<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 22, 2000
REGISTRATION STATEMENT NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CAPSTONE TURBINE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 3629 95-4180883
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>
6430 INDEPENDENCE
WOODLAND HILLS, CALIFORNIA 91367
(818) 716-2929
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
------------------------
DR. AKE ALMGREN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CAPSTONE TURBINE CORPORATION
6430 INDEPENDENCE
WOODLAND HILLS, CALIFORNIA 91367
(818) 716-2929
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
BRIAN CARTWRIGHT ROBERT E. BUCKHOLZ, JR.
LATHAM & WATKINS SULLIVAN & CROMWELL
633 WEST 5TH STREET, SUITE 4000 125 BROAD STREET
LOS ANGELES, CALIFORNIA 90071 NEW YORK, NEW YORK 10004
(213) 485-1234 (212) 558-4000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
TITLE OF CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED PER UNIT PRICE REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------
Common Stock............. $ $115,000,000 $30,360
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES
IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE
OFFER OR SALE IS NOT PERMITTED.
Subject to Completion. Dated March 22, 2000.
Shares
CAPSTONE TURBINE CORPORATION
Common Stock
----------------------
This is an initial public offering of shares of common stock of Capstone
Turbine Corporation. All of the shares of common stock are being
sold by Capstone.
Prior to this offering, there has been no public market for the common
stock. It is currently estimated that the initial public offering price per
share will be between $ and $ . Application will be made for
quotation of the common stock on the Nasdaq National Market under the symbol
"WATS".
See "Risk Factors" beginning on page 6 to read about factors you should
consider before buying shares of the common stock.
----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -------
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Capstone...................... $ $
</TABLE>
To the extent that the underwriters sell more than shares of
common stock, the underwriters have the option to purchase up to an additional
shares from Capstone at the initial public offering price less
the underwriting discount.
----------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 2000.
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
----------------------
Prospectus dated , 2000.
<PAGE> 3
[ARTWORK TO COME]
<PAGE> 4
PROSPECTUS SUMMARY
The following summarizes information in other sections of our prospectus,
including our financial statements, the notes to those financial statements and
the other financial information appearing elsewhere in this prospectus. You
should read the entire prospectus carefully.
CAPSTONE TURBINE CORPORATION
CAPSTONE
We develop, design, assemble and sell Capstone(TM) MicroTurbines for
worldwide applications in the multibillion dollar distributed power generation
and hybrid electric vehicle markets. We are the first company to sell a proven,
commercially available power source using microturbine technology. The Capstone
MicroTurbine combines sophisticated design, engineering and technology to
produce a highly reliable and flexible power production system that generates
electricity and heat for many commercial and industrial applications, including
resource recovery, combined heat and power, hybrid electric vehicles,
standby/backup power and peak shaving. We believe the simple and flexible design
of our microturbines will enable our distributors and end users to develop an
increasingly broad range of applications to fit their particular power needs.
PRODUCT
The Capstone MicroTurbine is a compact, environmentally friendly generator
of electricity and heat. Our state-of-the-art microturbines combine patented
air-bearing technology, advanced turbo-engineering and sophisticated power
electronics to produce an efficient, highly reliable electricity and heat
production system that requires little on-going maintenance. Our microturbines
can operate by remote control and use a broad range of gaseous and liquid fuels,
including previously unusable fuels such as low btu and high sulfur (sour) gas.
Our microturbines are easily transportable and designed to allow multiple units
to run together to meet an end user's specific needs.
We also have applied our technology to hybrid electric vehicles such as
buses and industrial use vehicles. Buses using Capstone MicroTurbines have
demonstrated greater range, less maintenance and lower cost than other low
emission buses. Our microturbines are currently being used in prototype buses
operating in Los Angeles, Nashville and Tucson.
We currently sell a system which produces approximately 30 kilowatts of
electricity. We expect our next model, a 60+ kilowatt system, to be available by
the third quarter of 2000.
TARGET MARKETS
The fundamental need for power, along with global deregulation of the
electric power industry, an increasing need for better power quality and
reliability and significant advances in power technology, are creating many new
opportunities for Capstone MicroTurbine systems.
STATIONARY
We believe the stationary applications for our microturbines are extremely
broad, either on a stand-alone basis or connected to the electric utility grid,
because of our microturbines' ability to adapt to fuels, load variations, and
various climates while operating in an environmentally friendly manner. We have
initially targeted markets which we believe will identify and employ our product
1
<PAGE> 5
attributes quickly. As levels of acceptance and volumes increase, we expect to
enter larger, more diverse markets. Our initial target markets are:
Resource Recovery
Oil and gas production creates fuel byproducts that traditionally have been
vented or flared into the atmosphere. Capstone MicroTurbines can burn these
waste gases with minimal emissions (thereby avoiding pollution penalties) and
produce on-site electricity for these activities. Our microturbines can also
burn high sulfur (sour) gas and low energy content gas such as landfill and
digester gas.
Combined Heat and Power
Using both the heat and electricity from the combustion of fuel improves
the overall efficiency of the energy generation process and can provide a
comprehensive solution to a customer's energy needs. Uses for the heat include
space heating, air conditioning and heating and cooling water. We have
identified the Japanese market as the most receptive for these applications in
the near term.
Backup and Standby/Peak Shaving
Many commercial and small industrial customers in developed countries could
reduce their electricity costs and/or improve their quality and reliability of
electric power supply by installing a Capstone MicroTurbine to meet some or all
of their needs. Utilities could install Capstone MicroTurbines at the end of the
electric utility grid to avoid costly build-out of power lines. In addition, end
users also can use our microturbines to avoid temporary spikes in power prices.
Developing Regions
Much of the world's population does not have access to electric power. Our
microturbine can be a primary, stand-alone power source which burns the gas or
liquid fuel of choice.
HYBRID ELECTRIC VEHICLES
We believe that the hybrid electric vehicle market represents a significant
near term opportunity and will expand as governments and consumers demand
cost-efficient, reliable and environmentally friendly vehicles, particularly in
urban areas.
COMPANY STRENGTHS
TECHNOLOGY LEADERSHIP
Our leadership position in microturbine technology stems from over ten
years of innovative research and development. This experience has resulted in
our unique ability to successfully integrate turbo-engineering with control and
power electronics for commercial applications.
FIRST TO MARKET WITH COMMERCIAL PRODUCT
We are the first company to sell a proven, commercially available
microturbine system.
CURRENTLY AVAILABLE FOR HYBRID ELECTRIC VEHICLE APPLICATIONS
The Capstone MicroTurbine was originally designed to be sufficiently
durable for vehicular applications, and has been in commercial use in hybrid
electric buses for over two years.
PROPRIETARY AIR-BEARING TECHNOLOGY
Capstone's patented air-bearing technology is critical to the
low-maintenance and high reliability of our microturbine system.
2
<PAGE> 6
STRONG MANAGEMENT TEAM IN PLACE
Led by Dr. Ake Almgren, we have a strong management team in place with
significant industry experience covering all principal functional areas.
OUR STRATEGY
Our objective is to maintain our position as the leading worldwide
developer and supplier of microturbine technology for the stationary distributed
generation and hybrid electric vehicle markets. The key elements of our strategy
are:
FOCUS ON NEAR TERM MARKET OPPORTUNITIES
We have targeted resource recovery, combined heat and power in Japan and
hybrid electric vehicles as markets which can quickly adopt our unique products.
We have established strategic relationships with direct end users and/or
distribution partners in each of these markets.
DEVELOP LONG TERM MARKET OPPORTUNITIES
We expect the North American market for both combined heat and power and
standby and backup/peak shaving to develop more slowly than our near term market
opportunities. We are establishing distribution alliances to penetrate the North
American markets for these long term opportunities.
ENHANCE OUR DISTRIBUTION ALLIANCES
We believe the most effective way to penetrate our target markets is with a
business-to-business distribution strategy. We are forging alliances with key
distribution partners worldwide. These partners include Williams Distributed
Power Services Inc., PanCanadian Petroleum Ltd., Mitsubishi Corporation, Takuma
Co., Meidensha Corporation, Sumitomo Corporation and Alliant Energy Corp. We
have developed alliances with Advanced Vehicular Systems and DesignLine to
develop the hybrid electric bus market.
BROADEN AND ENHANCE OUR PRODUCT LINE
We are currently developing a 60+ kilowatt microturbine system for expected
commercial shipments in the third quarter of 2000. We intend to develop a family
of microturbines with power outputs of up to 125+ kilowatts. We also intend to
continue our research and development efforts to enhance our current products.
AGGRESSIVELY PROTECT OUR INTELLECTUAL PROPERTY
We believe that a policy of actively protecting our patents and other
intellectual property is an important component of our strategy to remain the
leader in microturbine technology and will provide us a long-term competitive
advantage.
ACHIEVE PRODUCTION EFFICIENCIES
We expect our unit production costs and prices to decline substantially as
volumes increase. Our strategy is to use low cost materials and to outsource all
non-proprietary hardware and electronics to achieve high volume, low cost
production targets. We are pursuing a "tier one" supply strategy and are working
with vendors that can scale up quickly to significant quantities. We will retain
manufacturing control over our proprietary air-bearing and combustion
components.
OUR EXISTING SHAREHOLDER BASE
Prior to this offering, we have raised over $260 million of private equity.
Through our investor base we have access to extensive knowledge and experience
in the electric utility industry, gas utility industry and application
engineering throughout the world.
3
<PAGE> 7
THE OFFERING
Shares offered by us...................... shares
Common stock to be outstanding after this
offering.................................. shares
Use of proceeds........................... We plan to use the proceeds for
purchasing tooling and
manufacturing equipment, expanding
sales and marketing activities,
continuing product development,
payment to Fletcher Challenge
Limited as part of a buyback of
marketing rights, and for general
corporate purposes, including
research and product development,
manufacturing and market
development, capital expenditures
and potential acquisitions. See
"Use of Proceeds".
Proposed Nasdaq National Market symbol.... WATS
The number of shares of our common stock that will be outstanding after
this offering:
- includes 5,884,431 shares outstanding as of February 29, 2000, plus
86,223,198 shares of common stock to be issued upon the conversion of
preferred stock into common stock immediately before this offering, plus
shares of common stock to be issued in this offering; and
- excludes up to shares of common stock issuable upon
exercise of the overallotment option granted to the underwriters and up
to 10,755,169 shares of common stock either issued or available for issue
under our stock option plans and shares reserved for issuance
under our employee stock purchase plans.
Unless otherwise indicated, all information in this prospectus:
- assumes the underwriters option to purchase additional shares in the
offering will not be exercised; and
- gives effect to the conversion of all outstanding shares of preferred
stock and warrants into shares of common stock.
----------------------
We were incorporated in California in 1988. We intend to reincorporate in
Delaware prior to the completion of this offering. Our principal executive
offices are located at 6430 Independence, Woodland Hills, California 91367. Our
telephone number at that location is (818) 716-2929. Our internet address is
www.capstoneturbine.com.
The name Capstone and the Turbine Blade logo are trademarks that belong to
us. This prospectus also contains the names of other entities which are the
property of their respective owners.
4
<PAGE> 8
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1996 1997 1998 1999
------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Total revenues.............................................. $ 920 $ 1,462 $ 1,623 $ 84 $ 6,694
Cost of goods sold.......................................... 199 2,179 8,147 5,335 15,629
------- -------- -------- -------- --------
Gross profit (loss)....................................... 721 (717) (6,524) (5,251) (8,935)
Operating costs and expenses:
Research and development.................................. 4,796 8,599 13,281 19,019 9,151
Selling, general and administrative....................... 1,878 3,585 10,946 10,257 11,191
------- -------- -------- -------- --------
Income (loss) from operations............................. (5,953) (12,901) (30,751) (34,527) (29,277)
Net income (loss)....................................... $(5,957) $(12,595) $(30,553) $(33,073) $(29,530)
======= ======== ======== ======== ========
</TABLE>
The pro forma balance sheet data at December 31, 1999 reflects our receipt
of the estimated net proceeds from the sale of million shares of common
stock in this offering (at an assumed initial public offering price of $ per
share), less underwriting fees, estimated expenses and the application of the
estimated net proceeds. Other than the capitalized lease obligations, we have no
borrowings.
