warrant value and corresponding non-cash
expense.
Preferred stock dividends, accretion and conversion. We recorded non-cash
charges of $19.1 million in 2000 and $7.7 million in 1999 associated with our
redeemable preferred stock to reflect dividend rights and accretion to
redemption value. In 1999, we issued Series E convertible preferred stock at a
lower price than the price which was subsequently determined by the board of
directors to be the fair market value totaling a $22.0 million discount. All of
our preferred stock was converted to common at the time of our initial public
offering.
Income Tax Expense. As of December 31, 2000, our accumulated net operating
loss carryforward was $30 million. We anticipate that all of this loss
carryforward amount will remain available for offset against any future tax
liabilities that we may incur. However, because of uncertainty regarding our
ability to use these carryforwards, we have established a valuation allowance
for the full amount of our deferred tax assets.
Liquidity and Capital Resources
Our principal sources of liquidity as of December 31, 2000 consisted of $146
million of cash and investments. We have primarily funded our operations
through our initial public offering in August 2000, resulting in net proceeds
of $139 million, sales of shares of our preferred stock, which have resulted in
gross proceeds of approximately $43 million, as well as $5 million in
development funding received from Caterpillar in 1999. Cash used in operating
activities in 2000 was $15.3 million, a $12.7 million increase from the
$2.6 million used in 1999. The increased level of cash usage is primarily
attributable to a higher level of product development, and the expansion of our
manufacturing operations and sales activities.
Capital expenditures were $4.4 million in 2000 and $598,000 and $793,000 in
1999 and 1998, respectively. We made these expenditures to acquire engineering
test equipment, to develop market demonstration units, and to purchase
manufacturing equipment to facilitate production testing, as well as for
general computer equipment and software for administrative purposes, and for
the buildout of additional office, engineering lab and manufacturing space. We
expect to incur $8.0 to $10.0 million in capital expenditures in 2001 primarily
on manufacturing facility improvements, including product test and assembly
equipment, to increase our manufacturing capacity.
24
We believe our existing cash balances at December 31, 2000 will be
sufficient to meet our capital requirements through at least the next 24
months, although we may elect to seek additional funding prior to that time.
Beyond the next 24 months, our capital requirements will depend on many
factors, including the rate of sales growth, the market acceptance of our
products, the rate of expansion of our sales and marketing activities, the rate
of expansion of our manufacturing facilities, and the timing and extent of
research and development projects. Although we are not a party to any agreement
or letter of intent with respect to a potential acquisition, we may enter into
acquisitions or strategic arrangements in the future which could also require
us to seek additional equity or debt financing.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in
short-term instruments. We believe that our investment policy is conservative,
both in terms of the average maturity of investments that we allow and in terms
of the credit quality of the investments we hold. We estimate that a 1%
decrease in market interest rates would decrease our interest income by $1.5
million. Because of the short-term nature of the majority of our investments,
we do not believe a 1% decline in interest rates would have a material effect
on their fair value.
We invest our cash in a variety of financial instruments, including bank
time deposits, and taxable and tax-advantaged variable rate and fixed rate
obligations of corporations, municipalities, and local, state and national
government entities and agencies. These investments are denominated in U.S.
dollars.
ITEM 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data required by this item is
included in Part IV, Item 14(a) on this Form 10-K and are presented beginning
on page F-1.
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
25
PART III
ITEM 10. Executive Officers of the Registrant.
The following table sets forth, as of December 31, 2000, certain information
concerning our executive officers:
Name Age Position(s)
---- --- -----------
Eric L. Jones............... 65 Chairman of the Board of Directors
Joseph F. Pinkerton, III.... 37 President and Chief Executive Officer
David S. Gino............... 42 Vice President of Finance, Chief Financial
Officer, Treasurer, and Secretary
James A. Balthazar.......... 47 Vice President of Marketing
William E. Ott, II.......... 45 Vice President of Sales and Service
Eric L. Jones has served as the Chairman of our Board of Directors since
March 1995. Since April 1994, he has been a partner with SSM Venture Partners,
L.P., an Austin, Texas-based venture capital firm. Mr. Jones is currently a
director/chairman of several private companies including Motive Communications,
360 Commerce, eTopware and NetBotz. He is also the past chairman of the board
of directors of VTEL Corporation and Tivoli Systems, both of whom became public
corporations during his tenure. During a 25-year career at Texas Instruments,
Mr. Jones managed a Fortune 500-sized business units as a corporate vice
president and Group president. Mr. Jones holds a Ph.D. in mechanical
engineering from the University of Texas at Austin.
Joseph F. Pinkerton, III, our founder, has served as our Chief Executive
Officer, President and director since August 1992. Mr. Pinkerton formed Active
Power in 1992. Shortly after founding the company, Mr. Pinkerton patented the
world's first room temperature magnetic bearing capable of operating without
electronic controls. Since then, he has brought together a team of experienced
engineers, developed a revolutionary flywheel device and filed over 30 patent
applications covering magnetic bearings, flywheel systems and rotating
electric machinery. From June 1989 to June 1992, Mr. Pinkerton was a principal
with Fundamental Research Company,in Walled Lake, Michigan. While at FRC, Mr.
Pinkerton completed two joint research projects with the University of Texas at
Austin and was awarded a patent for a novel electrical generator. Mr. Pinkerton
received a Bachelor of Arts degree in Physics from Albion College, Albion, MI
in association with Columbia University, New York, N.Y.
David S. Gino has served as Chief Financial Officer, Vice President of
Finance and Secretary since joining Active Power in December 1999. From August
1995 to November 1999, Mr. Gino was the Chief Financial Officer and Executive
Vice President of Finance of DuPont Photomasks, Inc. (DPI), a public
semiconductor component manufacturer. Mr. Gino led DPI through a period of
rapid growth, numerous acquisitions, its initial public offering and secondary
public financing. Prior to joining DPI, Mr. Gino held a number of financial and
business management positions with The DuPont Company's semiconductor
materials, imaging systems and printing and publishing businesses. Mr. Gino
holds a Bachelor of Arts degree in economics from the University of California
at Santa Barbara and an M.B.A. from the University of Phoenix.
James A. Balthazar has served as our Vice President of Marketing since
October 1996. Mr. Balthazar is responsible for worldwide marketing activities
at Active Power, including market development, channel development and product
marketing activities. Prior to joining Active Power, Mr. Balthazar held various
management positions, including Vice President of Marketing, during his 12-year
tenure at Convex Computer Corporation, a public supercomputer manufacturer in
Richardson, Texas. He joined Convex as an early employee, prior to the company
becoming public, and assisted in its growth to an over $250 million company
before being purchased by Hewlett Packard in 1995. Before that, he worked as a
consulting engineer for Structural Dynamics Research Corp. (SDRC), Cincinnati,
Ohio, and for University Computing Co. (UCC),
26
Dallas, Texas. The Maryland native has a Bachelor of Science degree from the
University of Maryland, College Park and a Master's of Science degree in
theoretical and applied mechanics from Cornell University, Ithaca, New York.
William E. Ott, II has served as our Vice President of Sales and Service
since September 1997. Before Active Power, Mr. Ott held several senior field
management positions in the high technology arena including over nine years
with Convex Computer Corporation, which was acquired in 1995 by Hewlett
Packard. Most recently, Mr. Ott served as General Manager for Eastern United
States, Canada and Latin America at US Data Corp., a public manufacturer of
automation software. From August 1995 to July 1996, he was the Southeastern
Sales Director for Pyramid Technology Corp., a public high performance UNIX
server manufacturer, and from July 1994 to June 1995, he was the Southeastern
United States Sales Manager for Sybase, Inc. Mr. Ott holds a Bachelor of
Science degree in electrical engineering and an M.B.A. from the University of
Missouri at Columbia.
Further information required by this Item is incorporated by reference to
our Proxy Statement under the sections captioned "Matters to be Considered at
Annual Meeting--Proposal One: Election of Directors" and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934."
ITEM 11. Executive Compensation.
The information required by this Item is incorporated by reference to our
Proxy Statement under the sections captioned "Executive Compensation and Other
Information" and "Certain Transactions."
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference to our
Proxy Statement under the section captioned "Ownership of Securities."
ITEM 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference to our
Proxy Statement under the section captioned "Certain Transactions."
27
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this 10-K:
1. Financial Statements. The following financial statements of Active
Power, Inc. are filed as a part of this Form 10-K on the pages indicated:
Page
----
Report of Independent Auditors............................................. F-1
Financial Statements:
Balance Sheets............................................................. F-2
Statements of Operations................................................... F-3
Statements of Stockholders' Equity (Deficit)............................... F-4
Statements of Cash Flows................................................... F-5
Notes to Financial Statements.............................................. F-6
2. Schedules.
All schedules have been omitted since the information required by the
schedule is not applicable, or is not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the Financial Statements and notes thereto.
3. Exhibits.
Exhibit
Number Description
------- -----------
3.1* Form of Amended and Restated Certificate of Incorporation (filed as
Exhibit 3.1 to the Company's IPO Registration Statement on Form S-l
(SEC File No. 333-36946) (the "IPO Registration Statement")
3.2* Form of Amended and Restated Bylaws (filed as Exhibit 3.2 to the IPO
Registration Statement)
4.1* Specimen certificate for shares of Common Stock (filed as Exhibit 4.1
to the IPO Registration Statement)
4.2* Warrant to Purchase Common Stock issued to Enron North America Corp.
(filed as Exhibit 4.2 to the IPO Registration Statement)
4.3* Warrant to Purchase Common Stock issued to Stephens Group, Inc. (filed
as Exhibit 4.3 to the IPO Registration Statement)
10.1* Form of Indemnity Agreement (filed as Exhibit 10.1 to the IPO
Registration Statement)
10.2* Active Power, Inc. 2000 Stock Incentive Plan (filed as Exhibit 10.2 to
the IPO Registration Statement)
10.3* Active Power, Inc. 2000 Employee Stock Purchase Plan (filed as Exhibit
10.3 to the IPO Registration Statement)
10.4* Second Amended and Restated Investors' Rights Agreement by and between
Active Power, Inc. and certain of its stockholders (filed as Exhibit
10.4 to the IPO Registration Statement)
10.5* Consulting Services Agreement by and between Active Power and Eric L.
Jones (filed as Exhibit 10.5 to the IPO Registration Statement)
28
Exhibit
Number Description
------- -----------
10.6+* Phase II Development and Phase III Feasibility Agreement by and
between Active Power, Inc. and Caterpillar Inc. (filed as Exhibit 10.6
to the IPO Registration Statement)
10.7* Credit Terms and Conditions by and between Active Power, Inc. and
Imperial Bank (filed as Exhibit 10.7 to the IPO Registration
Statement)
10.8* Security and Loan Agreement by and between Active Power, Inc. and
Imperial Bank (filed as Exhibit 10.8 to the IPO Registration
Statement)
10.9* Lease Agreement by and between Active Power, Inc. and Braker Phase
III, Ltd. (filed as Exhibit 10.9 to the IPO Registration Statement)
l0.l0* First Amendment to Lease Agreement by and between Active Power, Inc.
and Braker Phase III, Ltd. (filed as Exhibit 10.10 to the IPO
Registration Statement)
10.11* Second Amendment to Lease Agreement by and between Active Power, Inc.
and Braker Phase III, Ltd. (filed as Exhibit 10.11 to the IPO
Registration Statement)
10.12* Third Amendment to Lease Agreement by and between Active Power, Inc.
and Braker Phase III, Ltd. (filed as Exhibit 10.12 to the IPO
Registration Statement)
10.13* Fourth Amendment to Lease Agreement by and between Active Power, Inc.
and Metropolitan Life Insurance Company (filed as Exhibit 10.13 to the
IPO Registration Statement)
10.14* Fifth Amendment to Lease Agreement by and between Active Power, Inc.
and Metropolitan Life Insurance Company (filed as Exhibit 10.14 to the
IPO Registration Statement)
10.15* Sublease Agreement by and between Active Power, Inc. and Video
Associates Laboratories, Inc. (filed as Exhibit 10.15 to the IPO
Registration Statement)
10.16* Employee offer letter (including severance arrangements) from Active
Power, Inc. to David S. Gino (filed as Exhibit 10.16 to the IPO
Registration Statement)
10.17 Lease Agreement by and between Active Power, Inc. and BC12 99, Ltd.
10.18 Sixth Amendment to Lease Agreement by and between Active Power, Inc.
and Metropolitan Life Insurance Company
10.19 Seventh Amendment to Lease Agreement by and between Active Power, Inc.
and Metropolitan Life Insurance Company
23.1 Consent of Ernst & Young LLP
24.1 Power of Attorney, pursuant to which amendments to this Form 10-K may
be filed, is included on the signature page contained in Part IV of
this Form 10-K
- --------
* Incorporated by reference to the indicated filing
+ Confidential treatment previously granted
29
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.
Active Power, Inc.
/s/ Joseph F. Pinkerton, III,
By:__________________________________
Joseph F. Pinkerton, III,
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby severally constitutes and appoints, Joseph F. Pinkerton, III and
David S. Gino, and each or any of them, his true and lawful attorney-in-fact
and agent, each with the power of substitution and resubstitution, for him in
any and all capacities, to sign any and all amendments to this Annual Report on
Form 10-K and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Joseph F. Pinkerton, III President, Chief Executive March 15, 2001
______________________________________ Officer and Director
Joseph F. Pinkerton, III (principal executive
officer)
/s/ David S. Gino Vice President of Finance March 15, 2001
______________________________________ and Chief Financial
David S. Gino Officer (principal
financial and accounting
officer)
/s/ Eric L. Jones Chairman of the Board of March 15, 2001
______________________________________ Directors
Eric L. Jones
/s/ Richard E. Anderson Director March 15, 2001
______________________________________
Richard E. Anderson
/s/ Rodney S. Bond Director March 15, 2001
______________________________________
Rodney S. Bond
/s/ Jan H. Lindelow Director March 15, 2001
______________________________________
Jan H. Lindelow
/s/ Terrence L. Rock Director March 15, 2001
______________________________________
Terrence L. Rock
30
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Active Power, Inc.
We have audited the accompanying balance sheets of Active Power, Inc. (the
Company) as of December 31, 2000 and 1999, and the related statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period 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 financial position of Active Power, Inc. at
December 31, 2000 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Austin, Texas
January 18, 2001
F-1
ACTIVE POWER, INC.
BALANCE SHEETS
(Thousands, except share and per share amounts)
Year ended December 31,
------------------------
2000 1999
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 92,720 $ 24,856
Short-term investments............................. 42,541 1,409
Accounts receivable, net........................... 1,934 38
Inventories, net................................... 2,343 934
Prepaid expenses and other......................... 1,177 5
----------- -----------
Total current assets............................. 140,715 27,242
Property and equipment, net.......................... 4,469 1,124
Long-term investments................................ 10,948 --
----------- -----------
Total assets..................................... $ 156,132 $ 28,366
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................... $ 2,133 $ 196
Accrued expenses................................... 1,610 597
Notes payable...................................... -- 55
----------- -----------
Total current liabilities........................ 3,743 848
Other non-current liabilities........................ -- 7
Warrants with redemption rights...................... -- 3,614
----------- -----------
Total liabilities.................................... 3,743 4,469
Redeemable convertible preferred stock, zero and
7,732,084 shares issued and outstanding in 2000 and
1999, respectively.................................. -- 54,235
Stockholders' equity (deficit):
1992 Preferred Stock--$.001 par value, $.50
redemption value: 420,000 shares designated,
issued and outstanding; $210,000 liquidation
value............................................. -- --
Preferred Stock, par value $.001 per share;
25,000,000 shares authorized, none issued and
outstanding....................................... -- --
Common Stock--$.001 par value; 400,000,000 shares
authorized; 39,043,166 and 10,787,126 shares
issued and outstanding in 2000 and 1999,
respectively...................................... 39 11
Treasury stock, at cost; 34,599 shares............. (2) (2)
Deferred stock compensation........................ (7,519) (5,430)
Additional paid-in capital......................... 212,601 803
Accumulated deficit................................ (52,730) (25,720)
----------- -----------
Total stockholders' equity (deficit)............. 152,389 (30,338)
----------- -----------
Total liabilities and stockholders' equity
(deficit)....................................... $ 156,132 $ 28,366
=========== ===========
See accompanying notes.
F-2
ACTIVE POWER, INC.
STATEMENTS OF OPERATIONS
(Thousands, except share and per share amounts)
Year ended December 31,
------------------------------------
2000 1999 1998
----------- ----------- ----------
Product revenue......................... $ 4,872 $ 1,047 $ 915
Cost of goods sold (excludes deferred
stock compensation amortization of $698
in 2000 and $195 in 1999).............. 7,966 3,006 1,238
----------- ----------- ----------
Product margin (loss)................... (3,094) (1,959) (323)
Development funding..................... -- 5,000 --
Operating expenses:
Research and development (excludes
deferred stock compensation
amortization of $1,636 in 2000 and $910
in 1999)............................... 9,864 4,441 4,045
Selling, general and administrative
(excludes deferred stock compensation
amortization of $4,358 in 2000 and $526
in 1999)............................... 6,205 3,972 1,925
Amortization of deferred stock
compensation........................... 6,692 1,631 --
----------- ----------- ----------
Total operating expenses................ 22,761 10,044 5,970
----------- ----------- ----------
Operating loss.......................... (25,855) (7,003) (6,294)
Interest income......................... 4,365 439 339
Interest expense........................ (2) (18) (34)
Change in fair value of warrants with
redemption rights...................... (1,562) (3,614) --
Other income............................ (50) 8 10
----------- ----------- ----------
Net loss................................ $ (23,104) $ (10,188) $ (5,979)
Cumulative undeclared dividends on
preferred stock........................ (2,053) (1,820) (1,283)
Accretion on redeemable convertible
preferred stock to redemption amounts.. (17,026) (5,886) (1,505)
Beneficial conversion feature on
preferred stock issuance............... -- (21,953) --
----------- ----------- ----------
Net loss to common stockholders......... $ (42,183) $ (39,848) $ (8,767)
=========== =========== ==========
Net loss per share, basic and diluted... $ (1.92) $ (3.98) $ (0.90)
Shares used in computing net loss per
share, basic and diluted............... 21,928,874 10,009,554 9,789,407
Pro forma loss per share, basic and
diluted, assuming conversion of
convertible preferred stock to common
stock (unaudited)...................... $ (0.71)
Shares used in computing pro forma loss
per share, basic and diluted, assuming
conversion of convertible preferred
stock to common stock (unaudited)...... 32,462,945
See accompanying notes.