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED DECEMBER 31, AS ADJUSTED
----------------------------------------------------- DECEMBER 31,
1995 1996 1997 1998 1999 1999
-------- -------- -------- -------- --------- ------------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 525 $ 1,464 $ 44,563 $ 4,943 $ 6,858
Working capital.......................... 255 1,773 41,431 6,919 6,294
Total assets............................. 1,351 6,820 56,989 25,770 36,927
Capital lease obligations................ -- 846 1,885 4,449 5,899
Long term debt........................... -- -- -- -- --
Redeemable preferred stock............... 11,242 25,975 99,720 101,624 156,469
Stockholders' (deficiency)/equity........ (11,371) (24,176) (56,057) (91,151) (144,225)
Total liabilities and stockholders'
equity................................. $ 1,351 $ 6,820 $ 56,989 $ 25,770 $ 36,927
</TABLE>
5
<PAGE> 9
RISK FACTORS
You should carefully consider the following risks and all other information
in this prospectus before deciding to invest in our common stock.
RISKS RELATING TO OUR BUSINESS
OUR TARGETED CUSTOMERS MAY NOT ACCEPT OR PURCHASE OUR TECHNOLOGY AT SUFFICIENT
RATES TO GROW OUR BUSINESS, WHICH COULD IMPAIR OUR PROFITABILITY
We target well positioned and well capitalized early adopters as our
initial customers. However, we cannot guarantee that our targeted customers will
purchase our microturbines at all or in sufficient quantities to grow our
business. Also, the market for sales to our targeted customers is increasingly
competitive and is characterized by rapidly changing technologies, extensive
research and new product introductions. Some of our competitors may have greater
resources or better formed relationships with early adopters than we have. Also,
early adopters worldwide who helped make the Model 330 commercially viable may
not purchase our 60+ kilowatt unit.
WE MAY NOT BE ABLE TO OBTAIN RECUPERATOR CORES FROM SOLAR TURBINE CORPORATION,
OUR SOLE SUPPLIER, AND OUR ASSEMBLY AND PRODUCTION OF MICROTURBINES MAY SUFFER
DELAYS AND INTERRUPTIONS
Solar Turbine Corporation is our sole supplier of recuperator cores. Solar
is a wholly-owned subsidiary of one of our competitors, Caterpillar Corporation.
At present we are not aware of any other suppliers which could produce these
cores to our specifications within our time requirements. We cannot assure you
that Solar will be able to furnish us with a sufficient number of recuperator
cores to meet customer demand, that we will be able to purchase recuperator
cores from Solar at commercially acceptable prices or, if Solar stops making
recuperator cores, that we will be able to procure recuperator cores from
another supplier or manufacture them ourselves on a timely basis and at
commercially acceptable prices. Although we have a license agreement that would
permit us to produce the recuperator cores on our own in the event Solar
terminates production, we would not be able to initiate production without
significant delay and interruptions. Also, we cannot assure you that Solar will
honor the license agreement, that a court would enforce it, or that we will be
able to meet our obligations under it. If we had to develop and produce our own
recuperator cores without using Solar's intellectual property, we estimate it
could take up to three years to be in production.
WE MAY NOT BE ABLE TO RETAIN EXISTING MANAGEMENT AND THE EFFECTIVE
IMPLEMENTATION OF OUR EXPANSION PLAN WOULD SUFFER
Our success depends in significant part upon the continued service of key
management personnel, such as Dr. Ake Almgren, our Chief Executive Officer, Mr.
Jeffrey Watts, our Chief Financial Officer and Mr. William Treece, our Senior
Vice President of Strategic Technology Development. Currently, the competition
for qualified personnel is intense and we cannot assure you that we can retain
our existing management team. The loss of Dr. Almgren, Mr. Watts, Mr. Treece or
any other key management personnel could materially adversely affect our
operations. In addition, in anticipation of the commercial roll out of our
products, we have begun to hire new management team members to provide more
sales and marketing expertise. Since these management team members will not have
a proven track record with us, we cannot assure you that they will be successful
in overseeing their functional areas.
WE MAY NOT BE ABLE TO HIRE AND RETAIN NECESSARY PERSONNEL AND OUR ABILITY TO
EFFECTIVELY BUILD AND MARKET OUR PRODUCT WOULD SUFFER
We have historically experienced delays in filling personnel positions. We
expect to experience continued difficulty in filling our needs for qualified
engineers and other personnel. Competition is intense for qualified technical,
sales, marketing and management personnel, and in particular skilled
6
<PAGE> 10
engineers. As a result, we may not be able to hire and retain engineering
personnel, or individuals to head any of our departments, and our failure to do
so could delay product development cycles, affect the quality of our products
and/or otherwise significantly affect our business.
WE MAY NOT EFFECTIVELY IMPLEMENT OUR SALES AND MARKETING EXPANSION PROGRAM AND
OUR SALES WOULD SUFFER
We will need to substantially enhance our internal sales and marketing
staff in order to increase our sales efforts. We cannot assure you that the
expense of such internal expansion will not exceed the net revenues generated,
or that our sales and marketing team will successfully compete against the more
extensive and well-funded sales and marketing operations of our current and
future competitors. We are in the early stages of developing our distribution
network. Also, key sales and marketing team members are new employees. Our sales
and marketing force may not successfully sell and market our products. Our
inability to recruit, or our loss of, important sales and marketing personnel or
distribution partners, or the inability of new sales personnel to effectively
sell and market our microturbine system could materially adversely affect our
business and results of operations.
JAPANESE COMPETITORS MAY DEVELOP ALTERNATIVE TECHNOLOGY OR MAY CEASE TO PURCHASE
OUR PRODUCTS AND OUR SALES MAY DECLINE
We believe that the greatest competitive threat we face in the long-term
will most likely arise from Japanese competitors, many of which have unique
design capabilities for advanced combined heat and power units and have greater
resources than us. Over time, these competitors may include our current Japanese
partners. Our Japanese partners may pursue alternative technologies or develop
alternative products in addition to or in lieu of our products either on their
own or in collaboration with others. They may develop products or components
better suited for integration with their systems than our products. They possess
an advantage in marketing to potential purchasers or distributors in the Pacific
Rim, a prime market for various applications of the Capstone MicroTurbine. If we
are not able to achieve our expected penetration and growth in Japan and Asia,
our sales, operations and business may be materially adversely affected.
WE MAY NOT BE ABLE TO ESTABLISH COLLABORATIVE MARKETING RELATIONSHIPS AND OUR
SALES WOULD NOT INCREASE AS EXPECTED
We believe that we must enter into strategic marketing alliances or similar
collaborative relationships in order to expand our customer base. Providing
volume price discounts and other allowances along with significant costs
incurred in customizing our products may reduce the potential profitability of
these relationships. We may not be able to identify appropriate distributors on
a timely basis, and we cannot assure you that the distributors with which we
partner will be successful. In addition, we cannot assure you that we will be
able to negotiate collaborative relationships. The lack of success of our
collaborators in marketing any products may also adversely affect our financial
condition and results of operations.
THE 60+ KILOWATT CAPSTONE MICROTURBINE'S PRODUCTION MAY BE DELAYED, IT MAY BE
POORLY SUITED TO THE MARKET, OR IT MAY ERODE SALES OF THE MODEL 330
A necessary part of our market penetration strategy is the timely and
successful launch of our 60+ kilowatt microturbine. While the 60+ kilowatt unit
is not essential to all microturbine applications, it is very important to our
strategy for further penetrating markets. Factors which could delay or hinder
the successful launch of our next generation 60+ kilowatt microturbine include:
- research or development problems;
- difficulties in adjusting the current production assembly system to
produce and assemble the 60+ kilowatt unit; or
- an unstable supply or unsatisfactory quality of components from vendors.
7
<PAGE> 11
We cannot guarantee you that demand for our 60+ kilowatt unit will exist
and not diminish or cease at the time we are prepared to commercially produce
the 60+ kilowatt unit. It is also possible that production of the 60+ kilowatt
unit could replace or diminish the market for our Model 330.
WE DO NOT HAVE EXPERIENCE IN INTERNATIONAL SALES AND MAY NOT SUCCEED IN GROWING
OUR INTERNATIONAL SALES
We do not have experience in international sales and will depend on our
international marketing partners for these sales. Most of these partnerships are
recently created and may not achieve the results that we expect. Also, if a
dispute arises between us and any of our partners, we may not achieve our
desired sales results and we may be delayed or completely fail to penetrate some
international markets, and our revenue and operations could be materially
adversely affected. Any inability to obtain foreign regulatory approvals or
quality standard certifications on a timely basis could negatively impact our
business and results of operations. Also, as we seek to expand into the
international markets, customers may have difficulty or be unable to integrate
our products into their existing systems. As a result, our products may require
additional redesigning. In addition, our international business may be subject
to a variety of additional risks, including:
- delays in establishing international distribution channels;
- difficulties in collecting international accounts receivables;
- difficulties in complying with foreign regulatory and commercial
requirements;
- increased costs associated with maintaining international marketing
efforts;
- compliance with U.S. Department of Commerce export controls;
- increases in duty rates;
- the introduction of non-tariff trade barriers;
- fluctuations in currency exchange rates;
- political and economic instability; and
- difficulties in enforcement of intellectual property rights.
WE HAVE A HISTORY OF NET LOSSES, WE ANTICIPATE CONTINUED LOSSES THROUGH AT LEAST
2001 AND WE MAY NEVER BECOME PROFITABLE
Since our inception in 1988, we have reported net losses for each year. We
have made limited sales to date and have a total stockholders' deficiency of
$144.2 million since inception through December 31, 1999. Our net losses were
$30.6 million in 1997, $33.1 million in 1998 and $29.5 million in 1999. We
anticipate incurring additional net losses through at least 2001. Even if we do
achieve profitability, we may be unable to sustain or increase our profitability
in the future.
WE HAVE A SHORT OPERATING HISTORY AND THEREFORE YOUR BASIS FOR EVALUATING US IS
LIMITED
We were organized in 1988, but we have only been commercially producing the
Capstone MicroTurbine since December 1998. Also, because we are in the early
stages of selling our products, with relatively few customers, we have had
uneven order flow from period to period. Accordingly, we have a limited
operating history from which you can evaluate our present business and future
prospects. We may not succeed given the technological and marketing challenges
involved in producing and marketing the Capstone MicroTurbine. When deciding
whether to invest in our common stock, you must consider the expenses,
difficulties, complications, and delays frequently encountered in connection
with the growth of a new business, the development of new technology, and the
competitive and regulatory environment in which we operate. Also, many of our
partnerships with local
8
<PAGE> 12
country partners are new arrangements and may not succeed in increasing sales
and penetrating markets as predicted.
WE MAY BE UNABLE TO FUND OUR FUTURE OPERATING REQUIREMENTS
We are a capital intensive company and will need additional financing to
fund our operations. We averaged approximately $2.0 million per month of cash
outflows in 1999, and we expect these expenses to continue at present levels or
increase in the future. As of December 31, 1999, we had approximately $6.9
million in cash and cash equivalents on hand. Our future capital requirements
will depend on many factors, including our ability to successfully market and
sell our products. To the extent that the funds generated by this offering are
insufficient to fund our future operating requirements, we will need to raise
additional funds, through further public or private equity or debt financings.
These financings may not be available or, if available, may be on terms that are
not favorable to us and could result in further dilution to our shareholders. In
addition, downturns in worldwide capital markets may further impede our ability
to raise additional capital on favorable terms or at all. If adequate capital is
not available to us, we would likely be required to significantly curtail or
possibly even cease our operations.
WE MAY NOT BE ABLE TO EFFECTIVELY PREDICT OR REACT TO RAPID TECHNOLOGICAL CHANGE
AND OUR SALES MAY DECLINE
The market for our products is characterized by rapidly changing
technologies, extensive research and new product introductions. We believe that
our future success will depend in large part upon our ability to enhance our
existing products and to develop, introduce and market new products. As a
result, we expect to continue to make a significant investment in product
development. We have in the past experienced setbacks in the development of our
products and our anticipated roll out of our products has accordingly been
delayed. Although we believe that we have overcome the principal technical
hurdles experienced in the past, we may not be able to develop and introduce new
products or enhancements to our existing products in a timely manner that
satisfies customer needs, achieves market acceptance or addresses technological
changes in target markets. In addition, products or technologies developed by
others may adversely affect our competitive position or render our products or
technologies noncompetitive or obsolete.
WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR GROWTH, WHICH WOULD IMPAIR OUR
PROFITABILITY
If we are successful in executing our business plan, we will experience
growth in our business that could place a significant strain on our management
and other resources. We cannot assure you that we will be able to implement our
growth strategy successfully. Our ability to manage our growth will require us
to continue to improve our operational, financial and management information
systems, to implement new systems and to motivate and effectively manage our
employees. We cannot assure that our management will be able to effectively
manage this growth.
WE MAY NOT EFFECTIVELY EXPAND OUR PRODUCTION CAPABILITIES, WHICH WOULD
NEGATIVELY IMPACT OUR SALES
We anticipate a significant increase in our business operations which will
require expansion of our internal and external production capabilities. We may
experience delays or problems in our expected production expansion that could
significantly impact our business. Several factors could delay or prevent our
expected production expansion, including our:
- inability to purchase parts or components in adequate quantities or
sufficient quality;
- failure to increase our assembly and test operations;
- failure to hire and train additional personnel;
- failure to develop and implement manufacturing processes and equipment;
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<PAGE> 13
- inability to find and train proper local country partners with
capabilities to produce, assemble, test and develop our products; and
- inability to acquire new space for additional production capacity.
WE MAY NOT ACHIEVE PRODUCTION COST REDUCTIONS NECESSARY TO COMPETITIVELY PRICE
OUR PRODUCT, WHICH WOULD IMPAIR OUR SALES
We believe that we will need to reduce the unit production cost of our
products over time to maintain our ability to offer competitively priced
products. Our ability to achieve this cost reduction will depend on low cost
design enhancements, obtaining necessary tooling and favorable vendor contracts,
as well as obtaining economies of scale resulting from high sales volumes. We
cannot assure you that we will be able to achieve these production cost
reductions.
OUR SUPPLIERS AND MANUFACTURERS MAY NOT SUPPLY US WITH A SUFFICIENT AMOUNT OF
COMPONENTS OR COMPONENTS OF ADEQUATE QUALITY, AND WE MAY NOT BE ABLE TO PRODUCE
OUR PRODUCT
Although we generally attempt to use standard parts and components for our
products, some of our components are currently available only from a single
source or from limited sources. For example, the recuperator core used in our
products is only available from Solar Turbine Corporation, a wholly-owned
subsidiary of Caterpillar, one of our competitors. Also, we cannot guarantee
that any of the parts or components that we purchase will be of adequate
quality. We may experience delays in production of our Capstone MicroTurbine if
we fail to identify alternate vendors, or any parts supply is interrupted or
reduced or there is a significant increase in production costs, each of which
could materially adversely affect our business and operations.
WE MAY NOT BE ABLE TO CONTROL OUR WARRANTY EXPOSURE, WHICH COULD IMPAIR OUR
FINANCIAL CONDITION
We sell our products with warranties. However, these warranties vary from
product to product, such as the years covered, and the extent of the warranty
protection. Any malfunction of our product could expose us to significant
warranty expenses. Because we vary the warranties available and our history of
warranty expenses is limited, we cannot assure you that we can control or
reasonably predict these warranty expenses. Although we attempt to reduce our
risk of warranty claims through warranty disclaimers, we cannot assure you that
our efforts will effectively limit our liability. Any significant incurrence of
warranty expense could have a material adverse effect on our financial
condition.
WE FACE POTENTIAL SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS, WHICH COULD
IMPACT STOCK PRICES
A number of factors could affect our operating results and thereby impact
our stock prices, including:
- the timing of the introduction or enhancement of products by us or our
competitors;
- our reliance on a small number of customers;
- the size, timing and shipment of individual orders;
- market acceptance of new products;
- customer order deferrals in anticipation of new products;
- changes in our operating expenses, the mix of products sold, or product
pricing;
- factors affecting suppliers;
- development of our direct and indirect channels;
- personnel changes; and
- general political, economic and regulatory conditions.
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<PAGE> 14
Because we are in the early stages of selling our products, with relatively few
customers, we expect our order flow to continue to be uneven from period to
period. Because a significant portion of our expenses are fixed, a small
variation in the timing of recognition of revenue can cause significant
variations in operating results from quarter to quarter.
OUR RELOCATION INTO NEW FACILITIES COULD DISRUPT OUR OPERATIONS
We plan to relocate our corporate headquarters, sales, marketing and
distribution centers and manufacturing facility beginning in the third quarter
of 2000. This transition could disrupt our sales efforts and the manufacturing
and distribution of our products, particularly if there are unforeseen delays or
interruptions in our transition process. Any disruption in our ability to sell,
produce or distribute our products could impede our business operations,
resulting in reduced profitability. In addition, if we are unable to generate
increased sales and profit sufficient to absorb increased overhead and other
costs associated with our relocation, we would likely experience lower operating
profit margins. Also, any delay in relocating our headquarters or disruption to
our operations as a result of the move could have a negative impact on our
business.
OUR PRODUCTS INVOLVE A LENGTHY SALES CYCLE AND WE MAY NOT ANTICIPATE SALES
LEVELS APPROPRIATELY, WHICH COULD IMPAIR OUR PROFITABILITY
The sale of our products typically involves a significant commitment of
capital by customers, with the attendant delays frequently associated with large
capital expenditures. We are targeting, in part, customers in the utility
industry, which generally commit to a larger number of products when ordering
and which have a lengthy process for approving capital expenditures. We have
also targeted the hybrid electric vehicle market, which requires a significant
amount of lead time due to implementation costs incurred. For these and other
reasons, the sales cycle associated with our products is typically lengthy and
subject to a number of significant risks over which we have little or no
control. We expect to plan our production and inventory levels based on internal
forecasts of customer demand, which is highly unpredictable and can fluctuate
substantially. If sales in any period fall significantly below anticipated
levels, our financial condition and results of operations could suffer. In
addition, our operating expenses are based on anticipated sales levels, and a
high percentage of our expenses are generally fixed in the short term. As a
result of these factors, a small fluctuation in timing of sales can cause
operating results to vary from period to period.
POTENTIAL LITIGATION MAY ADVERSELY IMPACT OUR BUSINESS
Because of the nature of our business, we may face litigation relating to
intellectual property matters, labor matters, product liability and shareholder
disputes. Any litigation could be costly, divert management attention or result
in increased costs of doing business. As an example, two of our shareholders
have indicated that they may assert various claims against us and some of our
present and former officers and directors arising out of representations which
they allege were made by us in connection with our 1997 offering of Series E
Preferred Stock. We had previously entered into a number of agreements tolling
any statutes of limitation that otherwise would have been applicable. The
shareholder has indicated an intention to bring a claim in Superior Court for
the County of Los Angeles, California. We continue discussions in an effort to
resolve the dispute. Although we intend to vigorously defend any lawsuit, we
cannot assure you that we would ultimately be successful. An adverse judgment
could negatively impact the price of our common stock and our ability to obtain
future financing on favorable terms or at all.
WE MAY BE EXPOSED TO LAWSUITS AND OTHER CLAIMS IF OUR PRODUCTS FAIL, WHICH COULD
ADVERSELY IMPACT OUR RESULTS OF OPERATIONS
Potential customers will rely upon our products for critical energy needs.
A malfunction or the inadequate design of our products could result in tort or
warranty claims. Our engines run at high speeds and high temperatures which
could lead to personal injury or physical damage. Although we
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<PAGE> 15
attempt to reduce the risk of these types of losses through warranty disclaimers
and liability limitation clauses in our agreements, we cannot assure you that
our efforts will effectively limit our liability. Any liability for damages
resulting from malfunctions could be substantial and could materially adversely
affect our business and results of operations. In addition, a well-publicized
actual or perceived problem could adversely affect the market's perception of
our products. This could result in a decline in demand for our products, which
would materially adversely affect our financial condition and results of
operations.
THE CAPSTONE MICROTURBINE USES FLAMMABLE FUELS WHICH ARE INHERENTLY DANGEROUS
SUBSTANCES AND MAY SUBJECT US TO LIABILITY
Our Capstone MicroTurbine uses natural gas, high sulfur content (sour) gas,
methane, propane, gasoline, diesel, kerosene, and other similar fuels. These
substances are flammable fuels that could leak and combust if ignited by another
source. Since our Capstone MicroTurbine is a new product, any accidents
involving our systems or other microturbine products could impede demand for our
products.
RISKS RELATING TO OUR INDUSTRY
WE FACE INTENSE COMPETITION FROM OTHER POWER PROVIDERS
The market for our products is highly competitive and is changing rapidly.
We believe that the primary competitive factors affecting the market for our
products include:
- operating efficiency;
- reliability;
- product quality and performance;
- life cycle costs;
- development of new products and features;
- quality and experience of sales, marketing and service organizations;
- availability and price of fuel;
- product price;
- name recognition; and
- quality of distribution channels.
Several of these factors are outside our control. We cannot assure you that we
will be able to compete successfully in the future with respect to these or any
other competitive factors.
We currently compete with existing technologies such as the electric
utility grid and reciprocating engines, as well as emerging distributed
generation technologies, including other microturbines and fuel cells. Existing
distributed generation technologies are provided by well established companies
with huge economies of scale and worldwide presence. Also, our competitors
include several well established companies with substantially greater resources
than we have. A number of major automotive and industrial companies have
in-house microturbine development efforts, including Honeywell (AlliedSignal),
Elliott/General Electric, NREC (Ingersoll Rand), Toyota, Mitsubishi Heavy
Industries, Volvo/ABB, Turbo Genset and Williams International. We expect all of
these companies to enter into commercial production of microturbines in the
future.
Our Capstone MicroTurbine also competes with other currently available
distributed generation technologies, including reciprocating engines, fuel
cells, photovoltaics and wind powered systems. Many of the competitors producing
these technologies also have greater resources than we have. For instance,
reciprocating engines are produced in part by Caterpillar, Detroit Diesel and
Cummins. We
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<PAGE> 16
cannot assure you that the market for microturbine products will not ultimately
be dominated by approaches other than ours or those of our competitors will not
able to achieve a significantly greater market share of potential customers.
OUR COMPETITORS WHO HAVE SIGNIFICANTLY GREATER RESOURCES THAN WE HAVE MAY BE
ABLE TO ADAPT MORE QUICKLY TO NEW OR EMERGING TECHNOLOGIES OR TO DEVOTE GREATER
RESOURCES TO THE PROMOTION AND SALE OF THEIR PRODUCTS
Our competitors who have significantly greater resources than we have may
be able to adapt more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the promotion and sale
of their products. Competition could increase further if new companies enter the
market or if existing competitors expand their product lines. We believe that
developing and maintaining a competitive advantage will require continued
investment by us in product development, manufacturing capability and sales and
marketing. We cannot assure you that we will have sufficient resources to make
the necessary investments to do so. In addition, current and potential
competitors have established or may in the future establish collaborative
relationships among themselves or with third parties, including third parties
with whom we have strategic relationships, to increase the ability of their
products to address the needs of our prospective customers. Accordingly, new
competitors or alliances may emerge and rapidly acquire significant market
share.
A MASS MARKET FOR THE MICROTURBINE MAY NEVER DEVELOP OR MAY TAKE LONGER TO
DEVELOP THAN WE ANTICIPATE, WHICH WOULD ADVERSELY IMPACT OUR REVENUES
Our products represent an emerging market, and we do not know whether our
targeted customers will want to use them. If a mass market fails to develop or
develops more slowly than we anticipate, we may be unable to recover the losses
we will have incurred to develop our product, we may be unable to meet our
operational expenses and may be unable to achieve profitability. The development
of a mass market for our systems may be impacted by many factors which are out
of our control, including:
- the cost competitiveness of the microturbine;
- the future costs and availability of fuels used by the microturbine;
- consumer reluctance to try a new product;
- consumer perceptions of the microturbine's safety;
- regulatory requirements; and
- the emergence of newer, more competitive technologies and products.