F-3
ACTIVE POWER, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Thousands)
1992
Preferred Stock Common Stock Treasury Stock Total
--------------- --------------- -------------- Deferred Additional Stockholders'
Number Par Number of Par Number At Stock Paid-In Accumulated Equity
of Shares Value Shares Value of Shares Cost Compensation Capital Deficit (Deficit)
--------- ----- --------- ----- --------- ---- ------------ ---------- ----------- -------------
Balance at December
31, 1997............ 420 $-- 9,932 $10 35 $ (2) $ -- $ -- $ (6,750) $ (6,742)
Exercise of stock
options............. -- -- 115 -- -- -- -- 11 -- 11
Preferred stock
issuance costs...... -- -- -- -- -- -- -- (11) (14) (25)
Accretion of
redeemable
convertible
preferred stock to
redemption amount... -- -- -- -- -- -- -- -- (1,505) (1,505)
Cumulative dividends
on redeemable
convertible
preferred stock..... -- -- -- -- -- -- -- -- (1,283) (1,283)
Net loss............ -- -- -- -- -- -- -- -- (5,979) (5,979)
--- ---- ------- --- --- ---- ------- -------- -------- --------
Balance at December
31, 1998............ 420 -- 10,047 10 35 (2) -- -- (15,531) (15,523)
Exercise of stock
options............. -- -- 740 1 -- -- -- 134 -- 135
Warrants issued for
services............ -- -- -- -- -- -- -- 1,380 -- 1,380
Preferred stock
issuance costs...... -- -- -- -- -- -- -- (66) -- (66)
Deferred stock
compensation........ -- -- -- -- -- -- (7,061) 7,061 -- --
Amortization of
deferred stock
compensation........ -- -- -- -- -- -- 1,631 -- -- 1,631
Accretion of
redeemable
convertible
preferred stock to
redemption amount... -- -- -- -- -- -- -- (5,886) -- (5,886)
Cumulative dividends
on redeemable
convertible
preferred stock..... -- -- -- -- -- -- -- (1,820) -- (1,820)
Net loss............ -- -- -- -- -- -- -- -- (10,189) (10,189)
--- ---- ------- --- --- ---- ------- -------- -------- --------
Balance at December
31, 1999............ 420 -- 10,787 11 35 (2) (5,430) 803 (25,720) (30,338)
Exercise of stock
options............. -- -- 1,497 2 -- -- -- 554 -- 556
Exercise of
warrants............ -- -- 432 -- -- -- -- 5,206 -- 5,206
Deferred stock
compensation........ -- -- -- -- -- -- (8,781) 8,781 -- --
Amortization of
deferred stock
compensation........ -- -- -- -- -- -- 6,692 -- -- 6,692
Accretion of
redeemable
convertible
preferred stock to
redemption amount... -- -- -- -- -- -- -- (13,712) (3,314) (17,026)
Cumulative dividends
on redeemable
convertible
preferred stock..... -- -- -- -- -- -- -- (1,461) (592) (2,053)
Conversion of
redeemable
convertible
preferred stock to
common stock........ -- -- 17,462 17 -- -- -- 73,296 -- 73,313
Net proceeds from
initial public
offering............ -- -- 8,900 9 -- -- -- 139,134 -- 139,143
Net loss............ -- -- -- -- -- -- -- -- (23,104) (23,104)
--- ---- ------- --- --- ---- ------- -------- -------- --------
Balance at December
31, 2000............ 420 $-- 39,078 $39 35 $ (2) $(7,519) $212,601 $(52,730) $152,389
=== ==== ======= === === ==== ======= ======== ======== ========
See accompanying notes.
F-4
ACTIVE POWER, INC.
STATEMENTS OF CASH FLOWS
(Thousands)
Year ended December 31,
---------------------------
2000 1999 1998
-------- -------- -------
Operating activities
Net loss......................................... $(23,104) $(10,188) $(5,979)
Adjustment to reconcile net loss to cash used
in operating activities:
Depreciation expense........................... 1,066 629 342
Loss on disposal of assets..................... -- 1 --
Warrants issued for services................... -- 1,380 --
Amortization of deferred stock compensation.... 6,692 1,631 --
Changes in fair value of warrants with
redemption rights............................. 1,562 3,614 --
Changes in operating assets and liabilities:
Accounts receivable, net..................... (1,896) 181 (193)
Inventories, net............................. (1,409) (126) 18
Prepaid expenses and other assets............ (1,172) 11 7
Accounts payable............................. 1,937 (57) (253)
Accrued expenses............................. 1,013 394 157
Other non-current liabilities................ (7) (51) --
-------- -------- -------
Net cash used in operating activities............ (15,318) (2,581) (5,899)
Investing activities
Net maturity (purchase) of short-term
investments..................................... (52,080) 3,327 (965)
Purchases of property and equipment.............. (4,411) (598) (793)
-------- -------- -------
Net cash provided by (used in) investing
activities...................................... (56,491) 2,729 (1,758)
Financing activities
Payments on notes payable........................ (55) (114) (98)
Net proceeds from issuance of common stock....... 139,698 136 11
Proceeds from issuance of convertible preferred
stock, net of issuance costs.................... -- 21,887 9,975
Net proceeds from exercise of warrants........... 30 -- --
-------- -------- -------
Net cash provided by financing activities........ 139,673 21,909 9,888
-------- -------- -------
Increase in cash and cash equivalents............ 67,864 22,056 2,231
Cash and cash equivalents, beginning of period... 24,856 2,800 569
-------- -------- -------
Cash and cash equivalents, end of period......... $ 92,720 $ 24,856 $ 2,800
======== ======== =======
Supplemental disclosure of cash flow information:
Interest paid.................................... $ 2 $ 18 $ 33
======== ======== =======
See accompanying notes.
F-5
ACTIVE POWER, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2000
1. Organization
Active Power, Inc. was founded in 1992 for the purpose of developing and
commercializing advances in the field of electromechanics. Since inception,
Active Power has devoted its efforts principally to research and development,
production and marketing of flywheel-based power-quality and storage products
that provide consistent, reliable electric power required by today's digital
economy. These efforts have included pursuing patent protection for
intellectual property, successful production of initial prototypes and limited
production volumes, development of manufacturing processes, raising capital and
pursuing markets for Active Power's products.
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Active Power recognizes revenue when title transfers and its obligations are
complete, usually when a unit is shipped. Active Power recognizes revenue
related to units shipped for evaluation by the customer at the time of customer
acceptance of the unit.
Shipping and Handling Costs
The Company classifies shipping and handling costs as cost of goods sold.
Cash Equivalents
Active Power considers liquid investments with a maturity of three months or
less when purchased to be cash equivalents.
Short-Term and Long-Term Investments
Short-term and long-term investments consist of debt securities with readily
determinable fair values. Active Power accounts for highly liquid investments
with maturities greater than three months but less than one year at date of
acquisition as short-term investments. Active Power classifies short-term and
long-term investments as available-for-sale. The carrying amount of Active
Power's short-term and long-term investments approximates fair value.
Short term and long term investments at December 31, 2000 consist of the
following:
Carrying Value
--------------
Corporate Notes.............................. $ 4,627,296
Medium Term Notes............................ 11,948,466
Commercial Paper............................. 36,913,429
-----------
$53,489,191
===========
F-6
ACTIVE POWER, INC.
NOTES TO FINANCIAL STATEMENTS
The carrying value by contractual maturity, is shown below:
Due in one year or less......................... $42,540,812
Due after one year through five years........... 10,948,379
-----------
$53,489,191
===========
Inventories
Active Power states inventories at the lower of cost or replacement cost,
with cost being determined on a standard cost basis which does not differ
materially from actual cost.
Inventories, before reserves, consist of the following:
December 31,
--------------------------------
2000 1999 1998
---------- ---------- ----------
Raw materials............................... $2,902,224 $1,287,031 $ 662,436
Work in process............................. 310,330 135,324 197,607
Finished goods.............................. 4,981 295,315 26,381
Evaluation units............................ -- 27,771 183,323
---------- ---------- ----------
$3,217,535 $1,745,441 $1,069,747
========== ========== ==========
The following table summarizes the changes in inventory reserves:
Balance at December 31, 1997....................... $198,475
Additions charged to costs and expenses............ 105,000
Write-off of inventory............................. (41,001)
--------
Balance at December 31, 1998....................... 262,474
Additions charged to costs and expenses............ 549,275
Write-off of inventory............................. --
--------
Balance at December 31, 1999....................... 811,749
Additions charged to costs and expenses............ 63,118
Write-off of inventory............................. --
--------
Balance at December 31, 2000....................... $874,867
========
Property and Equipment
Active Power carries property and equipment at cost, less accumulated
depreciation. Active Power depreciates property and equipment using the
straight-line method over the estimated useful lives of the assets (generally
three to eight years).
Other Liabilities
The Company's other liabilities are made up of the following significant
components at December 31:
2000 1999
---------- --------
Compensation and Benefits Accruals...................... $ 917,001 $270,552
Accrued Warranty Liability.............................. 167,725 95,214
Other Accrued Expenses.................................. 525,567 231,236
---------- --------
$1,610,293 $597,002
========== ========
F-7
ACTIVE POWER, INC.
NOTES TO FINANCIAL STATEMENTS
Patent Application Costs
Active Power has not capitalized patent application fees and related costs
because of uncertainties regarding net realizable value of the technology
represented by the existing patent applications and ultimate recoverability.
All patent costs have been expensed through December 31, 2000.
Accounting for Stock-Based Compensation
As allowed by the Financial Accounting Standards Board's ("FASB") Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, Active Power accounts for its stock compensation arrangements
with employees under the provisions of the Accounting Principles Board's
Opinion No. 25, Accounting for Stock Issued to Employees. Deferred stock-based
compensation is amortized utilizing the accelerated method prescribed in FASB
Interpretation No. 28 over the vesting period which is generally four years.
Income Taxes
Active Power accounts for income taxes in accordance with the FASB's
Statement No. 109, Accounting for Income Taxes. Statement No. 109 prescribes
the use of the liability method whereby deferred tax asset and liability
account balances are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Segment Reporting
Active Power's chief operating decision maker allocates resources and
assesses the performance of its power management product development and sales
activities as one segment.
Concentration of Credit Risk
Financial instruments which potentially subject Active Power to
concentrations of credit risk consist of short-term investments and trade
receivables. Active Power's short-term investments are placed with high credit
quality financial institutions and issuers. Active Power performs limited
credit evaluations of its customers' financial condition and generally does not
require collateral. Active Power estimates an allowance for doubtful accounts
based on factors related to the credit risk of each customer. Credit losses
have not been significant to date.
The following table summarizes the changes in the allowance for doubtful
accounts receivable:
Balance at December 31, 1997........................................ $ 463
Additions charged to costs and expenses............................. 4,577
Write-off of uncollectible accounts................................. --
-------
Balance at December 31, 1998........................................ 5,040
Additions charged to costs and expenses............................. 20,936
Write-off of uncollectible accounts................................. --
-------
Balance at December 31, 1999........................................ 25,976
Additions charged to costs and expenses............................. 29,514
Write-off of uncollectible accounts................................. --
-------
Balance at December 31, 2000........................................ $55,490
=======
F-8
ACTIVE POWER, INC.
NOTES TO FINANCIAL STATEMENTS
The following customers accounted for a significant percentage of Active
Power's total revenue as follows:
Customer 2000 1999 1998
-------- ---- ---- ----
A............................................................ 96% 39% 17%
B............................................................ 1 21 --
C............................................................ -- 16 --
D............................................................ 1 13 --
E............................................................ -- -- 24
F............................................................ -- -- 20
Economic Dependence
The Company is heavily dependent on its relationship with Caterpillar. If
this relationship is unsuccessful, the business and revenue will suffer. The
loss or significant reduction in orders from Caterpillar, or the failure to
provide adequate service and support to the end-users of our products by
Caterpillar, would significantly reduce our revenue. Our operating results in
the foreseeable future will continue to depend on sales to a relatively small
number of OEM customers, primarily Caterpillar.
Advertising Costs
Active Power expenses advertising costs as incurred. These expenses were not
material in 2000, 1999 or 1998.
Net Loss Per Share
Active Power computes loss per share in accordance with the FASB's Statement
No. 128, Earnings Per Share, and SEC Staff Accounting Bulletin No. 98 ("SAB
98"). Under Statement No. 128 and SAB 98, basic loss per share is computed by
dividing net loss by the weighted average number of shares outstanding. Diluted
loss per share is computed by dividing net loss by the weighted average number
of common shares and dilutive common share equivalents outstanding. Active
Power's calculation of diluted loss per share excludes shares of common stock
issuable upon exercise of warrants and employee stock options because inclusion
would be antidilutive.
The following table sets forth the computation of basic and diluted net loss
per share:
Year Ended December 31,
---------------------------------------
2000 1999 1998
------------ ------------ -----------
Net loss to common stockholders....... $(42,183,272) $(39,848,010) $(8,767,391)
Basic and diluted:
Weighted-average shares of common
stock outstanding.................. 22,366,656 10,150,138 9,978,796
Weighted-average shares of common
stock subject to repurchase........ (437,782) (140,584) (189,389)
------------ ------------ -----------
Shares used in computing basic and
diluted net loss per share........... 21,928,874 10,009,554 9,789,407
============ ============ ===========
Basic and diluted net loss per share.. $ (1.92) $ (3.98) $ (0.90)
============ ============ ===========
F-9
ACTIVE POWER, INC.
NOTES TO FINANCIAL STATEMENTS
3. Property and Equipment
Property and equipment consist of the following at December 31:
2000 1999 1998
----------- ----------- ----------
Equipment................................. $ 3,440,102 $ 1,391,233 $1,036,883
Demonstration units....................... 171,252 107,321 107,321
Computers and purchased software.......... 943,248 424,525 319,131
Furniture and fixtures.................... 66,977 63,037 63,037
Leasehold improvements.................... 2,092,050 316,541 179,825
----------- ----------- ----------
6,713,629 2,302,657 1,706,197
Accumulated depreciation.................. (2,244,392) (1,178,934) (550,368)
----------- ----------- ----------
$4,469,237 $ 1,123,723 $1,155,829
=========== =========== ==========
4. Stockholders' Equity and Preferred Stocks
At December 31, 1999, Active Power had 10,420,000 shares of $.001 par value
preferred stock authorized and 8,152,084 shares outstanding. Upon closing of
the initial public offering in August 2000, all outstanding shares of Series A,
B, C, D and E redeemable convertible preferred stock were converted into an
aggregate of 17,461,883 shares of the Company's common stock. At December 31,
2000 Active Power has 25,420,000 shares of preferred stock authorized and
420,000 shares outstanding.
1992 Preferred Stock
Holders of the 1992 Preferred Stock are not entitled to dividends. The 1992
Preferred Stock shall be redeemed by Active Power at such time as the Board of
Directors determines, in its sole discretion, that Active Power has available
funds in excess of anticipated needs. No dividends may be declared or paid on
Common Stock so long as any shares of 1992 Preferred Stock are issued and
outstanding. The redemption price of the 1992 Preferred Stock is $0.50 per
share.
Stock Split
In March 2000, Active Power reincorporated in Delaware. In conjunction with
the reincorporation, all of the $0.01 par value shares held by the common and
preferred stockholders were automatically converted into two $0.001 par value
shares of the corresponding common or preferred stock of the Delaware
corporation. On July 13, 2000, Active Power's Board of Directors approved a
2.16-for-1 common stock split in the form of a dividend of 1.16 shares of
common stock for each share of common stock outstanding on July 20, 2000. All
share and per share amounts in the financial statements and accompanying notes
have been restated to reflect the reincorporation and stock split as if they
had taken place at the inception of Active Power.
Warrants
In November 1999, Active Power issued warrants to purchase 432,000 shares of
Common Stock to two purchasers of the Series E Preferred Stock in conjunction
with the placement of preferred stock and strategic alliance agreements with
those stockholders. The warrants have exercise prices of $5.25 per share. The
warrants were fully vested, non-forfeitable and exercisable upon issuance and
expire in November 2006. Active Power estimated the fair value of the warrants
using the Black-Scholes pricing model with the following assumptions: expected
volatility of 50%, expected life of 1 year, expected dividend yield of 0%, and
risk-free rate of 6%. Active Power expensed the estimated fair value of these
warrants of approximately $1.4 million in 1999. The exercise prices of the
warrants is to be adjusted only for capital restructures and stock splits, and
not for subsequent sales of Common Stock. The weighted average exercise price
of warrants outstanding at December 31, 2000 was $5.25 per share. The weighted
average fair value of warrants granted during the year ended December 31, 1999
was $3.19.
F-10
ACTIVE POWER, INC.
NOTES TO FINANCIAL STATEMENTS
Stock Option Agreements
Active Power has reserved 5,636,178 shares of its Common Stock for issuance
under its 2000 Stock Incentive Plan. The options are immediately exercisable
upon grant and vest over periods ranging from immediate to four years. Active
Power has repurchase rights for unvested shares purchased by optionees. At
December 31, 2000, 1999 and 1998, 321,245, 217,957 and 149,066 shares,
respectively, that were purchased by optionees remained unvested and subject to
repurchase.
A summary of Common Stock option activity during the years ended December
31, 2000, 1999 and 1998 is as follows:
Number of Range of Weighted-Average
Shares Exercise Prices Exercise Prices
---------- --------------- ----------------
Outstanding at December 31,
1997........................ 2,371,680 $ .07 -- 1.97 $ .15
Granted.................... 699,840 .16 -- .28 .23
Exercised.................. (114,912) .07 -- .28 .10
Canceled................... (56,160) .09 -- .16 .16
---------- -------------- -----
Outstanding at December 31,
1998........................ 2,900,448 $ .07 -- 1.97 $ .18
Granted.................... 1,276,560 .42 -- 1.04 .65
Exercised.................. (739,735) .07 -- .83 .19
Canceled................... (89,346) .09 -- 1.97 .29
---------- -------------- -----
Outstanding at December 31,
1999........................ 3,347,927 $ .07 -- 1.97 $ .35
Granted.................... 1,294,785 1.04 -- 68.50 5.04
Exercised.................. (1,496,745) .07 -- 6.94 .37
Canceled................... (102,637) .28 -- 6.94 1.65
---------- -------------- -----
Outstanding at December 31,
2000........................ 3,043,330 $ .07 -- 68.50 $2.42
========== ============== =====
At December 31, 2000, 2,592,848 shares were available for future grants.
The following is a summary of options outstanding and exercisable as of
December 31, 2000:
Weighted
Average
Remaining Weighted
Contractual Average
Life (in Exercise
Range of Exercise Prices Number years) Price
- ------------------------ --------- ----------- --------
$ .07--$ .09.................................. 242,404 5.5 .08
$ .16--$ .42.................................. 1,147,623 7.3 .23
$ .56--$ 1.39.................................. 1,124,721 8.9 .95
$ 1.85--$ 1.97.................................. 30,240 2.9 $ 1.90
$ 4.17--$ 6.94.................................. 385,401 9.4 $ 5.39
$17.00--$68.50.................................. 112,941 9.8 $34.46
--------- --- ------
3,043,330 8.1 $ 2.42
========= === ======
Stock options vested as of December 31, 2000, 1999, and 1998 were 1,274,526,
1,458,112, and 1,090,645 respectively.