UTILITY COMPANIES COULD PLACE BARRIERS TO OUR ENTRY INTO THE MARKETPLACE AND WE
MAY NOT BE ABLE TO EFFECTIVELY SELL OUR PRODUCT
Utility companies commonly charge fees to industrial customers for
disconnecting from the grid, for using less electricity, or for having the
capacity to use power from the grid for back up purposes. These types of fees
could increase the cost to our potential customers of using our systems and
could make our systems less desirable, thereby harming our revenue and
profitability.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WHICH COULD IMPAIR OUR
PROFITABILITY
We rely on a combination of patent, trade secret, copyright and trademark
law, and nondisclosure agreements to establish and protect our intellectual
property rights in our products. At March 15, 2000, we possessed 24 United
States patents and two international patents. In particular, we believe that our
patent for our air-bearing systems and our patent pending for our combustion
systems are key to our business. We believe that, due to the rapid pace of
technological innovation in turbine products, our ability to establish and
maintain a position among the technology leaders in the
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<PAGE> 17
industry depends on both our patents and other intellectual property and the
skills of our development personnel. We cannot assure you that any patent,
trademark, copyright or license owned or held by us will not be invalidated,
circumvented or challenged, that the rights granted thereunder will provide
competitive advantages to us or that any of our future patent applications will
be issued with the scope of the claims asserted by us, if at all. Further, we
cannot assure you that third parties or competitors will not develop
technologies that are similar or superior to our technology, duplicate our
technology or design around our patents. Also, another party may be able to
reverse engineer our technology and discover our intellectual property and trade
secrets. We may be subject to or may initiate proceedings in the U.S. Patent and
Trademark Office, which can require significant financial and management
resources. In addition, the laws of foreign countries in which our products are
or may be developed, manufactured or sold may not protect our products and
intellectual property rights to the same extent as the laws of the United
States. Our inability to protect our intellectual property adequately could have
a material adverse effect on our financial condition or results of operations.
OUR BUSINESS MAY BE HARMED IF WE ARE FOUND TO INFRINGE UPON THE PROPRIETARY
RIGHTS OF OTHERS
Third parties may claim infringement by us with respect to past, current or
future proprietary rights. In particular, Honeywell (AlliedSignal), Sundstrand
and Solar Turbine Corporation have patents in areas related to our business. Any
infringement claim, whether meritorious or not, could be time-consuming, result
in costly litigation or arbitration and diversion of technical and management
personnel or require us to develop non-infringing technology or to enter into
royalty or licensing agreements. Royalty or licensing agreements, if required,
may not be available on terms acceptable to us, or at all, and could
significantly harm our business and operating results. Litigation may also be
necessary in the future to enforce our patent or other intellectual property
rights, to protect our trade secrets, to determine the validity and scope of
proprietary rights of others. For example, in 1997, we were involved in a
dispute with Honeywell (Allied Signal) regarding various disputed intellectual
property rights. We entered into a settlement agreement regarding these issues.
These types of disputes could result in substantial costs and diversion of
resources and could materially adversely affect our financial condition and
results of operations.
FUTURE REGULATION OF OUR BUSINESS MAY IMPACT OUR ABILITY TO MARKET OUR PRODUCT
Our products are subject to federal, state, local and foreign laws and
regulations, governing, among other things, emissions to air as well as laws
relating to occupational health and safety. Regulatory agencies may impose
special requirements for implementation and operation of our products (e.g.
connection with the electric grid) or may significantly impact or even eliminate
some of our target markets. We may incur material costs or liabilities in
complying with government regulations. In addition, potentially significant
expenditures could be required in order to comply with evolving environmental
and health and safety laws, regulations and requirements that may be adopted or
imposed in the future. Furthermore, our potential utility customers must comply
with numerous laws and regulations. The deregulation of the utility industry may
also create challenges for our marketing efforts. For example, as part of
electric utility deregulation, federal, state and local governmental authorities
may impose transitional charges or exit fees which would make it less economical
for some potential customers to switch to our products.
YEAR 2000 DISRUPTIONS COULD IMPAIR OUR OPERATIONS
As of March 15, 2000, we had not experienced any Year 2000-related
disruption in the operation of our systems. Although most Year 2000 problems
should have become evident on January 1, 2000, additional Year 2000-related
problems may become evident only after that date. Although we implemented a Year
2000 program intended to ensure our computer systems and applications function
properly beyond 1999 and requested assurances from our suppliers that their
products are Year 2000 compliant and have not experienced any significant Year
2000 issues to date, we cannot be sure that we will be able to promptly or
correctly address all relevant Year 2000 issues, especially
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<PAGE> 18
where third-party customers or suppliers are involved. Such issues, if
triggered, could disrupt our systems or those of our third-party customers or
suppliers for a period of time. These disruptions could cause a loss of revenues
and damage our business reputation, as well as expose us to lawsuits for
damages.
RISKS RELATING TO THIS OFFERING
FUTURE SALES BY OUR CURRENT SHAREHOLDERS MAY ADVERSELY AFFECT THE MARKET PRICE
OF OUR COMMON STOCK
The market price of our common stock could decline as a result of sales of
a large number of shares in the market after this offering or the perception
that these sales could occur. These factors also could make it more difficult
for us to raise funds through future offerings of our common stock.
There will be shares of common stock outstanding immediately
after this offering. Of these shares, the shares sold by us in this offering and
additional shares will be freely transferable without restriction
or further registration under the Securities Act of 1933, except for any shares
held by our affiliates. The remaining shares will be restricted
and may be sold in the future only pursuant to an exemption under the Securities
Act. The holders of shares of common stock have agreed not to
sell those securities for 180 days after the date of this prospectus without the
prior written consent of Goldman, Sachs & Co. Goldman Sachs may, however, in its
sole discretion, release all or any portion of the securities subject to those
lock-up agreements.
The holders of approximately 91.8 million shares of common stock, all of
which must comply with the lock-up agreements described above, have registration
rights. If they exercise such rights, shares covered by a registration statement
can be sold in the public market. We also intend to register approximately
million shares of common stock that we have issued or may issue
under our benefit plans or pursuant to option agreements. After that
registration statement is effective, shares issued upon exercise of stock
options to persons other than affiliates will be eligible for resale in the
public market without restriction, which could adversely affect our stock price.
Absent registration, those shares could nevertheless be sold, subject to
limitations on the manner of sale. Sales by affiliates could also occur, subject
to limitations, under Rule 144 of the Securities Act.
INVESTORS WILL BE SUBJECT TO MARKET RISKS TYPICALLY ASSOCIATED WITH INITIAL
PUBLIC OFFERINGS
There has not been a public market for our common stock. We cannot predict
the extent to which a trading market will develop or how liquid that market
might become. If you purchase shares of common stock in this offering, you will
pay a price that was not established in the public trading markets. The initial
public offering price will be determined by negotiations between the
underwriters and us. You may not be able to resell your shares at or above the
initial public offering price and may suffer a loss on your investment.
The market price of our common stock is likely to be highly volatile as the
stock market in general has been highly volatile. Factors that could cause
fluctuation in the stock price may include, among other things;
- actual or anticipated variations in quarterly operating results;
- changes in financial estimates by securities analysts;
- conditions or trends in our industry;
- changes in the market valuations of other technology companies;
- announcements by us or our competitors of significant acquisitions,
strategic partnerships, divestitures, joint ventures or other strategic
initiatives;
- capital commitments;
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<PAGE> 19
- additions or departures of key personnel; and
- sales of common stock.
Many of these factors are beyond our control. These factors may cause the
market price of our common stock to decline, regardless of our operating
performance.
BECAUSE A SMALL NUMBER OF SHAREHOLDERS OWN A SIGNIFICANT PERCENTAGE OUR COMMON
STOCK, THEY MAY CONTROL ALL MAJOR CORPORATE DECISIONS AND OUR OTHER SHAREHOLDERS
MAY NOT BE ABLE TO INFLUENCE THESE CORPORATE DECISIONS
Following this offering, our executive officers and directors will
beneficially own approximately % of our outstanding common stock. In
addition, a small number of our investors will beneficially own approximately
% of our outstanding capital stock after this offering. If these parties
act together, they can elect all directors and approve actions requiring the
approval of a majority of our shareholders. The interests of our management or
these investors could conflict with the interests of our other shareholders.
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price per share significantly exceeds our net
tangible book value per share immediately after the offering. If you purchase
common stock in this offering, you will incur dilution of $ per share from
the price per share you paid based on pro forma as adjusted net book value at
March 1, 2000.
WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS THAT COULD DELAY OR PREVENT AN
ACQUISITION OF OUR COMPANY
Provisions in our certificate of incorporation, by-laws and Delaware
corporate law could make it more difficult and expensive for a third party to
acquire us, even if doing so would be beneficial to our shareholders. We will
also have a staggered board of directors which makes it difficult for
shareholders to change the composition of the board of directors in any one
year. These anti-takeover provisions could substantially impede the ability of
public shareholders to benefit from a change in control or change our management
and board of directors.
WE HAVE SUBSTANTIAL DISCRETION AS TO HOW TO USE THE PROCEEDS FROM THIS OFFERING
Our management has broad discretion as to how to spend the proceeds of this
offering and may spend the proceeds in ways with which our shareholders may not
agree. Investors will be relying on the judgment of our management regarding the
application of the net proceeds of this offering.
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FORWARD-LOOKING STATEMENTS
We have made statements under the captions "Prospectus Summary", "Risk
Factors", "Use of Proceeds", "Management's Discussion and Analysis of Financial
Condition and Results of Operations", "Business" and elsewhere in this
prospectus that are forward-looking statements. You can identify these
statements by forward-looking words such as "may", "will", "expect",
"anticipate", "believe", "estimate" and "continue" or similar words.
Forward-looking statements may also use difference phrases. Forward-looking
statements address, among other things:
- our future expectations;
- projections of our future results of operations or of our financial
condition; and
- other "forward looking" information.
We believe it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
accurately predict or which we do not fully control that could cause actual
results to differ materially from those expressed or implied by our
forward-looking statements, including:
- our inability to manage our growth;
- our inability to manufacture our products, including our development of
the 60+ kilowatt unit;
- our inability to expand in new and existing markets;
- changes in general economic and business conditions and in the technology
industry in particular;
- actions by our competitors;
- the level of demand for our products;
- changes in our business strategies;
- product development delays;
- changing environmental and governmental regulations;
- the ability to attract and retain employees and business partners;
- future levels of government funding;
- evolving markets for generating electricity and power;
- the ability to provide the capital required for product development;
operations and marketing; and
- other factors discussed under "Risk Factors" and elsewhere.
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USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of
shares of our common stock in this offering will be $ million,
at an assumed initial public offering price of $ per share, after deducting
the estimated underwriting discounts and commissions and our estimated offering
expenses. We estimate that our total net proceeds of $ million will be used
as follows:
- approximately $ million will be used for purchasing tooling and
manufacturing equipment;
- approximately $ million will be used for expanding sales and
marketing activities;
- approximately $ million will be used for continuing product
development efforts;
- approximately $11 million will be paid to Fletcher Challenge Limited as
part of a buyback of marketing rights;
- approximately $ million will be used for general corporate purposes,
including working capital, funds for operations, research and product
development, market development, capital expenditures and potential
acquisitions.
Pending their use, we will invest these proceeds in government securities
and other short-term, investment-grade securities. Although we currently intend
to use the proceeds as set forth above, management has broad discretion to vary
the uses as it deems fit.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. We
currently intend to retain our future earnings, if any, to finance the expansion
of our business and do not expect to pay any dividends in the foreseeable
future.
Payment of future cash dividends, if any, will be at the discretion of our
board of directors after taking into account various factors, including our
financial condition, operating results, current and anticipated cash needs and
plans for expansion.
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CAPITALIZATION
The following table sets forth our actual and pro forma, as adjusted
capital lease obligations, long-term debt and total capitalization at December
31, 1999. Our pro forma, as adjusted, capitalization gives effect to:
- the conversion of all outstanding shares of preferred stock into
86,223,198 shares of common stock upon the consummation of this offering;
- the issuance and sale of the shares of common stock
offered by us in this offering;
- the application of the estimated net proceeds from the sale of our common
stock payable to us based on an initial public offering price of
$ per share and after deducting underwriting fees and estimated
offering expenses.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
-----------------------
PRO FORMA,
ACTUAL AS ADJUSTED
--------- -----------
(in thousands)
<S> <C> <C>
Capitalized lease obligations............................... $ 5,899
Long-term debt.............................................. 0
Redeemable preferred stock,................................. 156,469
Stockholders' (deficiency)/equity:
Common stock.............................................. 4
Additional paid-in capital................................ 0
Accumulated deficit......................................... (144,229)
Total stockholders' (deficiency)/equity................. (144,225)
Total capitalization.................................... $ $
</TABLE>
- ---------------
The outstanding share information set forth above excludes:
- - 2,702,893 shares issuable upon exercise of stock options that are currently
issued, outstanding and exercisable within 60 days of February 29, 2000, plus
an additional 5,847,562 shares issuable upon exercise of stock options that
are currently issued and outstanding, plus an additional 2,204,714 shares
reserved for issuance in connection with future stock options and other awards
under our 1993 stock incentive plan; and
- - 15,616,488 shares issuable upon exercise of warrants outstanding as of
February 29, 2000, all of which are currently exercisable at a weighted
average exercise price of $0.35 per share.