F-11
ACTIVE POWER, INC.
NOTES TO FINANCIAL STATEMENTS
Of the stock options granted to employees during the year ended December 31,
1999, 1,275,480 had exercise prices below the fair value determined
subsequently by the board of directors of the underlying shares of Common Stock
on the date of grant. As a result, Active Power recorded unearned stock
compensation of $7,061,267 of which $1,631,068 was amortized to non-cash
compensation during the year ended December 31, 1999. The remaining unearned
compensation will be recognized as non-cash compensation over the remaining
vesting period of the options of approximately 3 years.
During 2000, Active Power granted 1,101,924 stock options to employees with
exercise prices below the fair value determined subsequently by the board of
directors of the underlying shares and, accordingly, recorded $8,781,404
additional unearned stock compensation of which $6,692,173 was amortized to
non-cash compensation during the year ended December 31, 2000. The remaining
unearned compensation will be recognized as non-cash compensation over the
options' vesting period of four years.
Pro forma information regarding net loss is required by Statement No. 123,
and has been determined as if Active Power had accounted for its employee stock
options under the fair value method of Statement No. 123. The fair value for
these options was estimated at the date of grant using a minimum value option
pricing model until the date of the initial public offering and the Black-
Scholes option pricing model thereafter, with the following assumptions:
Year ended December 31,
-------------------------
2000 1999 1998
------- ------- -------
Risk-free interest rate......................... 6.5% 6.5% 6.5%
Weighted-average expected life of the options... 7 years 7 years 7 years
Dividend rate................................... 0% 0% 0%
Assumed volatility.............................. 150% 0% 0%
Weighted average fair value of options granted:
Exercise price equal to fair value of stock on
date of grant.................................. $ 32.52 -- $ .06
Exercise price less than fair value of stock on
date of grant.................................. $ 8.90 $5.77 --
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. Active
Power's pro forma information under Statement No. 123 follows:
Year ended December 31,
---------------------------------------
2000 1999 1998
------------ ------------ -----------
Pro forma stock-based
compensation expense............ $ 8,619,884 $ 1,712,263 $ 35,726
Pro forma net loss............... $(25,032,060) $(10,269,539) $(6,014,504)
Pro forma net loss to common
stockholders.................... $(44,110,982) $(39,929,205) $(8,803,117)
Pro forma basic and diluted loss
per share....................... $ (2.01) $ (3.99) $ (.90)
Option valuation models incorporate highly subjective assumptions. Because
changes in the subjective assumptions can materially affect the fair value
estimate, the existing models do not necessarily provide a reliable single
measure of the fair value of Active Power's employee stock options. Because the
determination of fair value of all employee stock options granted after such
time as Active Power becomes a public entity will include an expected
volatility factor and because, for pro forma disclosure purposes, the estimated
fair value of Active Power's employee stock options is treated as if amortized
to expense over the options' vesting period, the effects of applying Statement
No. 123 for pro forma disclosures are not necessarily indicative of future
amounts.
F-12
ACTIVE POWER, INC.
NOTES TO FINANCIAL STATEMENTS
Common stock reserved at December 31, 2000 consists of the following:
For exercise of Common Stock Warrants............. 432,000
For issuance under the 1993/2000 Stock Option
Plan............................................. 5,636,178
5. Income Taxes
At December 31, 2000, Active Power has net operating loss carryforwards of
approximately $30 million for federal tax reporting purposes and research and
development credit carryforwards of approximately $563,000. The net operating
loss and research and development credit carryforwards begin to expire in 2007
if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of
the Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
Significant components of Active Power's deferred tax liabilities and assets
as of December 31 are as follows:
2000 1999
------------- -----------
Deferred tax assets:
Capital expenses.............................. 164,000 71,000
Warrants...................................... 511,000 511,000
Reserves and allowances....................... 628,000 461,000
Net operating loss and tax credit
carryforwards................................ 11,587,000 5,730,000
Other......................................... -- 34,000
------------- -----------
Total deferred tax assets..................... 12,890,000 6,807,000
Valuation allowance for net deferred tax
assets....................................... (12,890,000) (6,807,000)
------------- -----------
Net deferred taxes............................ $ -- $ --
============= ===========
Active Power has established a valuation allowance equal to the net deferred
tax assets due to uncertainties regarding the realization of deferred tax
assets based on the Company's lack of earnings history. The valuation allowance
increased by approximately $6,083,000 during 2000. Approximately $438,000 of
the valuation allowance for deferred tax assets relates to benefits for stock
option deductions, which when realized, will be allocated directly to
contributed capital.
Active Power's benefit for income taxes differs from the expected tax
benefit amount computed by applying the statutory federal income tax rate of
34% to loss before taxes due to the following:
Year Ended
December 31,
---------------------
2000 1999 1998
----- ----- -----
Federal statutory
rate................... (34.0)% (34.0)% (34.0)%
Non-cash compensation
expense................ 12.1 17.4 --
State taxes, net of
federal benefit........ (1.9) (1.5) (3.0)
Permanent items and
other.................. (2.5) (.6) (1.8)
Change in valuation
allowance.............. 26.3 18.7 38.8
----- ----- -----
0.0% 0.0% 0.0%
===== ===== =====
F-13
ACTIVE POWER, INC.
NOTES TO FINANCIAL STATEMENTS
6. Commitments
Active Power leases its office and manufacturing facilities under operating
lease agreements. The office space and manufacturing facilities leases are
noncancelable and obligate Active Power to pay taxes and maintenance costs. In
addition, Active Power leases certain equipment such as copiers and phone
systems under noncancelable leases.
Future minimum payments under these leases at December 31, 2000 are as
follows:
2001............................................. 1,184,974
2002............................................. 1,383,264
2003............................................. 1,073,781
2004............................................. 815,892
2005............................................. 334,795
----------
Total future minimum lease payments.............. $4,792,706
==========
Rent expense for the years ended December 31, 2000, 1999, and 1998 was
$489,597, $353,502, and $276,637 respectively.
Active Power has a consulting services agreement with the Chairman of the
board of directors. In accordance with the consulting agreement, the Chairman
receives $6,250 in consulting fees monthly. During 2000, 1999, and 1998 Active
Power paid $75,000 in fees per year under this agreement.
7. Employee Benefit Plan
In 1996, Active Power established a 401(k) Plan that covers substantially
all full-time employees. Company contributions to the plan are determined at
the discretion of the Board of Directors and vest ratably over five years of
service starting after the first year of employment. Active Power did not
contribute to this plan in 1998, 1999, and 2000.
8. Development Funding
During January 1999, Active Power entered into a contract development
agreement with a third party. In accordance with the agreement, the third party
provided funding to allow Active Power to accelerate development of its
products in a certain market application in exchange for the third party
obtaining exclusive marketing rights for the product in that application. The
exclusive marketing rights are subject to the third party meeting specified
minimum orders of the product. The two companies share ownership of the
resulting intellectual property. Active Power completed the contract in 1999
and collected the full $5,000,000 development funding specified in the
contract, which it recognized as it achieved the product performance milestones
specified in the agreement. Active Power does not separately account for
efforts spent by its engineers on research and development by the various
project. Because this project involved development of Active Power's product
already contemplated by management and for which Active Power co-owns the
resulting intellectual property, all of the costs associated with this contract
are classified in research and development expense.
F-14
ACTIVE POWER, INC.
NOTES TO FINANCIAL STATEMENTS
9. Geographic Information
Revenues for the year ended December 31 were as follows:
2000 1999 1998
---------- ---------- --------
United States................................. $3,392,607 $1,014,411 $867,775
Foreign countries............................. 1,479,526 32,400 47,543
---------- ---------- --------
Total......................................... $4,872,133 $1,046,811 $915,318
========== ========== ========
Revenues from foreign countries above represent shipments to customers
located primarily in Europe. Active Power has no property, plant or equipment
located outside the United States.
F-15
Supplementary Financial Information (Unaudited)
Year Ended December 31, 2000
------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- ------- -------
Product revenue...................... $ 182 $ 679 $ 1,343 $ 2,668
Product margin (loss)................ (339) (497) (742) (1,516)
Net loss............................. (4,857) (6,208) (5,789) (6,250)
Cumulative undeclared dividends on
preferred stock..................... (849) (849) (355) --
Accretion on redeemable convertible
preferred stock to redemption
amounts............................. (6,383) (7,329) (3,314) --
Net loss to common stockholders...... $(12,089) $(14,386) $(9,458) $(6,250)
Net loss per share, basic and
diluted............................. $ (1.15) (1.26) (0.35) (0.16)
Non-cash charges associated with redeemable preferred stock were recorded to
reflect dividend rights and accretion to redemption value prior to conversion
to common stock which occurred immediately prior to the Company's initial
public offering.
EXHIBIT 10.17
LEASE AGREEMENT
Between
BC12 99, Ltd.,
as Landlord,
and
Active Power, Inc.
as Tenant,
Covering approximately 126,750 gross square feet
of the Building known as
Braker 12
located at
2128 Braker Lane
Austin, Texas, 78758
STANDARD INDUSTRIAL LEASE AGREEMENT
TRAMMELL CROW COMPANY - (AUS/91)
Approximately 126,750 gross square feet
2128 Braker Lane
Austin, Texas 78758
(Braker 12)
LEASE AGREEMENT
THIS LEASE AGREEMENT is made and entered into by and between BC12 99, Ltd., a
Texas limited partnership hereinafter referred to as "Landlord," and Active
Power, Inc., a Delaware corporation hereinafter referred to as "Tenant."
1. PREMISES AND TERM. In consideration of the mutual obligations of Landlord
and Tenant set forth herein, Landlord leases to Tenant, and Tenant hereby takes
from Landlord, approximately 126,750 square feet of space (the "Premises")
shown on Exhibit "A" attached hereto and incorporated herein, located in the
building known as Braker 12, which building has an address of 2128 Braker Lane,
Austin, Travis County, Texas 78750 (the "Building"). The Building is located on
the real property described on Exhibit "A-1" attached hereto and incorporated
herein. The term of this Lease shall commence on the Commencement Date
hereinafter set forth and shall end on the last day of the month that is forty-
eight (48) months after the Commencement Date (the "Expiration Date").
Notwithstanding anything to the contrary contained herein, on the Commencement
Date, Tenant shall lease only that portion of the Premises containing 85,000
square feet and shown on Exhibit "A-2" attached hereto and incorporated herein
(the "Initial Premises"). Tenant shall lease approximately 20,875 square feet
of the Premises shown on Exhibit "A-3" attached hereto and incorporated herein
(the "First Additional Premises") not later than the date which is the sixth
month anniversary of the Commencement Date and Tenant shall lease the remaining
approximately 20,875 square feet of the Premises shown on Exhibit "A-4" attached
hereto and incorporated herein (the "Second Additional Premises") not later than
the first annual anniversary of the Commencement Date. In the event Tenant
elects to lease the First Additional Premises prior to the six month anniversary
of the Commencement Date or Tenant elects to lease the Second Additional
Premises prior to the first annual anniversary of the Commencement Date, the
commencement date for such space shall be the date Tenant actually occupies the
First Additional Premises and/or the Second Additional Premises, as the case may
be, for the conduct of Tenant's business. Further, notwithstanding anything to
the contrary set forth herein, Tenant shall have no obligations with respect to
or liability for the First Additional Premises or the Second Additional Premises
until the applicable commencement date for such space, except for the obligation
to pay one-half (1/2) of the Operating Expenses attributable to such space as
provided in Paragraph 2C below.
A. Existing Building and Improvements. The "Commencement Date" shall be May
----------------------------------
1, 2001, provided that the Commencement Date shall be delayed to the extent that
Landlord fails to deliver possession of the Initial Premises to Tenant for any
reason, including but not limited to, holding over by prior occupants. However,
Landlord shall within fifteen (15) days after the execution of this Lease by
Landlord and Tenant, notify the existing tenant in the Premises that such tenant
shall not be permitted to hold over after the expiration of its lease and that
the Premises have been rented to a third party effective as of May 1, 2001. If
the Commencement Date is delayed, the Expiration Date under the Lease shall be
similarly extended. Notwithstanding the foregoing, if the Commencement Date
does not occur by July 1, 2001, Tenant shall be entitled to terminate this Lease
by giving Landlord written notice of termination on or before the occurrence of
the Commencement Date. Landlord shall use its best efforts to deliver the
Initial Premises on May 1, 2001. Upon Landlord's delivery of the Premises,
Landlord shall, at Landlord's sole cost and expense, re-key the Premises. In
the event of holding over or retention of any third party tenant, tenants or
occupants of the Premises by the current tenant after April 30, 2001, Landlord
shall take all commercially reasonable steps necessary to evict such tenant as
soon as possible, including without limitation, the employment of legal counsel
to take steps required to evict such third party tenant, tenants or occupants.
Upon Tenant's occupancy of the Premises, Tenant shall be deemed to acknowledge
that subject to Paragraphs 4.B below, (i) it has inspected and accepts the
Premises in its "as is" condition, (ii) the buildings and improvements
comprising the same are suitable for the purpose for which the Premises are
leased, (iii) the Premises are in good and satisfactory condition, and (iv) no
representations as to the repair of the Premises nor promises to alter, remodel
or improve the Premises have been made by Landlord (unless otherwise expressly
set forth in this Lease).
2. BASE RENT, SECURITY DEPOSIT AND ESCROW DEPOSITS.
A. Base Rent. Tenant agrees to pay Landlord base rent ("Base Rent") for the
---------
Premises, in advance, without demand, deduction or set off, except as otherwise
provided herein, at the rates set forth below for the following periods:
----------------------------------------------------------------------------
Months Base Rental Rate PSF/Mo. Square Feet Base Monthly Rent
----------------------------------------------------------------------------
1-6 $0.48 85,000 $40,800.00
----------------------------------------------------------------------------
7-12 $0.48 105,875 $50,820.00
----------------------------------------------------------------------------
13-24 $0.48 126,750 $60,840.00
----------------------------------------------------------------------------
25-48 $0.50 126,750 $63,375.00
----------------------------------------------------------------------------
per month during the Term hereof. One monthly installment of $40,800.00, shall
be due and payable on the date hereof and shall be applied to the first monthly
installment of Base Rent due hereunder, and the foregoing described monthly
installments shall be due and payable on or before the first day of each
calendar month succeeding the Commencement Date, except that all payments due
hereunder for any fractional calendar month shall be prorated. In the event
Tenant elects to lease the First Additional Premises or the Second Additional
Premises prior to the sixth month anniversary of the Commencement Date and the
first annual anniversary of the Commencement Date, respectively, the Base Rent
Schedule set forth above shall be adjusted accordingly.
B. Security Deposit. In addition, Tenant agrees to deposit with Landlord on
----------------
the date hereof the sum of Seventy Nine Thousand Two Hundred Eighteen and 75/100
Dollars ($79,218.75) which shall be held by Landlord, without obligation for
interest, as security for the performance of Tenant's obligations under this
Lease (the "Security Deposit"), it being expressly understood and agreed that
the Security Deposit is not an advance rental deposit or a measure of Landlord's
damages in case of Tenant's default. Upon occurrence of an Event of Default,
Landlord may use all or part of the Security Deposit to pay past due rent or
other payments due Landlord under this Lease or the cost of any other damage,
injury, expense or liability caused by such Event of Default, without prejudice
to any other remedy provided herein or provided by law. The Security Deposit
shall be deemed the property of Landlord, but any remaining balance of the
Security Deposit shall be returned by Landlord to Tenant when all of Tenant's
obligations under this Lease have been fulfilled.
C. Operating Expenses. Without limiting in any way Tenant's other
------------------
obligations under this Lease, Tenant agrees to pay to Landlord its Proportionate
Share (as defined in this Paragraph 2C below) of Operating Expenses (hereinafter
defined) for the Project (hereinafter defined). Operating Expenses shall mean
(i) Taxes (hereinafter defined) payable by Landlord pursuant to Paragraph 3A
below, and the cost of any tax consultant to assist Landlord in determining the
fair tax valuation of the Building and land upon which it is located (ii) the
cost of utilities for the common areas of the Project payable by Landlord
pursuant to Paragraph 8 below, (iii) Landlord's cost of maintaining any
insurance or insurance related expense applicable to the Building and Landlord's
personal property used in connection therewith including, but not limited to,
insurance pursuant to Paragraph 9A below, and (iv) Landlord's cost of
maintaining the Project which include but are not limited to (a) maintenance
and repairs, (b) landscaping, (c) common area utilities, (d) water and sewer,
(e) roof repairs, (f) reasonable and customary management fees, (g) exterior
painting, and (h) parking lot maintenance and repairs. Operating Expenses shall
not include the following expenses: (a) any costs for interest, amortization, or
other payments on loans to Landlord, (b) expenses incurred in leasing or
procuring tenants, (c) legal expenses other than those incurred for the general
benefit of the Building's tenants, (d) allowances, concessions, and other costs
of renovating or otherwise improving space for occupants of the Building or
other buildings in the Project or vacant space in the Building or other
buildings in the Project, (e) rents under ground leases, (f) costs incurred in
selling, syndicating, financing, mortgaging, or hypothecating any of Landlord's
interests in the Building or the Project, (g) expenses for which Landlord is
actually reimbursed by another source (excluding tenant reimbursement for
Operating Expenses) including repair or replacement of any item covered by
warranty as well as insurance proceeds received by Landlord or paid by a tenant
or other third parties, (h) alterations attributable solely to individual
tenants of the Project, (i) the cost of capital improvements, depreciation,
interest, lease commissions, advertising and marketing costs, and principal
payments on mortgage and other non-operating debts of Landlord, (j) depreciation
of the Building or other buildings in the Project, (k) salaries paid to
employees above the Building manager level, commission to brokers, advertising
and promotion costs, and wages, salaries, fees and benefits paid to executive
personnel or officers or partners of Landlord, (l) the cost of tools and
equipment used initially in the construction of the Project, (m) costs incurred
in connection with the original construction of the Project or with any major
changes to same, including, but not limited to, additions or deletions of
corridor extensions, renovations and improvements of the common areas beyond the
costs caused by normal. wear and tear, and upgrades or replacement of major
1
Project systems, (n) costs of correcting defects (including latent defects),
including any allowances for same, in the construction of the Project or its
related facilities; (o) expenses for the defense of Landlord's title to the
premises or the Building, (p) the cost of overtime or other expenses of Landlord
in performing work expressly provided in this Lease to be performed by Landlord,
at Landlord's expense and not as part of Operating Expenses, (q) any amounts
expended by Landlord as environmental response costs for removal, enclosure,
encapsulation, clean-up, remediation or other activities regarding Landlord's
compliance with federal, state, municipal or local hazardous waste and
environmental laws, regulations or ordinances, (r) any fines or penalties
incurred as a result of Landlord's violation or failure to comply with any
governmental regulations and rules or any court order, decree or judgment, (s)
costs of initially bringing the Building or Project into compliance with
applicable laws as of the date of this Lease, (t) attorneys fees incurred in
connection with negotiations or disputes with other tenants or occupants of the
Project, (u) any charge for Landlord's income taxes, excess profit taxes, or
franchise taxes, (v) any Operating Expenses representing an amount paid to a
related corporation, entity or person which is in excess of the amount which
would be paid in the absence of such relationship, (w) expenses paid directly by
Tenant for any reason (such as Tenant's electricity use), and (x) all costs for
which Tenant or any other tenant in the Project is being directly or separately
billed other than as a component of Operating Expenses. Prior to the
Commencement Date and prior to January 1 of each calendar year during the Term,
Landlord shall make a good faith estimate of Operating Expenses for the upcoming
calendar year and Tenant's Proportionate Share of such expenses. During each
month of the Term of this Lease, on the same day that Base Rent is due
hereunder, Tenant shall deposit in escrow with Landlord an amount equal to one-
twelfth (1/12) of the estimated amount of Tenant's Proportionate Share of the
Operating Expenses. Tenant authorizes Landlord to use the funds deposited with
Landlord under this Paragraph 2C to pay such Operating Expenses. The initial
monthly escrow payments are based upon the estimated amounts for the year in
question and shall be increased or decreased annually to reflect the projected
actual amount of all Operating Expenses. As soon as is practical following the
end of each calendar year during the Term Landlord shall furnish to Tenant a
statement of Landlord's actual Operating Expenses for the previous calendar
year. If the Tenant's total escrow deposits for any calendar year are less than
Tenant's actual Proportionate Share of the Operating Expenses for such calendar
year, Tenant shall pay the difference to Landlord within thirty (30) days after
receipt of the statement of Actual Operating Expenses. If the total escrow
deposits of Tenant for any calendar year are more than Tenant's actual
Proportionate Share of the Operating Expenses for such calendar year, Landlord
shall retain such excess and credit it against Tenant's Proportionate Share of
Operating Expenses escrow deposits next maturing after such determination,
except in connection with the last calendar year of the Term, in which case
Landlord shall refund to Tenant any overpayment. The Premises and the Building
are a part of a project or business park owned, managed or leased by Landlord or
an affiliate of Landlord (the "Project"). Tenant's "Proportionate Share" of the
Project, as used in this Lease, shall mean a fraction, the numerator of which is
the gross rentable area contained in the Premises and the denominator of which
is the gross rentable area contained in the Building, which is 126,750 square
feet. Notwithstanding that the First Additional Premises and the Second
Additional Premises are not initially part of the Premises, Tenant shall pay,
commencing on the Commencement Date, one-half (1/2) of Tenant's Proportionate
Share of Operating Expenses attributable to such space.