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DILUTION
Our pro forma net tangible book value as of February 29, 2000 was $
million, or $ per share. Our pro forma net tangible book value per share is
determined by subtracting the total amount of our liabilities from the total
amount of our tangible assets and dividing the remainder by the number of shares
of our common stock outstanding after giving effect to the conversion of
preferred stock into 86,223,198 shares of common stock. The pro forma net
tangible book value per share after this offering will be $ . Therefore,
purchasers of shares of common stock in this offering will realize immediate
dilution of $ per share. The following table illustrates this dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Net tangible book value per share before this offering.... $
Increase per share attributable to this offering.......... $
Pro forma tangible book value per share after this
offering.................................................. $
Dilution per share to new investors......................... $
</TABLE>
The following table presents, as of March 1, 2000 and utilizing an initial
public offering price of $ per share, for our existing shareholders and our
new investors:
- the average number of shares of our common stock purchased from us;
- the total cash consideration paid; and
- the average price per share paid by the existing holders of common stock
including the holders of common stock after giving effect to the
conversion of preferred stock into shares of common stock.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders............................ % $ % $
New investors....................................
--------- ----- ---------- -----
Total.......................................... 100.0% 100.0%
========= ===== ========== =====
</TABLE>
The table excludes:
- up to shares of common stock that may be issued by us pursuant to
the underwriters' overallotment option;
- 2,702,893 shares of common stock issuable upon exercise of stock options
that are currently issued, outstanding and exercisable within 60 days of
February 29, 2000 at a weighted average exercise price of $0.49 per
share;
- 5,847,562 shares of common stock issuable upon exercise of stock options
that are currently issued and outstanding at February 29, 2000.
- 2,204,714 shares of common stock available for future grant under our
stock option plan as of February 29, 2000; and
- shares of common stock reserved for purchase after this offering
under our employee stock purchase plan.
To the extent these shares are issued, there will be further dilution to
new investors. See "Management" and the notes to our financial statements
included elsewhere in this prospectus.
20
<PAGE> 24
SELECTED HISTORICAL FINANCIAL DATA
The selected financial data shown below for, and as of the end of, each of
the years in the five-year period ended December 31, 1999, have been derived
from the audited financial statements of Capstone. The income statement data for
the years ended December 31, 1998 and 1999 and the balance sheet data at
December 31, 1998 and 1999 have been derived from financial statements that have
been audited by Deloitte & Touche LLP, independent auditors. The income
statement data for the years ended December 31, 1995, 1996, and 1997 and the
balance sheet data at December 31, 1995, 1996 and 1997 have been derived from
financial statements that have been audited by other independent auditors. The
summary financial data should be read in conjunction with "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes included
elsewhere in this prospectus for the statement of operations for the years ended
December 31, 1997, 1998, and 1999 and for the balance sheet data at December 31,
1998 and 1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1995 1996 1997 1998 1999
------- -------- -------- -------- --------
(in thousands, except for per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Total revenues.......................................... $ 920 $ 1,462 $ 1,623 $ 84 $ 6,694
Cost of goods sold...................................... 199 2,179 8,147 5,335 15,629
------- -------- -------- -------- --------
Gross profit (loss)................................... 721 (717) (6,524) (5,251) (8,935)
Operating costs and expenses:
Research and development.............................. 4,796 8,599 13,281 19,019 9,151
Selling, general and administrative................... 1,878 3,585 10,946 10,257 11,191
------- -------- -------- -------- --------
Income (loss) from operations......................... (5,953) (12,901) (30,751) (34,527) (29,277)
Net income (loss)................................... $(5,957) $(12,595) $(30,553) $(33,073) $(29,530)
======= ======== ======== ======== ========
Net income (loss) per share of common stock -- basic
and diluted....................................... $ (2.92) $ (5.38) $ (11.29) $ (10.65) $ (14.72)
======= ======== ======== ======== ========
</TABLE>
The Pro Forma Balance Sheet at December 31, 1999 is adjusted to reflect our
receipt of the estimated net proceeds from the sale of million shares of
common stock in this offering (at an assumed initial public offering price of
$ per share), less underwriting fees, estimated expenses and the application
of the estimated net proceeds. Other than the capitalized lease obligations, we
have no borrowings.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
ACTUAL YEAR ENDED DECEMBER 31, -------------------------
----------------------------------------------------- PRO FORMA,
1995 1996 1997 1998 1999 PRO FORMA AS ADJUSTED
-------- -------- -------- -------- --------- ----------- -----------
(in thousands) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 525 $ 1,464 $ 44,563 $ 4,943 $ 6,858 $
Working capital..................... 255 1,773 41,431 6,919 6,294
Total assets........................ 1,351 6,820 56,989 25,770 36,927
Capital lease obligations........... -- 846 1,885 4,449 5,899
Long-term debt...................... -- -- -- -- --
Redeemable preferred stock.......... 11,242 25,975 99,720 101,624 156,469 $10,834
Stockholders' (deficiency)/equity... (11,371) (24,176) (56,057) (91,151) (144,225) 7,585
-------- -------- -------- -------- --------- ------- -------
Total liabilities and stockholders'
equity............................ $ 1,351 $ 6,820 $ 56,989 $ 25,770 $ 36,927 $36,927
</TABLE>
21
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Capstone is the first company to produce commercially available distributed
power generation systems using microturbine technology. Our products are derived
from over 300 man-years of research and development, supported by over $260
million in private-equity investment. Since inception, we have generated
cumulative operating losses of approximately $120 million and we expect to
continue to sustain operating losses through fiscal year 2001.
From our founding in 1988 through 1998, we focused primarily on research
and development, culminating with the commercial release of our Model 330. With
commercial sales beginning in December 1998 and increasing to over 200 units in
1999, our focus has shifted beyond research and development and to commercial
production. We are developing, manufacturing and marketing microturbine
technology for use in stationary distributed power generation, combined heat and
power generation, resource recovery, hybrid electric vehicle and other power and
heat applications. In order to achieve our goals we will expand our sales and
marketing activities by hiring additional sales staff and entering into new
distribution agreements. We intend to achieve long-run profitability through
production efficiencies and economies of scale. Specifically, we are
consolidating our administrative and production operations into one building, we
are entering into new supplier contracts to reduce overall unit costs, and we
are developing new higher profit margin products.
Since the commercial release of the Capstone MicroTurbine, demand has
continued to grow and is anticipated to accelerate as successful results from
early adapters and new applications are recognized in the distributed generation
market. To accommodate this increased demand we are increasing the scale of our
operations, including the hiring of additional personnel, resulting in higher
operating expenses. We believe these increased operating expenses will enable us
to realize accelerated revenue growth. As a result of our expansion, the
anticipated increase in our operating expenses, and the difficulty in
forecasting revenue levels, we expect to continue to experience fluctuations in
our results of operations. See "Risk Factors".
We currently manufacture a 30 kilowatt unit and sell complete microturbine
units, subassemblies and components that can be fueled in part by natural gas,
propane, sour gas, kerosene and diesel. We will continue investing significant
resources in new product development and enhancements, including greater
kilowatt power production, additional fuel capabilities and additional
distributed power generation solutions such as co-generation applications. Our
new products should achieve increased efficiencies utilizing our existing
technology which will allow us to command higher unit prices while keeping costs
relatively low.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues
Revenues in 1999 were derived from unit sales for commercial applications.
All of our sales are based on our standard 30 kilowatt unit, which is a modular
unit that is manufactured in order to accommodate the customer specific
application and fuel type. Many of our sales are made to large, well-positioned
energy service providers that distribute our products individually or in
conjunction with their own power solutions. Sales in 1999 increased $6.6 million
to $6.7 million from $84,000 for 1998. Commercial sales began in December of
1998, and 1999 was the first complete fiscal year that commercial units were
available. During 1999, we shipped 211 units on customer orders totaling 521
units. Our backlog of orders at December 31, 1999 was 310 units.
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<PAGE> 26
Gross Profit (Loss)
Cost of goods sold includes direct material costs, assembly and testing,
compensation and benefits, overhead allocations for facilities and
administration, and warranty reserve charges. In 1999, our gross loss increased
$3.6 million, or 70%, to ($8.9) million for 1999 from a loss of ($5.3) million
for 1998. Costs for replacement of systems under warranty are charged against
our warranty reserve, which is accrued through charges to cost of goods sold.
During 1999, our warranty reserve rate is based on our estimates of future
warranty costs and the early stage of commercial production and product life
cycles. As of December 31, 1999, a warranty reserve of approximately $3.2
million had been accrued. With respect to unit costs, we anticipate component
costs to decline as we attain better economies of scale for purchased components
and greater production efficiencies from a larger manufacturing facility.
Research and Development
Research and development expense includes ongoing engineering compensation
and related expenses, overhead allocations for administration and facilities,
and material costs associated with development. In addition to research and
development expenses on existing products, we have expenses associated with the
next generation production units and associated components. Research and
development expenses decreased $9.9 million, or 52%, to $9.1 million for 1999
from $19.0 million for 1998. With the beginning of commercial production in
1999, a substantial portion of overhead allocable to research and development
decreased along with other general research and development expenses associated
with hardware and design. We intend to continue to invest resources for the
development of new systems and enhancements, including higher power
microturbines, expanded operating features, multi-fuel capabilities, and related
software. We expect that research and development expenses in 2000 will be
higher than those incurred in 1999.
Selling, General and Administrative
Selling, general and administrative expenses include compensation and
related expenses in support of our general corporate functions, which include
human resources, finance and accounting, information systems and legal services.
Sales, general and administrative expenses increased $934,000, or 9%, to $11.2
million for 1999 from $10.3 million for 1998. This increase resulted primarily
from higher compensation and overhead expenses associated with our general
growth including the development of our sales and marketing division. At
December 31, 1999 we had 156 full-time employees, up from 115 at December 31,
1998. The growth in employees was primarily in operations which added 26 people
and sales, general and administrative which added 13 people.
Interest and Other Income (Expense)
Other income (expense) consists principally of interest income earned on
our cash and cash equivalents and interest charges in connection with our
capital leases. Other income (expense) decreased $1.7 million, or 117%, to
($252,000) for 1999 from $1.5 million for 1998. This decrease was due to lower
interest earned on lower average investment balances available during 1999. In
addition, higher outstanding capital lease balances resulted in higher interest
expense charges.
Income Tax Provision
We account for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires
us to record an asset with respect to the expected future value of its net
operating loss carry forwards; however, our history of operating losses makes
the realization of our net operating loss carry forwards uncertain. Accordingly,
we have provided a valuation allowance for 100% of our net deferred tax asset of
$51.0 million at December 31, 1999. No provision for federal and state income
taxes (other than the minimum state income taxes) have been recorded as we
incurred net operating losses through December 31, 1999.
23
<PAGE> 27
At December 31, 1999, we had federal and state net operating loss carry forwards
of approximately $105.7 million and $88.2 million, respectively, which may be
utilized to reduce future federal taxable income through the year 2019, subject
to limitations. Under the Tax Reform Act of 1996, the amounts of and benefit
from net operating losses that can be carried forward may be impaired or limited
in some circumstances.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues
Revenues in 1998 and 1997 were derived from unit sales and contract
revenues. Unit sales were primarily to customers for beta testing applications,
while contract revenues were derived from reimbursements for government
sponsored programs associated with engineering research and development. Sales
decreased $1.5 million, or 95%, to $84,000 for 1998 from $1.6 million for 1997.
Revenues in 1997 consisted of 40 units sold for new beta applications. Once we
had a sufficient number of beta units running, we reduced new shipments to
monitor and improve beta performance. As a result, we only shipped three units
in the first eleven months of 1998. Following the completion of our beta
testing, we began selling commercial units in December 1998.
Gross Profit (Loss)
Cost of goods sold includes direct material costs, assembly and testing,
compensation and benefits, overhead allocations for facilities and
administration, and warranty reserve charges. In 1998, gross loss decreased $1.3
million, or 20%, to ($5.3) million for 1998 from ($6.5) million for 1997. Absent
inventory adjustments, our 1998 gross loss would have been $345,000, since we
reduced shipments to focus on beta testing. During 1998, we recognized a charge
of $4.2 million to writedown inventory to its net realizable value.
Research and Development
Research and development expense includes compensation and benefits for the
engineering and related staff, contract and consulting expenses, materials and
supplies for prototypes. Research and development expense increased $5.7
million, or 43%, to $19.0 million for 1998 from $13.3 million for 1997. The
increase in 1998 resulted primarily from expanded research and development
efforts to initiate commercial development. In addition, lower hardware expenses
were offset by higher engineering compensation costs.
Selling, General and Administrative
Selling, general and administrative expenses include compensation and
related expenses in support of our general corporate functions, which include
human resources, finance and accounting, information systems and legal services.
Sales, general and administrative expenses decreased $689,000, or 6%, to $10.3
million for 1998 from $10.9 million for 1997. This decrease is primarily a
result of higher shared cost expenses allocated to the engineering and
production cost centers rather than to general and administrative cost centers.
Shared costs expenses are allocated based on cost center personnel counts. The
decrease was partially offset by higher compensation and facility expenses.
Interest and Other Income (Expense)
Other income (expense) consists principally of interest income earned on
our cash and cash equivalents and interest charges in connection with our
capital leases. Other income (expense) increased $1.3 million to $1.5 million
for 1998 from $199,000 for 1997. This increase resulted primarily from $564,000
in higher interest income from higher average investment balances due to the
timing of funds received in an equity issuance.
24
<PAGE> 28
QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
The following table presents unaudited quarterly financial information for
the eight quarters ended December 31, 1999. This information was prepared in
accordance with generally accepted accounting principles, and, in the opinion of
management, contains all adjustments necessary for a fair presentation of such
quarterly information when read in conjunction with the financial statements
included elsewhere herein. As we increase commercial production, our operating
results for any prior quarters may not necessarily indicate the results for any
future periods.
<TABLE>
<CAPTION>
1998 1999
--------------------------------------- --------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- ------- ------- -------- ------- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues....................... $ 30 $ 8 $ -- $ 46 $ 222 $ 334 $ 759 $ 5,379
Costs of goods sold.................. 60 36 104 5,135 1,233 1,347 1,990 11,059
-------- ------- ------- -------- ------- ------- ------- --------
Gross profit (loss)................ (30) (28) (104) (5,089) (1,011) (1,013) (1,231) (5,680)
Operating costs and expenses:
Research and development........... 4,089 3,872 6,523 4,535 2,264 2,158 2,259 2,470
Selling, general and 2,209 2,173 3,291 2,584 2,502 2,568 2,748 3,373
administrative...................
-------- ------- ------- -------- ------- ------- ------- --------
Income (loss) from operations...... (6,328) (6,073) (9,918) (12,208) (5,777) (5,739) (6,238) (11,523)
Net income (loss).................. $ (5,726) $(5,640) $(9,609) $(12,098) $(5,785) $(5,825) $(6,253) $(11,667)
======== ======= ======= ======== ======= ======= ======= ========
</TABLE>
The increase in cost of goods sold in the fourth quarter of 1998 is
primarily the result of a charge to writedown inventory to its net realizable
value. The increase in sales, and respective cost of goods sold, in the third
and fourth quarters of 1999 resulted from our increased sales efforts to bring
our commercial units to market.
LIQUIDITY AND CAPITAL RESOURCES
Our cash requirements depend on many factors, including our product
development activities, our production expansion and our commercialization
efforts. We expect to devote substantial capital resources to continue the
development of our sales and marketing programs, to hire and train production
staff, and to expand our research and development activities. We intend to incur
approximately $1 million of expenditures in connection with relocating to our
new facility and making tenant improvements. We believe that our current cash
balances and the net proceeds from this offering will provide us with sufficient
capital to fund operations at least through 2001.
We have financed our operations primarily through private equity offerings.
We raised $125.6 million through December 31, 1999 and an additional $137.5
million in February 2000. Our primary cash requirements have been to fund
research and development, capital expenditures and production costs. Net cash
used in operating activities was $24.5 million, $36.2 million, and $25.7 million
for 1999, 1998 and 1997. Proceeds from the issuances of preferred and common
stock are currently held in government securities to provide liquidity for
operations. In addition, we use capital lease commitments to sell and leaseback
various fixed assets.
We have a commitment letter in place with Transamerica Business Credit
Corporation in which Transamerica extends to us a lease line of up to $10
million to lease equipment, including manufacturing equipment, machine tools,
furniture and computer related equipment. We also have a leasing arrangement
with Finova Capital whereby we utilized a $2 million equipment lease line.
Pursuant to these arrangements, as of December 31, 1999, we have $4.9 million
outstanding under our lease line with Transamerica, $1.0 million outstanding to
Finova and $22,000 outstanding to other leasing institutions.
At December 1999, we had commitments of $132.0 million with Solar Turbines
under a long-term purchase agreement for components and subassembly units which
expires August 2007. In
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<PAGE> 29
addition we have established a $1.0 million irrevocable letter of credit in
favor of Solar Turbines as a guarantee of payment for our purchase contract for
recuperator cores.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY
We currently develop products in the United States and market our products
in North America, Europe and Asia. As a result, factors such as changes in
foreign currency exchange rates or weak economic conditions in foreign markets
could affect our financial results. As all of our sales and supplies are
currently made in U.S. dollars, we do no utilize foreign exchange contracts to
reduce our exposure to foreign currency fluctuations. We also have no foreign
currency translations in our reported financial statements. In the future, as
our customers and vendor bases expand, we anticipate transactions that are in
foreign currencies.
INTEREST
We have no long-term debt outstanding and do not use any derivative
instruments.
INFLATION
We do not believe that inflation has had a material effect on our financial
position of results of operations during the past three years. However, we
cannot predict the future effects of inflation, including interest rate
fluctuations and market fluctuations.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instrument and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments. It
requires the recognition of all derivatives as either assets or liabilities in
the statement of position and measurement of the instruments at fair value. We
are required to adopt SFAS No. 133, as amended by Financial Accounting Standards
Board Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of SFAS No. 133") on January 1,
2001 and we are currently evaluating the impact on the financial statements.
26
<PAGE> 30
BUSINESS
Capstone develops, designs, assembles and sells Capstone MicroTurbines for
worldwide applications in distributed power generation and hybrid electric
vehicle markets. We are the first company to offer a proven, commercially
available power source using microturbine technology. The Capstone MicroTurbine
is a state-of-the-art system that produces approximately 30 kilowatts of
electricity for commercial and small industrial users. Our microturbine combines
patented air-bearing technology, advanced turbo-engineering and sophisticated
power electronics to produce an efficient, highly reliable electricity and heat
production system that requires little on-going maintenance. Also, because of
our advanced technology, our microturbines can operate by remote control and can
use a broad range of gaseous and liquid fuels in an environmentally friendly
manner.
We are the leading worldwide developer and supplier of microturbine
technology. As of February 29, 2000 we shipped 289 commercial units on 673
orders, creating a backlog of 384. We expect our next model, a 60+ kilowatt
system, to be commercially available by the third quarter of 2000. We believe
stationary applications for our microturbines, both independent of or connected
to the electric utility grid, are extremely broad. The primary stationary
markets that we intend to target include:
- resource recovery -- using natural gas that is otherwise flared or vented
to the environment to produce power;
- combined heat and power -- using both electricity and heat (for example,
for space heating air conditioning, and chilling water) to maximize use
of available energy;
- standby/backup power -- providing highly reliable protection for
increasingly electricity-dependent enterprises; and
- peak shaving -- self-generation during hours when electricity prices
spike.
We also have applied our technology to hybrid electric vehicles such as
buses and industrial use vehicles. Capstone MicroTurbine subassemblies are
currently used in prototype buses operating in Los Angeles, Nashville and
Tucson, and in tunnel carts and garbage trucks currently being deployed in
Japan.
Since our microturbine systems and subassemblies can be used as a power
source within larger energy "solutions" for our customers, we envision our
distributors and end users developing more applications over time. Our marketing
strategy includes partnering with major corporations with strong connections to
local markets. Where appropriate, primarily in resource recovery applications,
we intend to sell directly to the end user.
OUR PRODUCT
The Capstone MicroTurbine is a compact, environmentally friendly generator
of electricity and heat. It operates on the same principle as a jet engine but
can use a variety of commercially available fuels, such as natural gas, diesel,
kerosene and propane, as well as previously unusable or underutilized fuels
including low btu and high sulfur (sour) gas. The small size and relative
lightweight modular design allows for easy transportation and installation with
minimal site preparation.
The Capstone MicroTurbine incorporates three major design features:
- patented air-bearing technology;
- digital power electronics; and
- advanced combustion technology.
The air-bearing system allows the Capstone MicroTurbine's single moving
part to produce power without the need for lubrication, thereby reducing
maintenance and improving reliability. The digital power controller manages a
number of critical functions and monitors over 200 features of the
27
<PAGE> 31
microturbine. The digital power controller optimizes performance resulting in
lower emissions, higher reliability and consistent efficiency over a variable
power demand range.
Approximately the size of a large refrigerator, our Model 330 generates
approximately 30 kilowatts of electrical power and approximately 300,000
kilojoules per hour of heat. We have the ability to vary and modify our basic
microturbine model to accommodate a variety of applications and needs. The
Capstone Microturbine can operate:
- connected to the electric utility grid;
- on a stand-alone basis; or
- in dual mode, where the microturbine operates connected to the grid or,
when the grid is unavailable, the microturbine automatically disconnects
itself from the grid and operates on a stand-alone basis.
We offer various accessories including rotary gas compressors with digital
controls, batteries with digital controls for stand-alone or grid connected
operations, packaging options, and miscellaneous parts such as frames and
exhaust ducting and installation hardware if required. We also sell microturbine
components and subassemblies.
Our microturbine systems have accumulated over 300,000 hours of operation
under varying climates and operating conditions. Our product is highly reliable
with a target availability of 98% (i.e. the unit will be available to operate
98% of any given year). During 1999, we shipped 211 units and as of February 29,
2000 had a backlog of 384. Additionally, as of February 29, 2000 there were
approximately 1,500 units for which customers contracted to acquire and are
subject to penalties if they do not.
We expect our next microturbine system, a 60+ kilowatt unit, to be
available for commercial sales in the third quarter of 2000.
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<PAGE> 32
PRODUCT DEVELOPMENT
We have spent more than ten years and 300 man years of research and
development to create a highly reliable, efficient generating system with broad
fuel capabilities and power applications. Some of our important milestones and
noticeable accomplishments include:
<TABLE>
<CAPTION>
DATE MILESTONE
---- ---------
<S> <C>
1988........................ Capstone was organized to develop small single shaft gas
turbines for heat and electricity generation applications
in vehicles
1993........................ Ben Rosen, chairman of Compaq and brother Harold Rosen,
vice president of Hughes Aircraft, invested which resulted
in a focus on microturbines for vehicle applications
1994........................ Expanded development of microturbine toward stationary
distributed generation applications
1995........................ Shipped first prototype microturbine to customers
1996........................ Developed second generation microturbine and began field
testing
1997........................ First installation of a Capstone MicroTurbine subassembly
set in a hybrid electric bus
First microturbine subassembly operated with compressed
natural gas in a hybrid electric vehicle
Began development of the digital power controller
1998........................ Shipped first commercial product, the Model 330
1999........................ Achieved the ability to operate in stand-alone and dual
mode and to burn sour gas
Had approximately $7 million in revenue with 211 systems
shipped and over 150 employees
2000........................ Achieved multipooling software which allowed for
scalability
</TABLE>
TARGET MARKETS
STATIONARY POWER APPLICATIONS
Worldwide stationary power generation applications vary from huge central
stationary generating facilities, above 1,000 megawatts, down to back-up uses
below 10 kilowatts. Historically, power generation in most developed countries
such as the United States has been part of a regulated system. A number of
developments related primarily to the deregulation of the industry as well as
significant technology advances has broadened the range of power supply choices
to customers. We believe our microturbine will be used in a variety of
innovative electric power applications requiring less than 2 megawatts and more
immediately in those requiring less than 300 kilowatts. Capstone has identified
several markets with characteristics that we believe would value our inherently
flexible, distributed electricity generating system. Stationary power
applications for the Capstone MicroTurbine include:
- resource recovery;
- combined heat and power;
- backup and standby power and peak shaving; and
- other stationary power sources
29
<PAGE> 33
Each of these markets will adopt our products at different rates depending
upon several factors. We believe the resource recovery market generally and the
combined heat and power market in Japan have properties that are conducive to
the rapid acceptance of our microturbines. However, the combined heat and power
market in North America as well as the backup and standby power and peak shaving
markets will take longer to penetrate due to changing competitive conditions and
the deregulating electric utility environment.