Tenant at its sole expense, shall have the right no more frequently than
once per calendar year, following thirty (30) days prior written notice to
Landlord, which notice must be given within one hundred eighty (180) days after
Tenant's receipt of Landlord's statement of actual Operating Expenses pursuant
to this Paragraph 2.C, to audit Landlord's books and records relating to
Operating Expenses at Landlord's office during Landlord's normal business hours.
Tenant shall be solely responsible for all costs, expenses and fees incurred for
the audit; provided, that if an audit by Tenant establishes that Landlord has
overstated Tenant's Proportionate Share of Operating Expenses by more than five
percent (5%) in any one calendar year, Landlord shall reimburse Tenant for the
reasonable costs of the audit. Within sixty (60) days after the books and
records are made available to Tenant, Tenant shall have the right to give
Landlord written notice (an "Objection Notice") stating in reasonable detail any
objection to Landlord's statement of Operating Expenses for that year. If Tenant
provides Landlord with a timely Objection Notice, Landlord and Tenant shall work
together in good faith to resolve any issues raised by Tenant's Objection
Notice. The records obtained by Tenant shall be treated as confidential.
3. TAXES
A. Real Property Taxes. Subject to reimbursement under Paragraph 2C
-------------------
herein, Landlord agrees to pay all taxes, assessments and governmental charges
of any kind and nature (collectively referred to herein as "Taxes") that accrue
against the Premises, the Building and/or the land of which the Premises or the
Building are a part. If at any time during the term of this Lease there shall be
levied, assessed or imposed on Landlord a tax directly on the rents received
therefrom and/or a franchise tax, assessment, levy or charge measured by or
based, in whole or in part, upon such rents from the Premises and/or
improvements of which the Premises are a part, then all such taxes, assessments,
levies or charges, or the part thereof so measured or based shall be deemed to
be included within the term "Taxes" for the purposes hereof.
B. Personal Property Taxes. Tenant shall be liable for all taxes levied
-----------------------
or assessed against any personal property or fixtures placed in or on the
Premises. If any such taxes are levied or assessed against Landlord or
Landlord's property and (i) Landlord pays the same or (ii) the assessed value of
Landlord's property is increased by inclusion of such personal property and
fixtures and Landlord pays the increased taxes, then Tenant shall pay to
Landlord, within thirty (30) days after receipt of an invoice therefor, together
with documentation substantiating that such taxes were solely attributable to
Tenant's personal property and fixtures, the amount of such taxes.
4. LANDLORD'S REPAIRS AND MAINTENANCE.
A. Structural Repairs. Landlord, at its own cost and expense, shall
------------------
maintain the foundation and the structural soundness of the exterior walls of
the Building in good repair, reasonable wear and tear excluded. The term "walls"
as used herein shall not include windows, glass or plate glass, any doors,
special store fronts or office entries, and the term "foundation" as used herein
shall not include loading docks. Landlord shall further, at its sole cost and
expense (subject to inclusion as a component of Operating Expenses to the extent
such costs qualify as an Operating Expenses), repair, replace (as necessary) and
maintain in good working order, condition and repair, the roof, landscaping,
drainage, common area lighting facilities, parking lots and driveways of the
Project, sanitary sewers and water main in the Building, concealed plumbing
serving the Premises, all exterior common areas of the Project, and the exterior
of the Building. With respect to the foregoing areas of repair and maintenance,
Landlord shall maintain the Building in a manner reasonably consistent with
comparable industrial buildings in the North Austin submarket ("Comparable
Buildings"). Notwithstanding any other provision hereof, if the lack of such
maintenance and repair materially impairs Tenant's use of or access to the
Premises, and Landlord fails to make any required repairs within thirty (30)
days after the receipt of Tenant's written notice or, in the event the nature of
Landlord's obligation is such that more than thirty (30) days are required for
its performance and Landlord fails to commence performance with the thirty (30)
day period and thereafter diligently pursue the completion of same using
commercially reasonable efforts, Tenant may, at its option, make such repair or
replacement on Landlord's behalf and Landlord shall reimburse to Tenant, within
thirty (30) days of Tenant's written request therefor, Tenant's reasonable costs
and expenses in connection with the exercise of such right. Tenant shall
immediately give Landlord written notice of defect or need for repairs.
B. Delivery of Premises. Landlord shall deliver the Premises to Tenant
--------------------
in a "broom clean" condition with all systems in good working order, including
without limitation, all lights and lighting fixtures, plumbing fixtures and
systems, and with all dock doors and levelers in good working order. Landlord
shall also deliver the Premises with those installations which are currently in
the Premises that are identified by Landlord and Tenant prior to the
Commencement Date. Upon the request of either party, the other party shall
confirm in writing of such installations agreed to between Landlord and Tenant.
Landlord shall warranty the HVAC systems serving the Premises for a period of
thirty (30) days after the Commencement Date with respect to the Initial
Premises and for a period of thirty (30) days after the applicable commencement
date therefor, for the First Additional Premises and the Second Additional
Premises. On or before the Commencement Date, Landlord shall provide Tenant
with a copy of the existing tenant's exit inspection of the Premises, including
an inspection report by a licensed engineer, evidencing that the HVAC and
electrical systems serving the Premises are in good working order. On or before
the Commencement Date, Landlord shall also provide Tenant with a copy of
Landlord's most current roof inspecting evidencing that the roof of the Building
is in good condition and repair. If the roof inspection reflects any condition
needing repair, Landlord shall provide Tenant with evidence that such repair was
performed, or Landlord shall promptly make the necessary repair.
C. Repainting of Building Exterior. Prior to the Commencement Date,
-------------------------------
Landlord shall, at its sole cost and expense (and not as a component of
Operating Expenses), repaint the exterior of the Building in a color mutually
approved by Landlord and Tenant.
2
5. TENANT'S REPAIRS.
A. Maintenance of Premises. Tenant, at its own cost and expense, shall
-----------------------
(i) maintain all parts of the interior of the Premises and promptly make all
necessary repairs and replacements to the interior of the Premises (except those
for which Landlord is expressly responsible hereunder), and (ii) keep the
parking areas, driveways, alleyways and areas surrounding the loading docks free
of trash, debris and inventory, including but not limited to pallets, barrels,
and equipment from tenant use. If Tenant fails to make any required repairs
within thirty (30) days after receipt of a written request from Landlord, or in
the event the nature of Tenant's obligation is such that more than thirty (30)
days is required for performance, and Tenant fails to commence performance
within the thirty (30) day period and thereafter diligently pursue the
completion of same using commercially reasonable efforts, then the Landlord may
(but shall not be obligated to) perform such duties and the Tenant shall
reimburse Landlord within thirty (30) days of presentation of appropriate
statement. Tenant's obligation to maintain, repair and make replacements to the
Premises shall cover, but not be limited to, pest control (including termites),
trash removal and the maintenance, repair and replacement of all HVAC,
electrical, plumbing,(but only to the extent it is not concealed), sprinkler and
other mechanical systems.
B. Parking. Tenant and its employees, customers and licensees shall
-------
have the right to use all of the parking areas that have been designated as
parking areas (which parking areas for the common use of tenants of the Project
are shown on the site plan attached as Exhibit "A-5" attached hereto and
incorporated herein), subject to (i) all reasonable rules and regulations
promulgated by Landlord, and (ii) rights of ingress and egress of other lessees
of the Project. Except in connection with Tenant's parking spaces in the
Adjacent Parking Facility, Landlord shall not be responsible for enforcing
Tenant's parking rights against any third parties. Tenant shall have the right
to take commercially reasonable efforts to enforce its parking rights with
respect to the parking spaces not located in the Adjacent Parking Facility,
including without limitation, the use of parking stickers and the right to tow
or obstruct improperly parked vehicles. Tenant agrees not to park on any public
streets or private roadways adjacent to or in the vicinity of the Premises.
Landlord shall make available to Tenant on the Commencement Date the use of
forty (40) parking spaces in the parking lot adjacent to the Project (the
"Adjacent Parking Facility") on an unreserved basis. The location of the
Adjacent Parking Facility is shown on Exhibit "A-6" attached hereto and
incorporated herein. Landlord shall use reasonable efforts to insure that such
spaces in the Adjacent Parking Facility shall be available for use by Tenant,
including without limitation, the towing of unauthorized vehicles. Additionally,
Landlord shall make available to Tenant in the Adjacent Parking Facility
additional parking spaces in accordance with the following schedule :
Total Parking Spaces
Months in Adjacent Parking Facility
------ ---------------------------
Months 6 - 12 80 Spaces
Months 13 - 24 120 spaces
Months 25 - 48 160 Spaces
Landlord has not and will not grant any other tenant of the Project the right to
use the parking spaces being made available to Tenant hereunder situated in the
Adjacent Parking Facility during the term of this Lease (including any renewal
thereof). In consideration of Landlord's provision of the parking spaces in the
Adjacent Parking Facility, Tenant shall pay to Landlord, in addition to Base
Rent, the sum of $19.00 per parking space per month plus Tenant's proportionate
share of taxes, insurance and maintenance expenses applicable to the Adjacent
Parking Facility. Such payments shall be due and payable at the same time as
Base Rent is due hereunder.
C. System Maintenance. Landlord shall service HVAC equipment serving the
------------------
Premises within thirty (30) days of Tenant's occupancy (and within thirty (30)
days of Tenant's occupancy of the First Additional Premises and the Second
Additional Premises, as applicable) to ensure such HVAC equipment is in good
working order. Tenant, at its own cost and expense, shall enter into a
regularly scheduled preventive maintenance/service contract with a maintenance
contractor reasonably approved by Landlord for servicing all hot water, heating
and air conditioning systems and equipment within the Premises. The service
contract must include the replacement of filters on a regular basis and all
services suggested by the equipment manufacturer in its operations/maintenance
manual and must become effective within ninety (90) days of the date Tenant
takes possession of the applicable portion of the Premises.
6. ALTERATIONS.
A. Approval of Alterations. Except as set forth below, Tenant shall not
-----------------------
make any alterations, additions or improvements to the Premises without the
prior written consent of Landlord, which consent shall not be unreasonably
withheld or delayed for alterations or improvements which do not affect the
structure of the Building or which do not adversely affect the mechanical,
electrical or plumbing systems of the Building. Landlord shall not be required
to notify Tenant of whether it consents to any alteration, addition or
improvement until it (a) has received plans and specifications therefor which
are sufficiently detailed to allow construction of the work depicted thereon to
be performed in a good and workmanlike manner (and if Landlord has provided
Tenant with a CAD disk with existing improvements, Tenant shall have updated
such CAD disk), and (b) has had fifteen (15) business days to review such plans.
If the alteration, addition or improvement will affect the Building's structure,
HVAC system, or mechanical, electrical, or plumbing systems, then the plans and
specifications therefor must be prepared by a licensed engineer reasonably
acceptable to Landlord and, in the event Landlord has delivered to Tenant a CAD
disk with all existing improvements and systems shown thereon, then Tenant shall
update such CAD disk with such plans and specifications. Landlord shall notify
Tenant whether it consents to any alteration, addition or improvement within
fifteen (15) business days after Landlord has received the foregoing described
plans. If Landlord fails to notify Tenant of its approval or disapproval of such
alteration, addition or improvement within the foregoing described fifteen (15)
business day period, Landlord shall be deemed to have approved such requested
alteration, addition or improvement. Landlord's approval of any plans and
specifications shall not be a representation that the plans or the work depicted
thereon will comply with law or be adequate for any purpose, but shall merely be
Landlord's consent to performance of the work. Upon completion of any
alteration, addition, or improvement, Tenant shall deliver to Landlord accurate,
reproducible as-built plans therefor and in the event Tenant has received a CAD
disk from Landlord with all existing improvements, Tenant shall update the CAD
disk to show such improvements. Tenant may erect shelves, bins, machinery and
trade fixtures provided that such items (1) do not alter the basic character of
the Premises or the Building; (2) do not overload the same; and (3) may be
removed without material damage to the Premises. Unless Landlord specifies in
writing otherwise, all alterations, additions, and improvements shall be
Landlord's property when installed in the Premises. All shelves, bins, machinery
and trade fixtures installed by Tenant shall be removed on or before the earlier
to occur of the day of termination or expiration of this Lease or vacating the
Premises, at which time Tenant shall repair any damage caused by such removal.
Additionally, subject to paragraph (a) of the Tenant Improvement section of
Exhibit C, Landlord shall have the right to require Tenant to remove any
- ---------
alterations made to the Premises by Tenant during the term of this Lease. In the
event Landlord requires Tenant to remove any such alterations, Landlord shall
provide Tenant written notice of such removal requirement prior to the
expiration of the term of this Lease, and Tenant shall be afforded a reasonable
time to accomplish such removal after the Expiration Date and Tenant shall
repair any damage caused by such removal. All work performed by a Tenant in the
Premises (including that relating to the installations, repair replacement, or
removal of any item) shall be performed in accordance with all applicable
governmental laws, ordinances, regulations, in a good and workmanlike manner,
and so as not to damage or alter the Building's structure or the Premises.
Tenant shall be responsible for compliance with The Americans With Disabilities
Act of 1990 (the "ADA") with respect to any alterations, additions or
improvements to the Premises made by Tenant; provided that in no event shall
Tenant be required to make any alterations to the Premises or make any
structural alterations or alterations to the base Building (including restrooms
located within the Premises) in order to comply with the ADA or any other
federal or state law related to handicap or disabled persons unless compliance
is necessary solely as a result of Tenant's specific use of the Premises (and
not as a result of Tenant's use of the Premises for the purposes set forth in
Paragraph 12.A below) and not merely due to the fact that Tenant is making
alterations.
B. Permitted Alterations. Notwithstanding the foregoing provisions to
---------------------
Paragraph 6, Landlord's consent shall not be required for (i) the movement,
installation or modification of trade fixtures (including, without limitation,
risers, utility feeds and related conduits and interior fresh air/exhaust
louvers, but excluding any trade fixture to be installed on the outside of the
Premises or the Building), furniture (including, without limitation, kitchen
appliances, demountable partitions, computer racking and similar demountable
fixtures) and trade equipment to be installed on the inside of the Premises or
the Building; provided, however, that all of the foregoing items may be removed
from the Premises without material injury thereto, or (ii) any alterations and
improvements to the interior of the Building which do not affect the Building
structure and which do not materially affect the Building's mechanical,
electrical or plumbing systems.
C. Exterior Installations. Subject to Landlord's approval, not to be
----------------------
unreasonably withheld, Tenant shall have the right, at Tenant's sole cost and
expense, to install (i) a load bank yard and related equipment, and (ii)
additional transformers on the real
3
property described in Exhibit "A-1" as required by Tenant's permitted use of the
Premises, all in locations approved by Landlord, which approval shall not be
unreasonably withheld, provided that Tenant obtains all necessary approvals from
the City of Austin and all other governmental authorities having jurisdiction
over Tenant, the real property and the installations. Tenant shall remove the
foregoing described installations and all associated equipment at the end of the
Lease Term and shall repair all damage to the Project caused by such removal.
Tenant shall at its expense, maintain the installations in good and operable
condition and shall be responsible for the maintenance, repair, replacement and
removal thereof, as necessary. Landlord agrees that the location set forth on
Exhibit "A-7" is an approved location for the load bank yard.
7. SIGNS. Any exterior signage Tenant desires for the Premises shall be
subject to Landlord's written approval, which approval shall not be unreasonably
withheld or delayed. Subject to Landlord's approval of the design, location and
method of installation, which approval will not be unreasonably withheld or
delayed, Tenant shall be entitled to install, at Tenant's sole cost and expense,
up to two (2) corporate identification signs on the exterior of the Building and
one (1) monument along the entrance to Braker Lane, in a location to be mutually
approved by Landlord and Tenant. Upon the expiration or earlier termination of
this Lease, Tenant shall remove the two (2) corporate identification signs on
the exterior of the Building. Tenant shall repair, paint and/or replace the
Building fascia surface to which its signs are attached upon Tenant's vacating
the Premises or the removal or alteration of its signage. Tenant shall not,
without Landlord's prior written consent, (i) make any changes to the exterior
of the Premises, such as painting; (ii) install any exterior lights,
decorations, balloons, flags, pennants or banners; or (iii) except as otherwise
provided herein, erect or install any signs, windows or door lettering,
placards, decorations or advertising media of any type which can be viewed from
the exterior of the Premises. All signs, decorations, advertising media,
blinds, draperies and other window treatment or bars or other security
installations visible from outside the Premises shall conform in all respects to
the criteria established by Landlord and attached hereto as Exhibit "D".