Resource Recovery
On a worldwide basis there are thousands of locations where the production
of fossil fuels and other extraction and production processes creates fuel
byproducts which traditionally have been vented or flared (burned into the
atmosphere). The Capstone MicroTurbine can burn these waste gases with minimal
emissions thereby avoiding the imposition of pollution penalties, while
simultaneously producing electricity for use in the oil fields themselves. Our
Model 330 has demonstrated effectiveness in this application. The unit
outperforms conventional combustion engines in a number of circumstances,
including when the gas contains a high amount of sulfur.
During 2000, we expect a substantial portion of our units sold into the
resource recovery market to be used at oil and gas exploration and production
sites. We have also identified landfill and digester gas as well as seam gas
from coal deposits as near term target markets for our product. Our microturbine
has demonstrated its ability to run on low btu gas from landfill sites. As of
February 29, 2000 Interstate Detroit Diesel has ordered 40 microturbines, of
which we have shipped 10 units, for use in seam gas recovery from coal deposits.
Combined Heat and Power
Combined heat and power is an extensive market that seeks to use both the
heat energy and electric energy produced in the generation process. Using the
heat and electricity created from a single combustion process increases the
efficiency of the system from 30% to 70% or more. The increased operating
efficiency reduces overall emissions and, through displacement of other separate
systems, reduces variable production costs. The most prominent uses of heat
energy include space heating and air conditioning, heating and cooling water, as
well as drying and other applications.
There are substantial existing markets for combined heat and power
applications in western Europe, Japan, and other parts of Asia, in addition to
an emerging market in North America. Many governments have encouraged more
efficient use of the power generation process to reduce pollution and the cost
of locally produced goods. Japan, which has some of the highest electric power
costs in the world, has been particularly active in exploring innovative ways to
improve the efficiency of generating electricity. To access this market, we have
entered into agreements with various distributors including Takuma, which has
engineered a combined heat and power package that utilizes the hot exhaust air
of the microturbine for heating water.
We believe that the Capstone MicroTurbine provides an economic solution in
markets similar to Japan for delivering clean power when and where it is needed
without requiring a large capital investment. The Capstone MicroTurbine and/or
subassemblies incorporated into a more comprehensive energy package should allow
us to penetrate these large and growing markets. In particular, we believe our
microturbine's ability to accept a wide range of fuel options will enhance our
market position and accelerate acceptance in these locations. The ability of our
microturbines to use a location's fuel of choice, for example kerosene, diesel
or propane, will allow countries to use their available fuel source
infrastructure more efficiently.
Backup and Standby Power/Peak Shaving
With the trends of continuing deregulation in the electric utility industry
and increased reliance on sensitive digital electronics in day-to-day life,
industrialized societies are increasingly demanding high quality, high
reliability power. End customers with greater freedom of choice are
investigating
30
<PAGE> 34
alternative power sources to protect their business operations and equipment
from costly interruptions. Recent brown-outs and black-outs have demonstrated
the need to ensure high reliability. Along with deregulation has come the
initiation of competition in electric generation and substantially increased
electricity price volatility. Spot electricity prices in the midwest United
States reached $8,000 per megawatt-hour in 1998 and $5,000 per megawatt-hour
during the summer of 1999. We believe an increasing number of power marketers,
energy service providers, and end users will use alternative power sources to
protect against temporary price spikes by "peak shaving" or self-generating when
the local grid price gets too high. These load management applications give the
user a unilateral opportunity to reduce energy costs.
Our 60+ kilowatt Capstone MicroTurbine, which we expect to be the primary
product in these markets, will provide users great flexibility in this market.
The Capstone MicroTurbine system architecture allows any user to determine its
interface with the local electric grid with minimal disruption. In applications
where emissions, weight or vibration are important considerations, the
microturbine also has a competitive advantage due to its low emissions and
flexibility in siting. In addition, microturbines can be managed and monitored
remotely, thereby reducing on-site maintenance costs.
Utilities also can take advantage of Capstone MicroTurbines to avoid costly
transmission and distribution system expansion or upgrades in uncertain growth
or "weak" areas in the grid. These companies can place our microturbines at the
load to run parallel with the grid or to provide peaking power. Rural electric
cooperatives and electric utilities may use our microturbines as a stand-alone
system to provide temporary or backup power for specific applications or to
provide primary power for remote needs.
Developing Regions and Other Stationary Power Applications
Many people in less developed countries do not have access to electric
power. The fuels of choice in these countries generally tend to be liquid fuels
like kerosene, diesel and propane. The Capstone MicroTurbine's multi-fuel
capability should be a significant benefit and competitive advantage in these
regions. We also have designed our microturbine to be a competitive, reliable
primary power source alternative compared to diesel generators and other
technologies that currently provide power to remote areas or areas with
unreliable central generation. Remote commercial and industrial applications,
including offshore oil and gas platform power, pipeline cathodic protection, as
well as resort and rural area electrification can use our microturbine
effectively. The Capstone MicroTurbine is the only commercially available
microturbine that has demonstrated the ability to operate on a stand-alone
basis, a feature that is attractive in locations lacking significant
transmission infrastructure. In addition, while emissions have not been a large
market issue in these developing regions, we believe any increases in
environmental concerns or stricter emissions requirements would benefit us in
the long run.
HYBRID ELECTRIC VEHICLE POWER MARKET
We are actively pursuing the hybrid electric bus and industrial electric
vehicle market and have supplied microturbine subassemblies for hybrid electric
vehicles. Hybrid electric vehicular applications of our microturbine are
competitive due to low emissions and low cost per mile of operation. Using
vehicles which recharge batteries at night reduces the cost of electricity
consumed and helps to load balance the grid.
We believe that the hybrid electric vehicle market segment represents a
significant opportunity and will expand as governments and consumers demand
cost-efficient, reliable and environmentally friendly mobile electric power,
particularly in urban areas. Transit authorities have already demonstrated
hybrid electric buses as a viable alternative to pure electric buses and to
diesel buses which emit relatively high levels of emissions.
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Instead of working purely on a battery or other energy storage device,
hybrid electric vehicles combine the primary source battery with an auxiliary
power source, such as a Capstone MicroTurbine, to enhance performance. The
hybrid electric vehicles use electricity from the battery and the Capstone
MicroTurbine recharges the battery on an as needed basis while in operation.
These vehicles have many of the positive attributes of pure electric vehicles
but provide the added benefits of longer operating periods and longer ranges
than pure electric vehicles at the current level of technology.
The Capstone MicroTurbine has been tested for over two years in vehicle
applications. Our system has been designed into four different manufacturers'
general production hybrid electric vehicle platforms which were put into service
in the United States in 1999. The Capstone MicroTurbine, in one such hybrid
electric vehicle application, has logged more than 23,000 miles of operation in
a municipal bus without significant maintenance while providing a
cost-efficient, low emission alternative to higher cost pure electric vehicles
and higher emissions reciprocating engines. As of March 1, 2000, we had shipped
33 microturbines for vehicular use on 76 orders. The two significant advantages
of the microturbine as compared to the internal combustion engine are very low
emissions and very low maintenance.
Hybrid electric vehicles using the microturbine can recharge their
batteries using power from the electric grid at night when demand for
electricity is lowest, and use power generated by the microturbine during the
day when demand for grid power is highest. Electric utilities can therefore
benefit from the implementation of Capstone MicroTurbine-equipped hybrid
electric vehicles as a means of balancing intra-day demand for electricity. We
will pursue a strategy of partnering with electric utilities in promoting hybrid
electric buses.
MICROTURBINE BENEFITS
HIGH AVAILABILITY AND RELIABILITY
The Capstone MicroTurbine provides both high availability and reliability
when compared to other power generation alternatives. We designed the
microturbine for a target availability of 98%. We expect the reliability of our
60+ kilowatt model to be similar to that of the existing 30 kilowatt model.
MULTI-FUEL CAPABILITY
The Capstone MicroTurbine operates on a broad range of both gaseous and
liquid fuels. Current compatible gas fuels include, low pressure natural gas,
high pressure natural gas, low btu gas (for example, methane), high sulfur
content (sour) gas and compressed natural gas. Currently compatible liquid fuels
include diesel, kerosene and propane. Multi-fuel capability increases the number
of applications and geographic locations in which the Capstone MicroTurbine may
be used.
COST COMPETITIVE
The Capstone MicroTurbine is cost competitive in its target markets. In the
exploration and production markets environmental penalties incurred for flaring
gas can be avoided by using our microturbine. Our low maintenance microturbine
can burn wellhead, gas directly off the wellhead avoiding any intermediary
devices, while competing devices require extra maintenance and additional
intermediary devices to do the same. In the landfill digestor market, the
microturbine can burn low btu and sour gas while requiring minimal maintenance
relative to competing technologies, like reciprocating engines. In the coal seam
gas market, our microturbines require substantially less maintenance than
reciprocating engines. The ability of the microturbine to operate on a
stand-alone basis allows for less capital expenditures compared to the electric
utility grid, which requires up-front capital expenditures for additional
distribution and transmission lines. In combined heat and power applications the
microturbine's efficiency is approximately 60-70% compared to approximately 30%
efficiency when used only to generate electricity in typical technology. In the
hybrid electric vehicle
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market the microturbine results in lower cost per mile, lower emissions, and
load balancing of the grid for the utility.
ENVIRONMENTALLY FRIENDLY
In stationary power generation configurations, our digital power controlled
combustion system produces less than nine parts per million per volume of
emissions of NOx and unburned hydrocarbons at full power when burning natural
gas or propane, and less than 25 parts per million per volume when using diesel
fuel. We believe that these emission levels are less than the emissions of any
fossil fuel combustor without catalytic combustion or other emissions reduction
equipment. Due to our patented air-bearing technology, the Capstone Microturbine
requires no lubricants of any kind, avoiding potential ground contamination of
petroleum based lubricants used by conventional reciprocating engines, turbines
and other similar technologies. Also, because our system is air cooled, we avoid
the use of toxic liquid coolants, such as glycol.
MINIMAL MAINTENANCE
Our patented air-bearing system, digital power controller and air cooled
design significantly reduce the maintenance cost of the Capstone MicroTurbine.
The air bearings eliminate the need for lubrication, avoiding the need to change
oil and individually lubricate ball bearings or other similar devices. The
digital power controller's ability to continuously and remotely monitor our
microturbine performance avoids regularly scheduled diagnostic maintenance
costs. The air cooled design eliminates all of the maintenance related to liquid
cooling systems utilized with conventional power electronics technology and
generator cooling. Currently, the only scheduled maintenance is periodic
changing of the intake air filter and fuel filters every 8,000 hours of
operation and thermocouple, igniter and fuel injector replacement every 12,000
hours of operation.
REMOTE MONITORING AND OPERATING
The digital power controller allows users to efficiently monitor the
Capstone MicroTurbine's performance, fuel input, power generation and time of
operation in the field from off-site locations by telephonic hook-up. In
addition, the operator can remotely turn the microturbine on and off, control
the fuel flow and vary the power output.
FLEXIBLE CONFIGURATION
The Capstone MicroTurbine can be customized to serve a wide variety of
operating requirements. It can be connected to the electric utility grid or
operate on a stand-alone or dual mode basis. It can use a variety of fuel
sources and can be readily integrated into combined heating and power
applications. The microturbine can be sold either as a ready to use unit, or in
component and subassembly form for repackaging to the ultimate end user. The
microturbine can be operated as a single unit, or several units can be installed
together and operated in parallel as one unit.
SCALEABLE POWER SYSTEM
The Capstone MicroTurbine is designed to allow multiple units to run
together to meet each customer's specific needs. This feature enables users to
meet more precisely their growing demand requirements and thereby manage their
capital costs more efficiently.
RELATIVE EASE OF TRANSPORTATION AND INSTALLATION
Our microturbine is easy to transport, install and relocate, and its small
size allows great flexibility in siting. The system is approximately six feet
tall and weighs approximately 900 pounds. Relative to competing technologies,
the Capstone MicroTurbines are designed to minimize installation costs by
simplifying and standardizing installation procedures. Our microturbine requires
a fuel source hook-up, a hook-up for the power generated, and proper venting or
utilization of exhaust. Larger multi-
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pack microturbine configurations may require concrete pads to support the
additional weight, but the hook-ups are similar.