Landlord shall notify Tenant whether it consents to any exterior lighting or
other change or alteration to the exterior of the Premises or the Building
within ten (10) business days after Landlord has received plans and
specifications therefor, which detail, without limitation, the method of
attachment and location thereof. If Landlord fails to notify Tenant of its
approval or disapproval of any requested exterior lighting, exterior cameras or
other exterior installation within such ten (10) business day period, Landlord
shall be deemed to have approved the installation of the same.
8. UTILITIES. Landlord agrees to provide normal water, electricity, sewer and
gas service to the Premises. Tenant shall pay for all water, gas, heat, light,
power, telephone, sewer, sprinkler charges and other utilities and services used
on or at the Premises, together with any taxes, penalties, surcharges or the
like pertaining to the Tenant's use of the Premises directly to the utility
providing the same. All of said services except as provided below, shall be
separately metered to Tenant, at Tenant's expense. Landlord shall not be liable
for any interruption or failure of utility service on the Premises, and Tenant
shall have no rights or claims as a result of any such failure. Notwithstanding
the foregoing, in the event of a failure or interruption of electricity or water
to the Premises which prohibits or unreasonably interferes with Tenant's ability
to conduct business at the Premises and which (i) continues for forty-eight (48)
consecutive hours, and (ii) is caused by Landlord or Landlord's agents,
employees or contractors, Tenant shall be entitled to an abatement of rent
payable hereunder after the expiration of such forty-eight (48) hour period
until such electricity and/or is restored to the Premises to the extent
necessary to permit Tenant to conduct business. In the event water is not
separately metered to Tenant, Tenant agrees that it will not use water and sewer
capacity for uses other than normal domestic restroom and kitchen usage without
first obtaining Landlord's consent.
9. INSURANCE.
A. Landlord's Insurance. Landlord shall maintain during the Term of this
--------------------
Lease, insurance covering the Building in an amount equal to the full
"replacement cost" thereof (exclusive of foundation and excavation costs),
insuring against the perils of fire, lightning, extended coverage, vandalism and
malicious mischief. Landlord shall also maintain during the Term of this Lease
a policy or policies of commercial general liability insurance (including
endorsement or separate policy for owned or non-owned automobile liability)
covering the Project, with the premiums thereon fully paid on or before the due
date, issued by and binding upon an insurance company or companies qualified to
do business in the State of Texas. Such insurance shall afford minimum
protection of not less than $1,000,000.00 per occurrence per person coverage for
bodily injury, property damage, personal injury, or combination thereof together
with an umbrella or excess policy in an amount not less than $5,000,000.00 over
Landlord's base coverage amount. The term "personal injury" herein used means
false arrest, detention or imprisonment, malicious prosecution, wrongful entry,
libel and slander. If only a combined single limit coverage is available, it
shall be for at least $3,000,000.00 per occurrence with an umbrella policy of at
least $5,000,000.00 combined single limit per occurrence.
B. Tenant's Insurance. Tenant, at its own expense, shall maintain
------------------
during the Term of this Lease a policy or policies of workers' compensation
insurance in compliance with the laws of the State of Texas and commercial
general liability insurance, including personal injury and property damage, with
contractual liability endorsement, in the amount of Five Hundred Thousand
Dollars ($500,000.00) for property damage and One Million Dollars
($1,000,000.00) per occurrence and One Million Dollars ($1,000,000.00) in the
aggregate for personal injuries or deaths of persons occurring in or about the
Premises. Tenant, at its own expense, shall also maintain during the term of
this Lease fire and extended coverage insurance covering the replacement cost of
all of Tenant's personal property contained within the Premises. The commercial
general liability insurance policy shall (i) name the Landlord and the
management company for the Project as additional insureds and any workers'
compensation policy carried by Tenant, include a waiver of subrogation
endorsement in favor of Landlord; (ii) be issued by an insurance company which
is reasonably acceptable to Landlord; and (iii) provide that the issuer of such
policy shall endeavor to notify Landlord thirty (30) days prior to any
cancellation thereof. Certificates for such policies shall be delivered to
Landlord by Tenant on or before the Commencement Date and upon each renewal of
said insurance.
C. Prohibited Uses. Tenant will not permit the Premises to be used for
---------------
any purpose or in any manner that would (i) void the insurance thereon, (ii)
increase the insurance risk or cost thereof, or (iii) cause the disallowance of
any sprinkler credits; including without limitation, use of the Premises for the
receipt, storage or handling of any product, material or merchandise that is
explosive or highly inflammable. Landlord represents that Tenant's intended use
of the Premises shall not result in an increase in Landlord's insurance
premiums. If any increase in the cost of any insurance on the Premises or the
Building is caused by Tenant's use of the Premises or because Tenant vacates the
Premises, then Tenant shall pay the amount of such increase to Landlord within
thirty (30) days after receipt of an invoice therefor together with evidence
substantiating that such increase was caused solely by Tenant.
10. FIRE AND CASUALTY DAMAGE.
A. Total or Substantial Damage and Destruction. If the Premises or the
-------------------------------------------
Building should be damaged or destroyed by fire or other peril, Tenant shall
immediately give written notice to Landlord of such damage or destruction. If
the Premises or the Building should be so damaged by fire or other casualty
that, in Landlord's estimation, rebuilding or repairs cannot be completed within
one hundred eighty (180) days after the date of such damage (or within ninety
(90) days after the date of such damage, if the damage occurs during the last
twelve (12) months of the Lease Term, unless Tenant exercises its renewal
option, in which event the ninety (90) day period shall not apply), then either
Landlord or Tenant shall have the right to terminate this Lease, and in the
event of such termination, the rent shall be abated during the unexpired portion
of this Lease, effective upon the date of the occurrence of such damage.
Landlord shall notify Tenant within thirty (30) days after the date of the
damage of Landlord's estimated repair period (the "Repair Estimate") and in the
event the Repair Estimate reflects a repair period in excess of one hundred
eighty (180) days (or ninety (90) days, if applicable), the Repair Estimate
shall state whether Landlord elects to terminate this Lease. In the event the
Repair Estimate reflects that the repair period is in excess of one hundred
eighty (180) days (or ninety (90) days, if applicable) and Landlord does not
elect to terminate this Lease, Tenant shall be entitled to terminate this Lease
by delivering written notice of termination to Landlord within fifteen (15)
business days after Tenant's receipt of the Repair Estimate. In the event
neither Landlord nor Tenant terminate this Lease pursuant to this Paragraph
10A., Landlord, at its sole expense, shall perform Landlord's Restoration Work
(hereinafter defined) with reasonable diligence and continuity. "Landlord's
Restoration Work" shall mean all of the work necessary to repair and restore the
Building (exclusive of Tenant's property) to substantially the same condition as
that in which its was in immediately prior to the happening of the fire or other
casualty.
B. Partial Damage or Destruction. If the Premises or the Building should
-----------------------------
be damaged by any peril covered by the insurance to be provided by Landlord
under Paragraph 9A above and, the Repair Estimate reflects that rebuilding or
repairs can be substantially completed within one hundred eighty (180) days (or
ninety (90) days, if applicable) after the date of such damage, or in the event
the damage cannot be repaired within one hundred eighty (180) days (or ninety
(90) days, if applicable) but neither Landlord nor Tenant terminates this Lease
under Paragraph 10A., then this Lease shall not terminate and Landlord shall
promptly commence Landlord's Restoration Work.
4
C. Lienholders' Rights in Proceeds. Notwithstanding anything herein to
-------------------------------
the contrary, in the event the holder of any indebtedness secured by a mortgage
or deed of trust covering the Premises requires that the insurance proceeds be
applied to such indebtedness, then Landlord shall have the right to terminate
this Lease by delivering written notice of termination to Tenant within fifteen
(15) days after such requirement is made known to Landlord by any such holder,
whereupon all rights and obligations hereunder shall cease and terminate.
D. Rent Abatement. If the Premises shall be rendered untenantable or
--------------
inaccessible as a result of a fire or other casualty, then all rent payable
hereunder (including, without limitation the Tenant's Proportionate Share of
Operating Expenses) shall be abated in proportion to the area of the Premises
that has been rendered untenantable, inaccessible or unfit for Tenant's use and
occupancy for the period from the date of such damage or destruction until the
earlier of the date on which Tenant reoccupies the Premises (or such portion
thereof) for the normal conduct of its business.
E. Waiver of Subrogation. Notwithstanding anything to the contrary set
---------------------
forth herein, Tenant and Landlord each hereby waives on behalf of itself and
their respective insurers (none of which shall ever be assigned any such claim
or be entitled thereto due to subrogation or otherwise) any and all rights of
recovery, claim, action, or cause of action, against the other of them or their
respective agents, officers, and employees, for any loss or damage that may
occur to the Premises, or any improvements thereto or the Building of which the
Premises or the Project are a part, or any improvements thereto, or any personal
property therein, by reason of fire, the elements, or any other cause(s) which
are, or could be, insured against under the terms of a standard fire and
extended coverage insurance policy issued in the state of Texas, regardless of
whether such insurance is actually maintained and REGARDLESS OF THE CAUSE OR
ORIGIN OF THE DAMAGE INVOLVED, INCLUDING THE SOLE JOINT OR CONCURRENT,
NEGLIGENCE OF THE RELEASED PARTY OR ITS AGENTS, OFFICERS, EMPLOYEES OR BUILDING
MANAGER.
F. Termination Right. In any case where the Repair Estimate does not
-----------------
give rise to Tenant's termination right as aforesaid (as well as any case where
Tenant does not elect to exercise its termination right as aforesaid), Tenant
shall have the right to terminate this Lease, if for any reason, Landlord's
Restoration Work is not completed by the Outside Restoration Date (as defined
below). Tenant may exercise the termination right described in the preceding
sentence by delivering written notice thereof to Landlord at any time following
the Outside Restoration Date and prior to the date Landlord completes Landlord's
Restoration Work; provided however, Landlord may nullify such termination notice
if Landlord completes Landlord's Restoration Work within thirty (30) days after
its receipt of such notice, in which case this Lease shall continue in full
force and effect. If Tenant terminates this Lease as provided in this Section
10.F, then such termination shall be effective on the date specified in Tenant's
notice of termination but no later than one hundred eighty (180) days after the
date of such notice as if said date were the date fixed for the expiration of
the Term. Any rent paid by Tenant for a period beyond the date of termination
of this Lease or for any period of abatement shall promptly be refunded by
Landlord to Tenant. For purposes of this Lease, the term "Outside Restoration
Date", with respect to any fire or other casualty, shall mean the date which is
the day following the date of the casualty plus the repair period set forth in
the Repair Estimate; provided, however, that the Outside Restoration Date shall
be postponed by one day for each day that Landlord is actually delayed in
completing such Landlord's Restoration Work as a result of one or more events of
force majeure; provided, further, however, that (i) the Outside Restoration Date
shall not be postponed by more than thirty (30) days in the aggregate as a
result of events of force majeure, no matter how many days Landlord is actually
delayed in completing Landlord's Restoration Work as a result of one or more
events of force majeure, and (ii) Landlord shall not be deemed to have been
actually delayed in completing the Landlord's Restoration Work by an event of
force majeure unless, within five (5) days after such event of force majeure,
Landlord shall have notified Tenant of such event of such event of force majeure
and of the fact that the same is going to delay Landlord in completing the
Landlord's Restoration Work.
The provisions of this Paragraph 10 shall be considered an express
agreement governing any case of damage or destruction of the Building or the
Premises by fire or other casualty and any law now or hereafter in force which
is inconsistent with the provisions of this Paragraph 10 shall have no
application.
11. LIABILITY AND INDEMNIFICATION. Except for any claims, rights of recovery
and causes of action that Landlord has released, Tenant shall hold Landlord
harmless from and defend Landlord against any and all claims or liability for
any injury or damage (i) to any person or property whatsoever occurring in, on
or about the Premises or any part thereof, the Building and/or other common
areas, the use of which Tenant may have in accordance with this Lease, if (and
only if) and to the extent (and only to the extent) such injury or damage shall
be caused in whole or in part by the act, neglect, fault or omission of any duty
by Tenant, its agents, employees or contractors; and (ii) all costs, counsel
fees, expenses and liabilities incurred in connection with any such claim or
action or proceeding brought thereon. The provisions of this Paragraph 11 shall
survive the expiration or termination of this Lease. Landlord shall not be
liable in any event for personal injury or loss of Tenant's property caused by
fire, flood, water leaks, rain, hail, ice, snow, smoke, lightning, wind,
explosion, interruption of utilities or other occurrences. Landlord strongly
recommends that Tenant secure Tenant's own insurance in excess of the amounts
required elsewhere in this Lease to protect against the above occurrences if
Tenant desires additional coverage for such risks. Tenant shall give prompt
notice to Landlord of any significant accidents involving injury to persons or
property. Furthermore, Landlord shall not be responsible for lost or stolen
personal property, equipment, money or jewelry from the Premises or from the
public areas of the Building or the Project, regardless of whether such loss
occurs when the area is locked against entry. Landlord shall not be liable to
Tenant or Tenant's employees, customers or invitees for any damages or losses to
persons or property caused by any lessees in the Building or the Project, or for
any damages or losses caused by theft or burglary. Landlord strongly recommends
that Tenant provide its own security systems and services and secure Tenant's
own insurance in excess of the amounts required elsewhere in this Lease to
protect against the above occurrences if Tenant desires additional protection or
coverage for such risks. Landlord may, but is not obligated to, enter into
agreements with third parties for the provision, monitoring, maintenance and
repair of any courtesy patrols or similar services or fire protective systems
and equipment and, to the extent same is provided at Landlord's sole discretion,
Landlord shall not be liable to Tenant for any damages, costs or expenses which
occur for any reason in the event any such system or equipment is not properly
installed, monitored or maintained or any such services are not properly
provided. Landlord shall use reasonable diligence in the maintenance of
existing lighting, if any, in the parking areas servicing the Premises, and
Landlord shall not be responsible for additional lighting or any security
measures in the Project, the Premises, or parking areas.
12. USE AND COMPLIANCE WITH LAWS.
A. Tenant's Use. The Premises shall be used only for the purpose of
------------
receiving, storing, shipping and selling (other than retail) products, materials
and merchandise made and/or distributed by Tenant, for manufacturing (to the
extent permitted by law) and assembly, and for such other lawful purposes as may
be incidental thereto. Except as otherwise provided herein, outside storage,
including without limitation storage of trucks and other vehicles, is prohibited
without Landlord's prior written consent.
B. Tenant's Compliance Obligations. Subject to Paragraphs 4 and 12C
-------------------------------
hereof, Tenant shall comply with all governmental laws, ordinances and
regulations applicable to Tenant's specific use of the Premises and shall
promptly comply with all governmental orders and directives for the correction,
prevention and abatement of nuisances in, upon or connected with the Premises,
all at Tenant's sole expense. Tenant shall not permit any objectionable or
unpleasant odors, smoke, dust, gas, noise or vibrations to emanate from the
Premises, nor take any other action that would constitute a nuisance or would
disturb, unreasonably interfere with or endanger Landlord or any other lessees
of the Building or the Project.
C. Landlord's Compliance Obligations. Landlord shall be responsible at
---------------------------------
Landlord's expense for compliance with all federal , state and local laws,
ordinances and regulations (including without limitation the ADA and the Texas
Architectural Barriers Act) applicable to the Premises, the common areas of the
Project and the exterior of the Building unless, such compliance is necessary
solely as a result of Tenant's specific use of the Premises (and not as a result
of Tenant's use of the Premises set forth in Paragraph 12 A above) and not
merely due to the fact that Tenant is making alterations to the Premises.
13. HAZARDOUS WASTE. The term "Hazardous Substances," as used in this Lease,
shall mean pollutants, contaminants, toxic or hazardous wastes, radioactive
materials or any other substances, the use and/or the removal of which is
required or the use of which is restricted, prohibited or penalized by any
"Environmental Law," which term shall mean any federal, state or local statute,
ordinance, regulation or other law of a governmental or quasi-governmental
authority relating to pollution or protection of the environment or the
regulation of the storage or handling of Hazardous Substances. Tenant hereby
agrees that: (i) no activity will be conducted on the Premises that will
produce any Hazardous Substances, except for such activities that are part of
the ordinary course of Tenant's business activities (the "Permitted
Activities"), provided said Permitted Activities are conducted in accordance
with all Environmental Laws and have been approved in advance in writing by
Landlord and, in connection therewith, Tenant shall be
5
responsible for obtaining any required permits or authorizations and paying any
fees and providing any testing required by any governmental agency; (ii) the
Premises will not be used in any manner for the storage of any Hazardous
Substances, except for the temporary storage of such materials that are used in
the ordinary course of Tenant's business (the "Permitted Materials"), provided
such Permitted Materials are properly stored in a manner and location meeting
all Environmental Laws and have been approved in advance in writing by Landlord,
and, in connection therewith, Tenant shall be responsible for obtaining any
required permits or authorizations and paying any fees and providing any testing
required by any governmental agency; (iii) no portion of the Premises will be
used as a landfill or a dump; (iv) Tenant will not install any underground tanks
of any type; (v) Tenant will not cause any surface or subsurface conditions to
come into existence that constitute, or with the passage of time may constitute,
a public or private nuisance; and (vi) Tenant will not permit its agents or
employees to bring any Hazardous Substances onto the Premises, except for the
Permitted Materials, and if so brought thereon, the same shall be immediately
removed, with proper disposal, and all required clean-up procedures shall be
diligently undertaken by Tenant at its sole cost pursuant to all Environmental
Laws. Landlord and Landlord's representatives shall have the right but not the
obligation to enter the Premises upon reasonable prior notice for the purpose of
inspecting the storage, use and disposal of any Permitted Materials to ensure
compliance with all Environmental Laws; provided that Tenant's business
operations are not unreasonably disturbed and Landlord repairs all damage
resulting from such inspection. Should it be determined that any Permitted
Materials are being improperly stored, used or disposed of, then Tenant shall
immediately take such corrective action as is reasonable under the
circumstances. If at any time during or after the term of this Lease, the
Premises is found to be contaminated with Hazardous Substances which were
brought onto the Premises by Tenant or Tenant's employees or agents, Tenant
shall diligently institute proper and thorough clean-up procedures, at Tenant's
sole cost. Tenant agrees to indemnify and hold Landlord harmless from all
claims, demands, actions, liabilities, costs, expenses, damages, penalties and
obligations of any nature arising from or as a result of any contamination of
the Premises with Hazardous Substances brought onto the Premises by Tenant or
Tenant's agents or employees. The foregoing indemnification and the
responsibilities of Tenant shall survive the termination or expiration of this
Lease.
Notwithstanding anything to the contrary contained in this Lease, Landlord
(and not Tenant) shall be liable for, and Tenant shall not be deemed to have
waived by taking possession of the Premises or otherwise, any violations of
applicable laws (including applicable laws pertaining to health and the
environment) or restrictive covenants or other encumbrances relating to the
Project that: (i) occurred in whole or in part prior to the date hereof,
including any violation continuing as of the date hereof; or (ii) result in
whole or in part from the failure of the Project (as opposed any particular
operation or conduct of Tenant in the Premises which may violate applicable laws
or other provisions of this Lease) to comply with applicable laws or restrictive
covenants or other encumbrances (excluding, however, any such failure that is
caused by alterations to the Premises made by Tenant); or (iii) result in whole
or in part from the presence, release or disposal of asbestos or other Hazardous
Substances on or from the Project, excluding only Hazardous Substances placed on
the Project by Tenant. In the event any asbestos or asbestos containing
materials is found in the Premises and the same was not placed therein by Tenant
or Tenant's agents or employees, Landlord shall, at Landlord's sole cost and
expense, promptly cause the removal of all such asbestos and asbestos containing
materials, whether or not such removal is required under applicable laws.
14. INSPECTION. Landlord's agents and representatives shall have the right to
enter the Premises at any reasonable time during business hours (or at any time
in case of emergency) upon reasonable prior notice (i) to inspect the Premises,
(ii) to make such repairs as may be required or permitted pursuant to this
Lease, and/or (iii) during the last six (6) months of the Lease Term, for the
purpose of showing the Premises. In addition, during the last six (6) months of
the Term Landlord shall have the right to erect a suitable sign on the Premises
stating the Premises are available for lease.
15. ASSIGNMENT AND SUBLETTING.
A. Tenant shall not assign, sublease, transfer or encumber this Lease or
any interest therein without the prior written consent of Landlord, which
consent shall not be unreasonably withheld. Any such attempted assignment in
violation of the terms and covenants of this Paragraph shall, exercisable in
Landlord's sole and absolute discretion, be voidable. If Tenant requests
Landlord's consent to an assignment or sublease, Tenant shall submit to
Landlord, in writing, the name of the proposed assignee or subtenant and the
nature and character of the business of the proposed assignee or subtenant, the
term, use, rental rate and all other material terms and conditions of the
proposed assignment or sublease. Landlord shall within twenty (20) days after
Landlord's receipt of such written request and information either consent to or
refuse to consent to such assignment or sublease in writing (but no such consent
to an assignment or sublease shall relieve Tenant of its obligations under this
Lease of any liability hereunder). If Landlord should fail to notify Tenant in
writing of its decision within such twenty (20) day period, Landlord shall be
deemed to have consented to such assignment or sublease.
B. In addition to the rent hereunder, Tenant hereby covenants and agrees
to pay to Landlord fifty percent (50%) of any Net Profits (as hereinafter
defined) which it receives which is in excess of the rent (including Base Rent,
Operating Expenses and parking rent) payable hereunder within ten (10) days
following receipt thereof by Tenant. The term "Net Profits" as used herein
shall mean such portion of the rent payable by an assignee or subtenant under
the applicable assignment or sublease in excess of the rent payable by Tenant
under this Lease (or pro rata portion thereof in the event of a subletting) for
the corresponding period, after deducting from such excess rent the following:
(i) all of Tenant's reasonable costs associated with such assignment or
subletting, including, without limitation, broker commissions, architectural
fees, engineers' fees and attorney fees; (ii) any reasonable costs incurred by
Tenant to prepare or alter the Premises, or portion thereof, for the assignee or
sublessee; (iii) any design, construction or moving allowances, rental
concessions or other out-of-pocket concession or costs incurred by Tenant. The
provisions of this subparagraph B shall not apply to a Permitted Transfer, as
hereinafter defined. Notwithstanding the foregoing, during the occurrence of an
Event of Default under Paragraph 19A, Landlord shall be entitled to receive and
Tenant shall pay to Landlord all rent payable by an assignee or subtenant,
without deduction for any costs or expenses incurred by Tenant.
C. If at any time during the Lease Term the person or persons who own the
voting shares of Tenant at the time of the execution of this Lease cease for any
reason, including but not limited to merger, consolidation or other
reorganization involving another corporation, to own a majority of such shares
(except as the result of transfers by gift, bequest or inheritance to or for the
benefit of members of the immediate family of such original shareholder(s)),
such an event shall be deemed to be an assignment. The preceding sentence shall
not apply whenever Tenant is a corporation, the outstanding stock of which is
listed on a recognized security exchange, or if at least eighty percent (80%) of
its voting stock is owned by another corporation, the voting stock of which is
so listed.
D. Notwithstanding anything herein to the contrary, Tenant may assign its
entire interest under this Lease or sublet the Premises to a wholly-owned
corporate or controlled subsidiary or parent of Tenant or to any successor to
Tenant by purchase, merger, consolidation or reorganization (hereinafter
collectively referred to "Corporate Transfer") without the consent of Landlord
provided: (i) Tenant is not in default under this Lease beyond any applicable
cure period; (ii) if such proposed transferee is a successor to Tenant by
purchase, said proposed transferee shall acquire all or substantially all of the
stock or assets of Tenant's business or, if such proposed transferee shall
acquire all or substantially all of the stock or assets of Tenant's business or,
if such proposed transferee is a successor to Tenant by merger, consolidation or
reorganization, the continuing or surviving corporation shall own all or
substantially all of the assets of Tenant; (iii) in no event shall any transfer,
release or relief of Tenant from any of its obligations under this Lease, unless
Tenant ceases to exist as a result of the Corporate Transfer; and (iv) such
transferee assumes in writing Tenant's obligations under this Lease or such
transferee assumes Tenant's obligations under this Lease by operation of law.
Tenant shall give Landlord written notice at least twenty (20) days prior to the
effective date of such Corporate Transfer. As used herein, the terms "control"
or "subsidiary" shall mean a corporate entity wholly-owned by Tenant or at least
51 percent of its voting stock is owned by Tenant. A transfer pursuant to the
provisions of this Paragraph 15D shall sometimes be referred to herein as a
"Permitted Transfer".
16. CONDEMNATION. If any portion of the Premises is taken for any public or
quasi-public use under governmental law, ordinance or regulation, or by right of
eminent domain or private purchase in lieu thereof, and the taking prevents or
materially interferes with the use of the remainder of the Premises for the
purpose for which they were leased to Tenant or, in Tenant's reasonable opinion,
the remaining portion of the Premises is not suitable for Tenant's use, then
Tenant shall have the right to terminate this Lease by delivering written notice
of termination to Landlord within thirty (30) days of the taking, and the rent
shall be abated during the unexpired portion of this Lease, effective on the
date of such taking. In the event Tenant does not elect to terminate this
Lease, the rent payable hereunder during the unexpired portion of this Lease
shall be reduced to such extent as may be fair and reasonable under all of the
circumstances. All compensation awarded in connection with or as a result of
any of the foregoing proceedings shall be the property of Landlord, and Tenant
hereby assigns any interest in any such award to Landlord; provided, however,
Landlord shall have no interest in any award made to Tenant for loss of business
or goodwill or for the taking of Tenant's trade fixtures and personal property,
if a separate award for such items is made to Tenant.
6
17. HOLDING OVER. At the termination of this Lease by its expiration or
otherwise, Tenant shall immediately deliver possession of the Premises to
Landlord with all repairs and maintenance required herein to be performed by
Tenant completed. If, for any reason, Tenant retains possession of the Premises
after the expiration or termination of this Lease, unless the parties hereto
otherwise agree in writing, such possession shall be deemed to be a tenancy at
will only, and all of the other terms and provisions of this Lease shall be
applicable during such period, except that Tenant shall pay Landlord from time
to time, upon demand, as rental for the period of such possession, an amount
equal to one and one-half (1 1/2) times the Base Rent in effect on the date of
such termination of this Lease, computed on a daily basis for each day of such
period. No holding over by Tenant, whether with or without consent of Landlord,
shall operate to extend this Lease except as otherwise expressly provided. The
preceding provisions of this Paragraph 17 shall not be construed as consent for
Tenant to retain possession of the Premises in the absence of written consent
thereto by Landlord.
18. QUIET ENJOYMENT. Landlord represents that it has the authority to enter
into this Lease and that, so long as Tenant pays all amounts due hereunder and
performs all other covenants and agreements herein set forth, Tenant shall
peaceably and quietly have, hold and enjoy the Premises for the term hereof
without hindrance or molestation from Landlord, subject to the terms and
provisions of this Lease.
19. EVENTS OF DEFAULT. The following events (herein individually referred to
as an "Event of Default") each shall be deemed to be a default in or breach of
Tenant's obligations under this Lease:
A. Tenant shall fail to pay any installment of the rent herein reserved
when due, or any other payment or reimbursement to Landlord required herein when
due, and such failure shall continue for a period of five (5) days from the date
Tenant receives written notice that such payment was not made when due; provided
however, that Landlord shall not be required to provide such written notice to
Tenant more than two (2) times in any calendar year.
B. Tenant shall fail to discharge any lien placed upon the Premises in
violation of Paragraph 22 hereof within twenty (20) days after Tenant's receipt
of notice of any such lien or encumbrance being filed against the Premises.
C. Tenant shall fail to comply with any term, provision or covenant of
this Lease (other than those listed above in this paragraph) and shall not cure
such failure within thirty (30) days after written notice thereof from Landlord,
(except that if compliance cannot reasonably be achieved within the thirty (30)
day period, there shall be no event of default so long as Tenant commences the
cure within the thirty (30) day period and diligently and continuously pursues
actions intended to bring about compliance and brings about such compliance
within sixty (60) days after the expiration of the initial thirty (30) day
period).
20. REMEDIES. Upon each occurrence of an Event of Default, Landlord shall have
the option to pursue any one or more of the following remedies without any
notice or demand:
(a) Terminate this Lease;
(b) Enter upon and take possession of the Premises without terminating
this Lease;
(c) Make such payments and/or take such action and pay and/or perform
whatever Tenant is obligated to pay or perform under the terms of this Lease;
and/or
(d) Alter all locks and other security devices at the Premises, with or
without terminating this Lease, and pursue, at Landlord's option, one or more
remedies pursuant to this Lease, and Tenant hereby expressly agrees that
Landlord shall not be required to provide to Tenant the new key to the Premises,
regardless of hour, including Tenant's regular business hours;
and in any such event Tenant shall immediately vacate the Premises, and if
Tenant fails to do so, Landlord, without waiving any other remedy it may have,
may enter upon and take possession of the Premises and expel or remove Tenant
and any other person who may be occupying such Premises or any part thereof,
without being liable for prosecution or any claim of damages therefore. The
provisions of this Lease are intended to supersede Section 93.002 of the Texas
Property Code and Tenant hereby expressly waives any and all rights and remedies
Tenant may have under Paragraph (g) of such Section 93.002. Notwithstanding
anything to the contrary contained in this Lease, in no event shall Tenant be
liable for special or consequential damages as a result of a breach of or
default under this Lease.
A. Damages Upon Termination. If Landlord terminates this Lease at
------------------------
Landlord's option, Tenant shall be liable for and shall pay to Landlord the sum
of all rental and other payments owed to Landlord hereunder accrued to the date
of such termination, plus, as liquidated damages, an amount equal to the
positive difference, if any, of (i) the present value calculated at an interest
rate of ten percent (10%) of the total rental and other payments owed hereunder
for the remaining portion of the Lease term, calculated as if such term expired
on the date set forth in Paragraph 1, less (ii) the present value calculated at
an interest rate of ten percent (10%) of the then fair market rental for the
Premises for such period.
B. Damages Upon Repossession. If Landlord repossesses the Premises
-------------------------
without terminating this Lease, Tenant, at Landlord's option, shall be liable
for and shall pay Landlord on demand all rental and other payments owed to
Landlord hereunder, accrued to the date of such repossession, plus all amounts
required to be paid by Tenant to Landlord until the date of expiration of the
term as stated in Paragraph 1, diminished by all amounts actually received by
Landlord through reletting the Premises during such remaining term (but only to
the extent of the rent herein reserved). Actions to collect amounts due by
Tenant to Landlord under this paragraph may be brought from time to time, on one
or more occasions, without the necessity of Landlord's waiting until expiration
of the Lease term.
C. Costs of Reletting, Removing, Repairs and Enforcement. Upon an
-----------------------------------------------------
Event of Default, in addition to any sum provided to be paid under this
Paragraph 20, Tenant also shall be liable for and shall pay to Landlord (i)
brokers' fees and all other costs and expenses incurred by Landlord in
connection with reletting the whole or any part of the Premises to the extent
the same are not reimbursed under a new lease covering the Premises; (ii) the
costs of removing, storing or disposing of Tenant's or any other occupant's
property; (iii) the costs of repairing, altering, remodeling or otherwise
putting the Premises into condition acceptable to a new tenant or tenants to the
extent the same are not reimbursed under a new lease covering the Premises; (iv)
any and all costs and expenses incurred by Landlord in effecting compliance with
Tenant's obligations under this Lease; and (v) all reasonable expenses incurred
by Landlord in enforcing or defending Landlord's rights and/or remedies
hereunder, including without limitation all reasonable attorneys' fees and all
court costs incurred in connection with such enforcement or defense.
D. Late Charge. In the event Tenant fails to make any payment due
-----------
hereunder within five (5) days after such payment is due, including without
limitation any rental or escrow payment, in order to help defray the additional
cost to Landlord for processing such late payments and not as interest, Tenant
shall pay to Landlord on demand a late charge in an amount equal to five percent
(5%) of such payment. The provision for such late charge shall be in addition to
all of Landlord's other rights and remedies hereunder or at law, and shall not
be construed as liquidated damages or as limiting Landlord's remedies in any
manner. Notwithstanding the foregoing, Tenant shall not be required to pay a
late charge on the first two (2) late payments in any calendar year provided
that such payments are made within ten (10) days after receipt of notice that
the same were not paid when due.
E. Interest on Past Due Amounts. If Tenant fails to pay any sum which
----------------------------
at any time becomes due to Landlord under any provision of this Lease as and
when the same becomes due hereunder, and such failure continues for thirty (30)
days after the due date for such payment, then Tenant shall pay to Landlord
interest on such overdue amounts from the date due until paid at an annual rate
which equals the lesser of (i) eighteen percent (18%) or (ii) the highest rate
then permitted by law.
F. No Implied Acceptances or Waivers. Exercise by Landlord of any one or
---------------------------------
more remedies hereunder granted or otherwise available shall not be deemed to be
an acceptance by Landlord of Tenant's surrender of the Premises, it being
understood that such surrender can be effected only by the written agreement of
Landlord. Tenant and Landlord further agree that forbearance by Landlord or
Tenant to enforce any of its rights under this Lease or at law or in equity
shall not be a waiver of such party's right to enforce any one or more of its
rights, including any right previously forborne, in connection with any existing
or subsequent default. No re-entry or taking possession of the Premises by
Landlord shall be construed as an election on its part to terminate this Lease,
unless a written notice of such intention is given to Tenant, and,
notwithstanding any such reletting or re-entry or taking possession of the
Premises, Landlord may at any time thereafter elect to terminate this Lease for
a previous default. Pursuit of any remedies
7
hereunder shall not preclude the pursuit of any other remedy herein provided or
any other remedies provided by law, nor shall pursuit of any remedy herein
provided constitute a forfeiture or waiver of any rent due to Landlord hereunder
or of any damages occurring to Landlord by reason of the violation of any of the
terms, provisions and covenants contained in this Lease. Landlord's acceptance
of any rent following an Event of Default hereunder shall not be construed as
Landlord's waiver of such Event of Default and Tenant's payment of rent after a
Landlord default shall not be construed as a waiver of such default. No waiver
by Landlord or Tenant of any violation or breach of any of the terms, provisions
and covenants of this Lease shall be deemed or construed to constitute a waiver
of any other violation or default.
G. Reletting of Premises. In the event of any termination of this Lease
---------------------
and/or repossession of the Premises for an Event of Default, Landlord shall use
reasonable efforts to relet the Premises and to collect rental after reletting,
with no obligation to accept any lessee that Landlord deems undesirable or to
expend any funds in connection with such reletting other than customary expenses
incurred in connection with new leases or collection of rents therefrom. Tenant
shall not be entitled to credit for or reimbursement of any proceeds of such
reletting in excess of the rental owed hereunder for the period of such
reletting. Landlord may relet the whole or any portion of the Premises, for any
period, to any tenant and for any use or purpose.
H. Landlord's Default. If Landlord fails to perform any of its
------------------
obligations hereunder within thirty (30) days after written notice from Tenant
specifying such failure except as otherwise provided herein, Tenant's exclusive
remedy shall be an action for damages. Unless and until Landlord fails to so
cure any default after such notice, Tenant shall not have any remedy or cause of
action by reason thereof. All obligations of Landlord hereunder will be
construed as covenants, not conditions; and all such obligations will be binding
upon Landlord only during the period of its ownership of the Premises and not
thereafter; provided that the subsequent owner of the Premises assumes in
writing Landlord's obligations accruing hereunder accruing after the date of
such transfer. The term "Landlord" shall mean only the owner, for the time
being, of the Premises and, in the event of the transfer by such owner of its
interest in the Premises, such owner shall thereupon be released and discharged
from all covenants and obligations of the Landlord thereafter accruing, provided
that such covenants and obligations shall be binding during the Lease term upon
each new owner for the duration of such owner's ownership. Notwithstanding any
other provision of this Lease, Landlord shall not have any personal liability
hereunder. In the event of any breach or default by Landlord in any term or
provision of this Lease, Tenant agrees to look solely to the equity or interest
then owned by Landlord in the Project; however, in no event shall any deficiency
judgment or any money judgment of any kind be sought or obtained against any
Landlord.
I. Tenant's Personal Property. If Landlord repossesses the Premises
--------------------------
pursuant to the authority herein granted, or if Tenant vacates or abandons all
or any part of the Premises, then, in addition to Landlord's rights under
Paragraph 27 hereof, Landlord shall have the right to (i) keep in place and use,
or (ii) remove and store, all of the furniture, fixtures and equipment at the
Premises, including that which is owned by or leased to Tenant, at all times
prior to any repossession thereof by any lessor thereof or third party having a
lien thereon. In addition to the Landlord's other rights hereunder, Landlord may
dispose of the stored property if Tenant does not claim the property within ten
(10) days after the date the property is stored. Landlord shall give Tenant at
least ten (10) days prior written notice of such intended disposition. Landlord
shall also have the right to relinquish possession of all or any portion of such
furniture, fixtures, equipment and other property to any person ("Claimant") who
presents to Landlord a copy of any instrument represented by Claimant to have
been executed by Tenant (or any predecessor of Tenant) granting Claimant the
right under various circumstances to take possession of such furniture,
fixtures, equipment or other property, without the necessity on the part of
Landlord to inquire into the authenticity or legality of said instrument. The
rights of Landlord herein stated shall be in addition to any and all other
rights that Landlord has or may hereafter have at law or in equity, and Tenant
stipulates and agrees that the rights granted Landlord under this paragraph are
commercially reasonable.
J. Landlord's Termination Right. In the event Tenant vacates all or
----------------------------
substantially all of the Premises for any period of one hundred twenty (120) or
more consecutive days (other than a vacancy due to a casualty, condemnation, or
a vacancy for which Tenant is expressly entitled to abatement of Rent under this
Lease), Tenant shall not be in default hereunder; provided however, Landlord
shall have the right, but not the obligation, to terminate this Lease by
delivering written notice of termination to Tenant prior to the date that Tenant
re-occupies all or substantially all of the Premises and upon such termination,
Tenant shall have no further obligation hereunder (except for any obligation
that expressly survives termination of this Lease).
21. MORTGAGES. Tenant accepts this Lease subject and subordinate to any
mortgages and/or deeds of trust now or at any time hereafter constituting a lien
or charge upon the Premises or the improvements situated thereon or the
Building, provided that the foregoing subordination in respect to any mortgage
or deed of trust placed on the Project after the date hereof shall not become
effective until and unless the holder of such mortgage or deed of trust delivers
to Tenant a non-disturbance agreement permitting Tenant, if Tenant is not then
in default under this Lease after the expiration of all applicable notice and
cure periods, to remain in occupancy of the Premises in accordance with the
terms of this Lease in the event of a foreclosure of any such mortgage or deed
of trust; and further provided, however, that if the mortgagee, trustee or
holder of any such mortgage or deed of trust elects to have Tenant's interest in
this Lease superior to any such instrument, then by notice to Tenant from such
mortgagee, trustee or holder, this Lease shall be deemed superior to such lien,
whether this Lease was executed before or after said mortgage or deed of trust.
Tenant, at any time hereafter within fifteen (15) days after receipt of a
request therefor, shall execute a commercially reasonable instrument or other
document that may be reasonably requested by any mortgagee, trustee or holder
for the purpose of evidencing the foregoing subordination. Tenant shall not
terminate this Lease or pursue any other remedy available to Tenant hereunder
for any default on the part of Landlord without first giving written notice by
certified or registered mail, return receipt requested, to any mortgagee,
trustee or holder of any such mortgage or deed of trust, the name and post
office address of which Tenant has received written notice, specifying the
default in reasonable detail and affording such mortgagee, trustee or holder a
reasonable opportunity (but in no event less than thirty (30) days) to make
performance, at its election, for and on behalf of Landlord. Landlord
represents that the current holder of a mortgage on the Building is Nationwide
Life Insurance Company and Landlord shall deliver a subordination, non-
disturbance and attornment agreement from the current mortgage holder in the
form of Exhibit "B" attached hereto prior to the Commencement Date. In the
event Landlord fails to deliver such subordination, non-disturbance and
attornment agreement prior to the Commencement Date, Tenant shall be entitled to
terminate this Lease by delivering written notice of such termination to
Landlord prior to Landlord's delivery of the same to Tenant.
22. MECHANIC'S LIENS. Tenant has no authority, express or implied, to create
or place any lien or encumbrance of any kind or nature whatsoever upon, or in
any manner to bind, the interest of Landlord or Tenant in the Premises. Tenant
will save and hold Landlord harmless from any and all loss, cost or expense,
including without limitation attorneys' fees, based on or arising out of
asserted claims or liens against the leasehold estate or against the right,
title and interest of the Landlord in the Premises or under the terms of this
Lease.
23. MISCELLANEOUS.
A. Interpretation. The captions inserted in this Lease are for
--------------
convenience only and in no way define, limit or otherwise describe the scope or
intent of this Lease, or any provision hereof, or in any way affect the
interpretation of this Lease. Any reference in this Lease to rentable area shall
mean the gross rentable area as determined by the roofline of the building in
question.
B. Binding Effect. Except as otherwise herein expressly provided, the
--------------
terms, provisions and covenants and conditions in this Lease shall apply to,
inure to the benefit of and be binding upon the parties hereto and upon their
respective heirs, executors, personal representatives, legal representatives,
successors and assigns. Landlord shall have the right to transfer and assign, in
whole or in part, its rights and obligations in the Premises and in the Building
and other property that are the subject of this Lease.
C. Evidence of Authority. Tenant agrees to furnish to Landlord, promptly
---------------------
upon demand, a corporate resolution, proof of due authorization by partners or
other appropriate documentation evidencing the due authorization of such party
to enter into this Lease.
D. Force Majeure. Neither Landlord nor Tenant shall be held responsible
-------------
for delays in the performance of its obligations hereunder (other than the
payment of any sum due hereunder) when caused by material shortages, acts of
God, labor disputes or other events beyond the control of such party.
E. Payments Constitute Rent. Notwithstanding anything in this Lease to
------------------------
the contrary, all amounts payable by Tenant to or on behalf of Landlord under
this Lease, whether or not expressly denominated as rent, shall constitute rent.
F. Estoppel Certificates. Tenant agrees, from time to time, within
---------------------
fifteen (15) days after request of Landlord, to deliver to Landlord, or
Landlord's designee, an estoppel certificate stating that this Lease is in full
force and effect, the date to which rent has been paid, the unexpired term of
this Lease, any defaults existing under this Lease (or the absence thereof) and
such other factual
8
matters pertaining to this Lease as may be reasonably requested by Landlord. It
is understood and agreed that Tenant's obligation to furnish such estoppel
certificates in a timely fashion is a material inducement for Landlord's
execution of this Lease.
G. Entire Agreement. This Lease constitutes the entire understanding and
----------------
agreement of Landlord and Tenant with respect to the subject matter of this
Lease, and contains all of the covenants and agreements of Landlord and Tenant
with respect thereto. Landlord and Tenant each acknowledge that no
representations, inducements, promises or agreements, oral or written, have been
made by Landlord or Tenant, or anyone acting on behalf of Landlord or Tenant,
which are not contained herein, and any prior agreements, promises, negotiations
or representations not expressly set forth in this Lease are of no force or
effect. EXCEPT AS SPECIFICALLY PROVIDED IN THIS LEASE, TENANT HEREBY WAIVES THE
BENEFIT OF ALL WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE PREMISES,
INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTY THAT THE PREMISES ARE SUITABLE
FOR ANY PARTICULAR PURPOSE. Landlord's agents and employees do not and will not
have authority to make exceptions, changes or amendments to this Lease, or
factual representations not expressly contained in this Lease. Under no
circumstances shall Landlord or Tenant be considered an agent of the other.
This Lease may not be altered, changed or amended except by an instrument in
writing signed by both parties hereto.
H. Survival of Obligations. All obligations of Landlord and Tenant
-----------------------
hereunder not fully performed as of the expiration or earlier termination of the
term of this Lease shall survive the expiration or earlier termination of the
term hereof, including without limitation all payment obligations with respect
to taxes and insurance and all obligations concerning the condition and repair
of the Premises. Upon the expiration or earlier termination of the term hereof,
and prior to Tenant vacating the Premises, Tenant shall pay to Landlord any
amount reasonably agreed by Landlord and Tenant as necessary to put the Premises
in good condition and repair, reasonable wear and tear excluded, including
without limitation the cost of repairs to and replacements of all heating and
air conditioning systems and equipment therein, if the same is required. Tenant
shall also, prior to vacating the Premises, pay to Landlord the amount, as
reasonably estimated by Landlord, of Tenant's obligations hereunder for real
estate taxes and insurance premiums for the year in which the Lease expires or
terminates. All such amounts shall be used and held by Landlord for payment of
such obligations of Tenant hereunder, with tenant being liable for any
additional costs therefore upon demand by Landlord, or with any excess to be
returned to Tenant after all such obligations have been determined and
satisfied, as the case may be. Any Security Deposit held by Landlord may, at
Landlord's option, be credited against any amounts due from Tenant under this
Paragraph 23.H.
I. Severability of Terms. If any clause or provision of this Lease is
---------------------
illegal, invalid or unenforceable under present or future laws effective during
the term of this Lease, then, in such event, it is the intention of the parties
hereto that the remainder of this Lease shall not be affected thereby, and it is
also the intention of the parties to this Lease that in lieu of each clause or
provision of this Lease that is illegal, invalid or unenforceable, there be
added, as a part of this Lease, a clause or provision as similar in terms to
such illegal, invalid or unenforceable clause or provision as may be possible
and be legal, valid and enforceable.
J. Effective Date. All references in this Lease to "the date hereof" or
--------------
similar references shall be deemed to refer to the last date, in point of time,
on which all parties hereto have executed this Lease.
K. Brokers' Commission. Tenant represents and warrants that it has dealt
-------------------
with and will deal with no broker other than Hill Partners (represented by Chris
Whitworth), agent or other person in connection with this transaction or future
related transactions and that no other broker, agent or other person brought
about this transaction, and Tenant agrees to indemnify and hold Landlord
harmless from and against any claims by any other broker, agent or other person
claiming a commission or other form of compensation by virtue of having dealt
with Tenant with regard to this leasing transaction. Landlord agrees to pay the
commissions of Hill Partners due in connection with this Lease pursuant to a
separate written agreement with Hill Partners.
L. Ambiguity. Landlord and Tenant hereby agree and acknowledge that this
---------
Lease has been fully reviewed and negotiated by both Landlord and Tenant, and
that Landlord and Tenant have each had the opportunity to have this Lease
reviewed by their respective legal counsel, and, accordingly, in the event of
any ambiguity herein, Tenant does hereby waive the rule of construction that
such ambiguity shall be resolved against the party who prepared this Lease.
M. Joint Several Liability. If there be more than one Tenant, the
-----------------------
obligations hereunder imposed upon Tenant shall be joint and several. If there
be a guarantor of Tenant's obligations hereunder, the obligations hereunder
imposed upon Tenant shall be joint and several obligations of Tenant and such
guarantor, and Landlord need not first proceed against Tenant before proceeding
against such guarantor, nor shall any such guarantor be released from its
guaranty for any reason whatsoever, including, without limitation, in case of
any amendments hereto, waivers hereof or failure to give such guarantor any
notices hereunder.
N. Third Party Rights. Nothing herein expressed or implied is intended,
------------------
or shall be construed, to confer upon or give to any person or entity, other
than the parties hereto, any right or remedy under or by reason of this Lease.
O. Exhibits and Attachments. All exhibits, attachments, riders and
------------------------
addenda referred to in this Lease, and the exhibits listed herein below and
attached hereto, are incorporated into this Lease and made a part hereof for all
intents and purposes as if fully set out herein. All capitalized terms used in
such documents shall, unless otherwise defined therein, have the same meanings
as are set forth herein.
P. Applicable Law. This Lease has been executed in the State of Texas
--------------
and shall be governed in all respects by the laws of the State of Texas. It is
the intent of Landlord and Tenant to conform strictly to all applicable state
and federal usury laws. All agreements between Landlord and Tenant, whether now
existing or hereafter arising and whether written or oral, are hereby expressly
limited so that in no contingency or event whatsoever shall the amount
contracted for, charged or received by Landlord for the use, forbearance or
retention of money hereunder or otherwise exceed the maximum amount which
Landlord is legally entitled to contract for, charge or collect under the
applicable state or federal law. If, from any circumstance whatsoever,
fulfillment of any provision hereof at the time performance of such provision
shall be due shall involve transcending the limit of validity prescribed by law,
then the obligation to be fulfilled shall be automatically reduced to the limit
of such validity, and if from any such circumstance Landlord shall ever receive
as interest or otherwise an amount in excess of the maximum that can be legally
collected, then such amount which would be excessive interest shall be applied
to the reduction of rent hereunder, and if such amount which would be excessive
interest exceeds such rent, then such additional amount shall be refunded to
Tenant.
24. NOTICES. Each provision of this instrument or of any applicable
governmental laws, ordinances, regulations and other requirements with reference
to the sending, mailing or delivering of notice or the making of any payment by
Landlord to Tenant or with reference to the sending, mailing or delivering of
any notice or the making of any payment by Tenant to Landlord shall be deemed to
be complied with when and if the following steps are taken:
(i) All rent and other payments required to be made by Tenant to
Landlord hereunder shall be payable to Landlord at the address for Landlord set
forth below or at such other address as Landlord may specify from time to time
by written notice delivered in accordance herewith.
(ii) All payments required to be made by Landlord to Tenant hereunder
shall be payable to Tenant at the address set forth below, or at such other
address within the continental United States as Tenant may specify from time to
time by written notice delivered in accordance herewith.
(iii) Except as expressly provided herein, any written notice, document
or payment required or permitted to be delivered hereunder shall be deemed to be
delivered when received or, whether actually received or not, upon first
attempted delivery on a business day, when sent by United States Mail, postage
prepaid, Certified or Registered Mail, addressed to the parties hereto at the
respective addresses set out below, or at such other address as they have
theretofore specified by written notice delivered in accordance herewith.
25. ADDITIONAL PROVISIONS. See EXHIBIT "C" attached hereto and incorporated
herein by reference.
27. LANDLORD'S LIEN. Landlord hereby waives all statutory and contractual
liens to which it may be entitled on Tenant's property located in or about the
Premises.
9
EXECUTED BY LANDLORD as of the 27/th/ day of September, 2000.
BC12 99, Ltd. a Texas limited partnership
By: ORI, Inc., a Texas corporation, General Partner
________________________________________________________________
Attest/Witness By:
----------------------------------------------------------------
______________________________________ Title:
----------------------------------------------------------------
Title: Address: c/o Trammell Crow Central Texas, Inc.
- -------------------------------------- ----------------------------------------------------------------
301 Congress Avenue, Suite 1300, Austin, TX 78701
______________________________________ ----------------------------------------------------------------
EXECUTED BY TENANT as of the 27/th/ day of September, 2000.
Active Power, Inc., a Delaware corporation
________________________________________________________________
Attest/Witness By: Dave Gino
----------------------------------------------------------------
______________________________________ Title: Vice President/Chief Financial Officer
----------------------------------------------------------------
Title: Address: 11525 Stonehollow Drive, Suite 135
- -------------------------------------- ----------------------------------------------------------------
Austin, Texas 78758
______________________________________ ----------------------------------------------------------------
Phone: 512-491-3134
----------------------------------------------------------------
EXHIBIT "A" Description of Premises
EXHIBIT "A-1" Legal Description
EXHIBIT "A-2" Initial Premises
EXHIBIT "A-3" First Additional Premises
EXHIBIT "A-4" Second Additional Premises
EXHIBIT "A-5" Site Plan of Project
EXHIBIT "A-6" Adjacent Parking Facility
EXHIBIT "A-7" Approved Location of Load Bank Yard
EXHIBIT "B" Form Subordination, Non-Disturbance and Attornment Agreement
EXHIBIT "C" Additional Provisions
EXHIBIT "D" Sign Criteria
10
EXHIBIT "A"
FLOOR PLAN OF THE PREMISES
1
EXHIBIT "A-1"
LEGAL DESCRIPTION
Lot 5, Block C, Kramer Lane 65, Section 2, a subdivision in Travis County,
Texas, according to the map or plat thereof recorded in Volume 81, Page 323, 324
and 325 of Plat Records of Travis County, Texas.
1
EXHIBIT "A-2"
FLOOR PLAN FOR INITIAL PREMISES
2
EXHIBIT "A-3"
FLOOR PLAN FOR FIRST ADDITIONAL PREMISES
1
EXHIBIT "A-4"
FLOOR PLAN OF SECOND ADDITIONAL PREMISES
1
EXHIBIT "A-5"
SITE PLAN OF PROJECT
1
EXHIBIT "A-6"
ADJACENT PARKING FACILITY
1
EXHIBIT "A-7"
APPROVED LOCATION OF LOAD BANK YARD
1
EXHIBIT "B"
FORM OF SUBORDINATION, NON-DISTURBANCE
AND ATTORNMENT AGREEMENT
NON-DISTURBANCE AND ATTORNMENT AGREEMENT
----------------------------------------
Premises: 126,750 square feet of space located at 2128 Braker Lane, Austin,
Texas 78758
Lease Date: September 27, 2000, by and between BC12 99, Ltd., a Texas limited
partnership ("Landlord") and Active Power, Inc., a Delaware corporation
("Tenant").
This Agreement is made by and between Tenant, Landlord and Nationwide Life
Insurance Company, One Nationwide Plaza, Columbus, Ohio 43216, Attention: Real
Estate Investments, 01-34-02, ("Lender") , the holder or proposed holder of a
note or other obligation secured, or to be secured, by a mortgage/deed of trust
("Mortgage") upon the Premises and assignee, or proposed assignee of the Lease
under an assignment of leases, rents and profits ("Lease Assignment").
1. Tenant hereby agrees as follows:
a. The Lease and the rights of Tenant thereunder are, and shall be,
subject and subordinate to the lien of the Mortgage and to all of the terms,
conditions and provisions thereof, to all advances made or to be made
thereunder, to the full extent of the principal sum and interest thereon from
time to time secured thereby, and to an renewal, substitution, extension,
modification or replacement thereof, including any increase in the indebtedness
secured thereby or any supplements thereto.
b. Tenant will not pay any rent under the Lease more than one (1) month in
advance of its due date.
c. Tenant will not consent to the modification of any of the terms of the
Lease, or to the termination thereof by Landlord, without written approval of
Lender, which approval shall not be unreasonably withheld or delayed.
d. Tenant will not seek to terminate the Lease or to setoff or abate any
rent under the Lease by reason of any act or omission of Landlord, until Tenant
has given prompt written notice of such act or omission to Lender (at the last
address furnished to Tenant) and until Lender has received such notice and has
been given the opportunity, but without undertaking Landlord's obligations, to
cure the default within a sixty (60) day time period. In he event Lender has
begun action to cure the default, but has not completed the same during the
sixty (60) day period, Tenant agrees that Lender shall have a reasonable period
of time thereafter to so do. If the default is such that it cannot practically
be cured by Lender without taking possession of the Premises, Tenant agrees that
any right it may have to terminate the Lease or to setoff or abate any rent
under the Lease shall be suspended for a reasonable period of time so long as
Lender is diligently proceeding to acquire possession of the Premises, by
foreclosure or otherwise in order to cure said default.
e. Tenant will attorn to and recognize Lender or any purchaser at a
foreclosure sale under the Mortgage, any transferee who acquires the Premises by
deed in lieu of foreclosure, and the successors and assigns of such purchaser(s)
as its landlord for the unexpired balance (and any extensions, if exercised) of
the term of the Lease upon the same terms and conditions set forth in the Lease.
Tenant further agrees that Lender or such purchaser shall not be: (i) liable for
any act or omission of any prior landlord (including Landlord); (ii) liable for
the return of any security deposit not actually received by Lender or such
purchaser; (iii) subject to any offsets or defenses which Tenant might have
against any prior landlord (including Landlord); (iv) bound by an advance
payment of rent or additional rent made by Tenant to Landlord, except for rent
or additional rent applicable to the then current month, or (v) bound by any
amendment or modification of the Lease made without the written consent of
Lender, which consent shall not be unreasonably withheld or delayed.
f. Upon receipt of notice from Lender, Tenant shall pay all monies
then due or becoming due from Tenant under the Lease, to or at the direction of
Lender, notwithstanding any provision of the Lease to the contrary. Tenant
agrees that neither Lender's demanding or receiving any such payments, nor
Lender's exercising any other right, remedy, privilege, power or immunity
granted by the Mortgage or the Lease Assignment, will operate to impose any
liability upon Lender for performance of any obligation of Landlord under the
Lease unless and until Lender elects otherwise in writing. Such payments shall
continue until Lender directs Tenant otherwise in writing.
g. Tenant agrees that, notwithstanding any provision in the Lease to
the contrary, all insurance proceeds payable with respect to any casualty loss
at the Premises or the real property of which the Premises are a part and any
and all awards or other compensation that may be payable for the condemnation of
all or any portion of the Premises or the real property of which the Premises
are a part, may be applied by Lender, at its option and to the extent set forth
in the Mortgage or the Lease Assignment, to the indebtedness secured by the
Mortgage.
2. Lender agrees that, provided Tenant is not in default under the terms
of the Lease beyond any applicable notice or grace periods, Tenant's right of
possession to the Premises shall not be affected or disturbed by Lender in the
exercise of any of its rights under the Mortgage or the note secured thereby ,
the leasehold estate granted by the Lease be not be affected in any manner and
the rights of Tenant granted under the Lease shall not be affected in any
manner.
3. The agreements herein contained shall be binding upon and shall inure
to the benefit of the parties hereto, their respective participants, successors
and permitted assigns.
4. If Lender shall (a) advise Tenant that Landlord is in default under
the Mortgage, and (b) direct Tenant to pay directly to Lender all monies then
due or becoming due from Tenant under the Lease, then the Landlord hereby
authorizes Tenant to pay directly to Lender all monies then due and thereafter
coming due under the Lease, without any further authorization by Landlord and
notwithstanding any protest by Landlord; and Landlord hereby agrees that any
sums paid by Tenant to Lender pursuant to the provisions of this Paragraph 4
shall be deemed to have been paid by Tenant to Landlord under the Lease, and
Tenant shall have no liability to Landlord whatsoever for any sums so paid by
Tenant directly to Lender, whether or not Landlord protests the same.
1
DATED: _________________, 20___
TENANT:
ACTIVE POWER, INC., a Delaware corporation
By:____________________________________________
Name:__________________________________________
Title:_________________________________________
LANDLORD:
BC12 99 LTD., a Texas limited partnership
By: ORI, Inc., a Texas corporation, general partner
By:____________________________________
Name:__________________________________
Title:_________________________________
LENDER:
NATIONWIDE LIFE INSURANCE COMPANY, an Ohio corporation
By:____________________________________________
Name: Robert H. McNaghten
Title: Vice President
STATE OF OHIO )
----
)
COUNTY OF FRANKLIN )
--------
The foregoing instrument was acknowledged before me this _____ day of
________________, 2000 by Robert H. McNaghten, Vice President of Nationwide Life
Insurance Company, an Ohio corporation, on behalf of the corporation.
[NOTARIAL SEAL] __________________________________
Notary Public
My commission expires:
____________________________
STATE OF TEXAS )
)
COUNTY OF TRAVIS )
The foregoing instrument was acknowledged before me this _____ day of
________________, 2000 by ______________________, __________________________ of
Active Power, Inc., a Delaware corporation, on behalf of the corporation.
[NOTARIAL SEAL] __________________________________
Notary Public
My commission expires:
____________________________
2
STATE OF TEXAS )
)
COUNTY OF TRAVIS )
The foregoing instrument was acknowledged before me this _____ day of
________________, 2000 by ______________________, the ___________________ of
ORI, Inc., a Texas corporation, as general partner of BC 12 99, Ltd., a Texas
limited partnership, on behalf of said limited partnership.
[NOTARIAL SEAL] ___________________________________
Notary Public
My commission expires:
____________________________
3
EXHIBIT "C"
ADDITIONAL PROVISIONS
TENANT FINISH ALLOWANCE
- ------------------------
(a) Tenant, at its sole cost and expense (subject to payment with the Finish
Allowance (hereinafter defined)), shall submit to Landlord (i) architectural and
engineering drawings of the work to be performed by Tenant in the Premises (the
"Tenant's Work") and specifications for Tenant's Work (such architectural and
engineering drawings and specifications are herein collectively referred to as
the "Tenant's Plans"). Within ten (10) days after receipt by Landlord of
Tenant's Plans, Landlord (i) shall give its written approval thereto or (ii) if
Landlord reasonably believes that the work reflected on the Tenant's Plans does
not comply with the Approval Criteria (hereinafter defined), shall request
revisions or modifications to the Tenant's Plans (but only to the extent the
same fails to comply with the Approval Criteria). Tenant shall submit such
revisions or modifications to Landlord. Within five (5) days following receipt
by Landlord of such revisions or modifications, Landlord shall give its written
approval thereto or shall request other revisions or modifications therein (but
relating only to the extent Tenant has failed to comply with Landlord's earlier
requests). The preceding two sentences shall be implemented repeatedly until
Landlord gives its written approval to the Tenant's Plans. If Landlord shall
fall to respond to Tenant's Plans with its approval or request for revision
s/modification within the time period(s) provided above, such failure shall be
deemed Landlord's approval of Tenant's Plans. The Tenant's Plans as approved
(or deemed approved) by Landlord shall herein be referred to as the "Final
Tenant's Plans". Notwithstanding anything to the contrary set forth herein or
in the Lease, Tenant shall not be required to remove any portion of Tenant's
Work contained in the existing office portion of the Premises (the location of
which is shown on Exhibit A-1 attached hereto) at the end of the Lease Term
-----------
unless Landlord shall notify Tenant of such requirement in writing (which shall
specifically describe that portion of the Tenant's Work that must be removed) at
the time Landlord approves the Tenant's Plans.
(b) Landlord shall be entitled to object to any proposed Tenant Work, which
when completed, either (x) will adversely affect the structural integrity of the
Building or (y) will adversely affect the functioning outside the Premises of
any Building System (in either case, other than to a de minimus extent) (the
criteria specified in clauses (x) and (y) are herein referred to as the
"Approval Criteria").
(c) Except as otherwise set forth in the Lease, Tenant may perform the Tenant's
Work with any general contractor(s), construction manager(s), subcontractors and
trade contractors as Tenant elects. Tenant shall perform the Tenant's Work in
accordance with (i) the Final Tenant's Plans (subject to part (d) below)), (ii)
good construction practices, and (iii) all applicable laws.
(d) At any time after the Final Tenant's Plans are approved (or deemed
approved) by Landlord and thereafter throughout Tenant's prosecution of the
Tenant's Work, Tenant shall be permitted to direct changes in the Tenant's Work
(each a "Tenant Change Order") (it being agreed, however, that Tenant must
obtain Landlord's consent before prosecuting any Tenant Change Order that
constitutes a material alteration (each, a "Material Tenant Change Order")).
Within seven (7) days after its receipt of any proposed Material Tenant Change
Order, Landlord (i) shall give its written approval thereto or (ii) if Landlord
reasonably believes that such Material Tenant Change Order does not comply with
the Approval Criteria, shall request revisions or modifications to such Material
Tenant Change Order (but only to the extent the same fails to comply with the
Approval Criteria). Upon its receipt of any such request from Landlord, Tenant,
if it wishes to pursue such Material Tenant Change Order, shall submit such
revisions or modifications to Landlord. Within five (5) days following receipt
by Landlord of such revisions or modifications, Landlord shall give its written
approval thereto or shall request other revisions or modifications therein (but
relating only to the extent Tenant has failed to comply with Landlord's earlier
requests). The preceding two sentences shall be implemented repeatedly until
Landlord gives its written approval to the Material Tenant Change Order in
question. If Landlord falls to make a submission or furnish a response timely in
accordance with the provisions of this paragraph (d), Landlord shall be deemed
to have approved the Material Tenant Change Order in question. Once approved or
deemed approved by Landlord, a Material Tenant Change Order shall become part of
the Final Tenant's Plans and the work shown on such Material Tenant Change Order
shall be part of the Tenant's Work
(e) Landlord, at Tenant's expense, shall reasonably cooperate with Tenant's
efforts to obtain any permits, certificates or final approvals in connection
with any portion of the Tenant's Work including, without limitation, executing
and delivering any documents or instruments that Landlord is required to sign
and which are reasonably required by Tenant in connection therewith. If, as a
result of any failure by any tenant of the Building to comply with the terms of
such tenant's lease, Tenant cannot obtain any required permits, approvals or
certificates in connection with any portion of the Tenant's Work, then Landlord
shall use commercially reasonable efforts to cause such tenant to comply with
the terms of such tenant's lease to the extent necessary to enable Tenant to
obtain such permits, approvals or certificates. Landlord shall not be entitled
to impose upon Tenant any charges or fees of any kind (including, without
limitation, charges or fees for profit, overhead or supervision) in connection
with any Tenant's Work.
(f) Landlord shall provide Tenant with a Tenant Finish Allowance (the "Finish
Allowance") equal to One Hundred Thousand and no/100 Dollars ($100,000.00) to be
used by Tenant to pay the cost of the Tenant's Work, including without
limitation, space planning costs, architectural and engineering fees, general
contractor fees and other similar fees and expenses. Tenant shall bear the
entire cost of any Tenant's Work in excess of the Finish Allowance and shall pay
for such excess over the Finish Allowance directly to the contractors performing
the Tenant's Work. Landlord shall pay the Finish Allowance to Tenant within
thirty (30) days after substantial completion of the Tenant's Work and Tenant's
delivery to Landlord of final lien waivers from all contractors performing the
Tenant's Work.
RENEWAL OPTION
- --------------
Provided that there is no Event of Default existing at the time of Tenant's
election renew or as of the commencement of any renewal term, Tenant shall have
the right and option to renew this Lease for one (1) additional term of three
(3) years (the "First Renewal Term") and one (1) additional term of two (2)
years (the "Second Renewal Term") by delivering written notice of Tenant's
exercise of such renewal option to Landlord at least One Hundred Eighty (180)
days prior to the expiration date of the then current Lease term. Upon the
delivery of said notice and subject to the conditions set forth in the preceding
sentence, this Lease shall be extended upon the same terms, covenants and
conditions as provided in this Lease, except that the Base Rent payable during
First Renewal
1
Term and the Second Renewal Term, as applicable, shall be the greater of (i) the
Base Rent for the last day of the initial Lease Term, or (ii) the Base Rent
determined pursuant to the Consumer Price Index calculation below, and the rent
payable for the parking spaces in the Adjacent Parking Facility shall be
mutually determined by Landlord and Tenant.
Renewal Base Rent = Base Rentn x (CPI of Dec, of yearn)
--------------------
(CPI of Dec, of yearn-1)
//n// = last year of current term
The monthly Base Rent shall increase five percent (5%) halfway through the
applicable renewal term.
PRIVATE DRIVE:
- -------------
Tenant desires that the private drive providing access to the Building and the
building known as Braker K currently known as Dell Drive be re-named to Active
Power Drive. Tenant acknowledges that the private drive is not owned by the
Landlord and therefore the Landlord does not have the authority to rename the
drive Active Power Drive. Landlord agrees to cooperate with Tenant to
facilitate the desired name changed.
2
EXHIBIT "D"
SIGN CRITERIA
1
EXHIBIT 10.18
SIXTH AMENDMENT TO LEASE AGREEMENT BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY, AS LANDLORD
AND
ACTIVE POWER, INC., AS TENANT
To be attached to and form a part of Lease made the 12/th/ day of
March 1996 (which together with any amendments, modifications and
extensions thereof, is hereinafter called the Lease), between Landlord
and Tenant.
THIS SIXTH AMENDMENT TO LEASE AGREEMENT (this "Sixth Amendment) made and
---------------
entered into as of the ________ day of _________________, 2000 by and between
METROPOLITAN LIFE INSURANCE COMPANY ("Landlord") and ACTIVE POWER, INC.,
--------
("Tenant").
W I T N E S S E T H:
Landlord and Tenant entered into that certain Lease Agreement dated March
12, 1996 (the "Lease" for space in Stonehollow 1), amended by the First
-----
Amendment dated June 24, 1996 increasing the square footage to 8,100 square feet
in Stonehollow 1, Suite 135, amended by the Second Amendment dated September 4,
1996 notifying Landlord of a name change from "Magnetic Bearing Technologies" to
"Active Power, Inc." amended by the Third Amendment dated October 10, 1997
expanding into STONEHOLLOW 2 for approximately an additional 15,080 square feet
of space located at 11525 Stonehollow Drive, Suite 255, Austin, Texas for a
total of 23,180 square feet of space, amended by the Fourth Amendment dated
August 20, 1999 extending the term in Stonehollow 2, Suite 255 for an additional
twelve months, and amended by the Fifth Amendment dated February 9, 2000
extending the lease term for Suite 135 and Suite 255 to expire on March 31, 2003
and expansion into Suites 120, 110 and 130 to expire March 31, 2003.
Landlord and Tenant now desire to further amend the Lease Agreement and
Amendments in certain respects as more fully hereinafter set forth. Landlord and
Tenant agree as follows:
1. Landlord and Tenant agree that Tenant shall expand into an additional
4,050 square feet of space located at 11525 Stonehollow Drive
(Stonehollow 1) Suite 155 as outlined on the attached Exhibit "A" as
"expansion space".
2. Landlord grants Tenant a finishout allowance of $8,100.00.
3. Commencement Date for the "expansion space" (Suite 155) is estimated
to be December 15, 2000, however this date is contingent upon existing
tenant vacating the premises.
4. The Monthly Base Rental Rate for the "expansion space" (Suite 155)
shall be as follows:
Stonehollow 1 - "Expansion Space" (Suite 155) 4,050 square feet
Commencement - 03/31/03 = $0.90/sf ($3,645.00 per month)
5. Tenant agrees to pay to Landlord an Additional Security Deposit in the
amount of $4,100.00.
6. Except as specifically amended hereby, the Lease shall remain
unaffected hereby and in full force and effect as originally written.
Signatures on next page
DATED AS OF THE ______ DAY OF ____________________, 2000.
WITNESS: LANDLORD:
Metropolitan Life Insurance Company, a New
York Corporation; on behalf of a
commingled separate account
__________________________________
BY: SSR Realty Advisors, Inc., a Delaware
corporation, as Investment Advisor to
Metropolitan Life Insurance Company
By:_______________________________________
Name: ________________________________
Title: ________________________________
Address: ________________________________
________________________________
________________________________
Telephone:________________________________
Fax: ________________________________
DATED AS OF THE ______ DAY OF ____________________, 2000.
WITNESS: TENANT:
ACTIVE POWER, INC.
__________________________________
By:_______________________________________
Name: ________________________________
Title: ________________________________
Address: ________________________________
________________________________
________________________________
Telephone:________________________________
Fax: ________________________________
Exhibit "A"
-----------
Stonehollow 1
=============
Address: 11525 Stonehollow Drive, Suite 155 (expansion space)
Austin, Texas 78758
Legal Description: Lot 1-A, Block A, Stonehollow Section 4-A Resubdivision of
Lots 2 and 3 Stonehollow Section Four, a subdivision in
Travis County, Texas according to the map or plat of record
in Volume 98, Pages 36-37 in the Plat Records of Travis
County, Texas
EXHIBIT 10.19
SEVENTH AMENDMENT TO LEASE AGREEMENT BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY, AS LANDLORD
AND
ACTIVE POWER, INC., AS TENANT
To be attached to and form a part of Lease made the 12/th/ day of
March 1996 (which together with any amendments, modifications and
extensions thereof, is hereinafter called the Lease), between Landlord
and Tenant.
THIS SEVENTH AMENDMENT TO LEASE AGREEMENT (this "Seventh Amendment) made
-----------------
and entered into as of the _________ day of _______________, 2000 by and between
METROPOLITAN LIFE INSURANCE COMPANY ("Landlord") and ACTIVE POWER, INC.,
--------
("Tenant").
W I T N E S S E T H:
Landlord and Tenant entered into that certain Lease Agreement dated March
12, 1996 (the "Lease" for space in Stonehollow 1), amended by the First
-----
Amendment dated June 24, 1996 increasing the square footage to 8,100 square feet
in Stonehollow 1, Suite 135, amended by the Second Amendment dated September 4,
1996 notifying Landlord of a name change from "Magnetic Bearing Technologies" to
"Active Power, Inc." amended by the Third Amendment dated October 10, 1997
expanding into STONEHOLLOW 2 for approximately an additional 15,080 square feet
of space located at 11525 Stonehollow Drive, Suite 255, Austin, Texas for a
total of 23,180 square feet of space, amended by the Fourth Amendment dated
August 20, 1999 extending the term in Stonehollow 2, Suite 255 for an additional
twelve months, amended by the Fifth Amendment dated February 9, 2000 extending
the lease term for Suite 135 and Suite 255 to expire on March 31, 2003 and
expansion into Suites 120, 110 and 130 to expire March 31, 2003, and amended by
the Sixth Amendment where Tenant expanded into Suite 155 for an additional 4,050
square feet.
Landlord and Tenant now desire to further amend the Lease Agreement and
Amendments in certain respects as more fully hereinafter set forth. Landlord and
Tenant agree as follows:
Commencement Date for the "expansion space" (Suite 155) is confirmed to be
December 15, 2000.
Except as specifically amended hereby, the Lease shall remain unaffected hereby
and in full force and effect as originally written.
DATED AS OF THE __________ DAY OF _________________, 2001.
WITNESS: LANDLORD:
Metropolitan Life Insurance Company, a New
York Corporation; on behalf of a
commingled separate account
___________________________
BY: SSR Realty Advisors, Inc., a Delaware
corporation, as Investment Advisor to
Metropolitan Life Insurance Company
By:___________________________________
Name: ____________________________
Title: ____________________________
Address: ____________________________
____________________________
____________________________
DATED AS OF THE __________ DAY OF _________________, 2001.
WITNESS: TENANT:
ACTIVE POWER, INC.
___________________________
By:___________________________________
Name: ____________________________
Title: ____________________________
Address: ____________________________
____________________________
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in (i) the Registration
Statement (Form S-8 No. 333-43248) and (ii) the Registration Statement (Form S-
8 No. 333-56122) pertaining to the 2000 Stock Incentive Plan and 2000 Employee
Stock Purchase Plan of Active Power, Inc. of our report dated January 18, 2001,
with respect to the financial statements of Active Power, Inc. included in the
Annual Report (Form 10-K) for the year ended December 31, 2000.
/s/ Ernst & Young LLP
Austin, TX
March 1, 2001