PROTECTION RELAY FUNCTIONALITY
The Capstone MicroTurbine has protective relay functions built into the
digital power controller such that in grid-connect or dual mode, the
microturbine will not send power out over the grid if grid voltage is not
present. This feature minimizes the potential damage to the local electric grid
and one of incumbent utilities major concerns regarding the interconnection of
distributed generation technologies.
BUSINESS STRATEGY
Our goal is to maintain our position as the leading worldwide developer and
supplier of microturbine technology for the distributed generation market both
in stationary and hybrid electric vehicular applications. The following are key
elements of our strategy to achieve this objective:
FOCUS ON NEAR TERM MARKET OPPORTUNITIES
We have targeted resource recovery, combined heat and power in Japan and
hybrid electric vehicles as markets which can quickly adopt our unique product
offerings. We have established strategic relationships with direct users and/or
distribution partners in each of these markets.
In the resource recovery market, the Capstone MicroTurbine is a key
component of the Williams Energy Conversion Unit (ECU(TM)), a total power
generation, management and storage package. At a Williams ECU test installation
in an oilfield near Denver, two Capstone MicroTurbine power generators convert
untreated wellhead waste gas into clean, useable power. The power is transferred
to a Powercell PowerBlock(TM) system which stores, conditions and delivers the
power to the pump-jacks.
For example, in the combined heat and power market, we have entered into a
strategic marketing alliance with Active Power Corporation of Tokyo that will
allow Active Power to provide a much cleaner, lower-maintenance alternative to
older technology power generators in a variety of applications ranging from
small shops to residential buildings to construction sites.
In the hybrid electric vehicle market, we have supplied subassemblies and
other components for hybrid electric buses to various customers, including bus
manufacturers and electric utilities, as well as for industrial hybrid electric
uses, such as garbage trucks and tunnel service locomotives.
DEVELOP LONG TERM MARKET OPPORTUNITIES
We expect the North American market for both combined heat and power and
standby and backup/peak shaving to develop more slowly than our near term market
opportunities. We are establishing distribution alliances to penetrate these
markets as they develop. For example, we recently entered into an agreement with
Williams Distributed Power Services, Inc. with the goal of penetrating the
combined heat and power and backup and standby power markets in North America.
This agreement allows Williams to combine the Capstone MicroTurbine systems with
other equipment, tools or services for power generation supply or storage, sold
or leased by Williams. This will enable Williams to offer customers in the
United States and other international markets a suite of products and
specialized power supply packages incorporating the Capstone MicroTurbine. We
believe the Capstone MicroTurbine is an important addition to Williams'
portfolio of practical and leading edge technologies and will enable Williams to
offer a wide range of services to a diversified customer base.
ENHANCE DISTRIBUTION ALLIANCES
We believe the most effective way to penetrate our target markets is with a
business-to-business distribution strategy. We are forging alliances with key
distribution partners worldwide. Some of our
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key distribution partners are Williams Distributed Power Services Inc.,
PanCanadian Petroleum Ltd., Mitsubishi Corporation, Takuma Co., Meidensha
Corporation, Sumitomo Corporation and Alliant Energy Corp. Capstone has
developed alliances with, among others, Advanced Vehicular Systems and
DesignLine to develop the hybrid electric bus market.
BROADEN AND ENHANCE OUR PRODUCT LINE
We intend to broaden our product line by developing additional microturbine
products. We are currently developing a 60+ kilowatt microturbine system for
expected commercial shipments in the third quarter of 2000. We intend to develop
a family of microturbines with power output up to approximately 125+ kilowatts.
We expect to leverage our scaleable design architecture by developing
microturbines and digital power controllers to provide a superior
performance-price ratio while simultaneously improving our profitability.
We also intend to continue our research and development efforts to enhance
our current products by increasing performance and efficiency, and adding
features and functionality to our microturbines. Research and development
activities have also focused on development of related products and
applications, including gas compressors that enhance the microturbines'
multi-fuel capability and integration with energy storage devices like battery
packs for stand-alone applications.
AGGRESSIVELY PROTECT OUR PROPRIETARY INTELLECTUAL PROPERTY
We seek to identify and to protect aggressively 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 of being the technology leader in microturbine system technology and
will provide us with a long-term competitive advantage. In addition, we
implement very tight security procedures at our plant and facilities and have
confidentiality agreements with each of our vendors, employees and visitors to
our facilities.
ACHIEVE PRODUCTION EFFICIENCIES
Our efforts to be a low cost provider begin with the design process, where
our microturbine products are designed to facilitate high volume, low-cost
production targets. We manufacture only proprietary microturbine components,
including our air-bearing systems and combustion system components. Our
operating strategy is to outsource all non-proprietary hardware and electronics,
and we continue to establish a limited number of high volume supplier alliances
with companies that can quickly scale up to significant quantities. We are
pursuing a "tier one" supply strategy whereby we contract with a few suppliers
who are responsible for integrating various subassemblies.
SALES, MARKETING AND DISTRIBUTION
We are focused on selling microturbines in the worldwide stationary and
hybrid electric vehicular markets. We anticipate that our microturbines will be
used in a variety of electric power applications requiring less than 2 megawatts
and more immediately in applications requiring less than 300 kilowatts. Specific
early applications include combined heat and power, resource recovery, remote
and onsite power generation and hybrid electric vehicles. Focusing on these
target markets should help us build significant sales volume and reduce our unit
production costs. The current list price of our Model 330 translates into
approximately $900/kilowatt. As we achieve greater cost competitiveness which we
believe is under $600/kilowatt, we plan to enter into mainstream markets, such
as peak shaving, backup/standby power and base load power generation.
We believe the most effective way to penetrate these target markets is a
business-to-business distribution strategy. The four distribution agreements
that we have entered into with Japanese entities are typical of this approach.
These agreements allow our local country partners to distribute complete
Capstone MicroTurbine systems in Japan. They can also incorporate subassemblies
and components into uniquely designed combined heat and power units and packages
for distribution
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within Japan and the rest of the world, excluding the United States. Capstone
has the right to distribute these uniquely designed packages exclusively in the
United States and nonexclusively in the rest of the world excluding Japan.
Elsewhere, this general type of distribution agreement will be tailored to
the particular strengths of partners in various local country markets. In some
target markets, we will distribute our uniquely designed product solutions to
major corporations which will use the products directly.
Our approach for distribution within the hybrid electric vehicles market
has been to identify early adopters who can demonstrate the feasibility of the
microturbine technology. We initially developed sales relationships with smaller
bus companies, such as Advanced Vehicular Systems, DesignLine and E-Bus. Having
demonstrated the performance of our technology, we have established
relationships with larger regional bus companies, like Eldorado National.
Eldorado National is now delivering hybrid electrical buses to the Los Angeles
Department of Water & Power for use in the Los Angeles basin.
Early adopters in the industrial hybrid electrical vehicle market are
currently implementing the technology into the marketplace. Capstone Micro
Turbine subassemblies are currently used in tunnel service locomotives being
deployed by Tomoi and in garbage trucks being deployed by Mitsuit Fuji in Japan.
NORTH AMERICA
Our near-term focus in North America is to continue to sell into the
exploration and production segment of the resource recovery market. We are
developing strategic distribution partners in other distributed generation
markets which we believe will begin to generate significant sales in the next
three to five years. Our current strategic partners include electric utilities
like Hydro Quebec, gas utilities like New Jersey Resources and Southern Union
Company, propane companies such as Suburban Propane as well as energy service
providers such as Williams Companies and distributors of reciprocating engines
such as Interstate Detroit Diesel.
Current resource recovery customers/partners include, Pan Canadian
Petroleum and the Williams Companies. We currently have entered into
distribution agreements with both of these companies to distribute Capstone
MicroTurbine systems. Pan Canadian distributes our products in Canada. The
Williams Companies is an energy solution provider selling into a variety of
markets. The Capstone MicroTurbine is a key component of the Williams ECU(TM), a
total power generation, management and storage package. At a Williams ECU test
installation in an oilfield near Denver, two Capstone MicroTurbine power
generators are currently converting and treating wellhead waste gas into clean,
useable power.
In 1999 we sold 151 units in the North American market which generated
approximately $4.8 million in revenue.
ASIA
Our sales and marketing strategy in Asia is to first enter the Japanese
market by developing significant corporate distribution partnerships within
Japan which will subsequently enable us to quickly enter other selected markets
along the Pacific Rim.
Our primary market focus in Japan is combined heat and power applications.
Within Japan, there is great demand for economic energy solutions seeking to
lower both the existing high cost of electricity and meet the greenhouse gas
emissions guidelines of the Kyoto accords. Our local partners recognize the
quickest and most practical way to accomplish this is through combined heat and
power applications which raise efficiencies from approximately 30% for pure
electrical generation to approximately 60-70% or more in combined heat and power
applications. Each of our partners is seeking to design applications using our
microturbines and/or subassemblies and components for their particular target
combined heat and power market.
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We currently have substantially similar distribution agreements with
Mitsubishi Corporation, Kanamoto/Active Power, Sumitomo-Meidensha, and Takuma
Co. Ltd. All four companies can distribute complete Capstone MicroTurbine units
within Japan or can incorporate Capstone MicroTurbine subassemblies and
components into individually designed combined heat and power packages for
distribution both within Japan and the rest of the world. We have exclusive
distribution rights for these individually designed units in the United States
and have non-exclusive distribution rights in the rest of the world, excluding
Japan. All four companies have purchased on a prepaid basis 100 Capstone Model
330 MicroTurbine systems for delivery within 12 months from the signing of the
agreement. We expect all 400 units to be delivered on or before December 31,
2000.
In 1999 we sold 51 units in the Asian market which generated approximately
$1.6 million in revenue.
EUROPE
We currently have agreements in Europe with British Gas to investigate the
U.K. and Ireland markets, and with GAS Energietechnik to investigate the German
market primarily for combined heat and power applications. We intend to broaden
our distribution alliances in Europe in 2000 and 2001. In 1999 we sold nine
units in Europe which generated approximately $275,000 in revenue.
HYBRID ELECTRIC VEHICLES MARKET
The hybrid electric vehicles market segment represents a significant
opportunity for the Capstone MicroTurbine. This microturbine system was put into
production platforms used by four different manufacturers for hybrid electric
vehicles placed into service in 1999. The Capstone MicroTurbine, in one such
hybrid electric vehicle application, has logged more than 23,000 miles of
operation in a municipal bus without significant maintenance. Electric utilities
can benefit from the implementation of Capstone MicroTurbine-equipped hybrid
electric vehicles as a means of balancing intra-day demand for electricity. We
intend to pursue a strategy of partnering with electric utilities in promoting
hybrid electric buses.
DISTRIBUTION AGREEMENTS
As stated above, we intend to continue to enter into distribution
arrangements with knowledgeable distributors in the various target markets. We
do not expect to market directly to end users, except in the resource recovery
market. Our general strategy will be to enter into nonexclusive distribution
agreements with interested and qualified third parties who will use our Capstone
MicroTurbine and/or subassemblies in their products and energy solutions. We
intend to become a supplier of critical components to the distributed energy
solution industry as a whole.
As part of this strategy and to increase the speed of adoption of our
products, we have entered into five distribution agreements, one with the
Williams Companies and four with various Japanese entities. The Japanese
distribution agreements are substantially similar and provide that these
distributors will promote, market, sell, distribute and service our complete
microturbine units or some subassemblies, or both generally in connection with
stationary applications. Typically, these agreements have a term of
approximately three years and allow the distributors to distribute complete
Capstone MicroTurbine systems in Japan. They can also incorporate subassemblies
and components into uniquely designed combined heat and power units and packages
for distribution within Japan and the rest of the world, excluding the United
States. Capstone has the right to distribute these uniquely designed packages
exclusively in the United States and nonexclusively in the rest of the world,
excluding Japan.
Under these agreements, each distributor prepaid for 100 complete
microturbine systems. We have granted to the distributor the right to use some
of our intellectual property, including our trademarks. In addition to
promoting, selling and distributing our products, the distributor must provide
specific services to end users including on-going maintenance and prompt
warranty services in
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accordance with the warranty then in effect. Also, each employee of a
distributor who is to provide services to end users must attend our service
certification seminars and receive our services certification.
We entered into a supply agreement with Williams Distributed Power
Services, Inc. in June 1999 whereby Williams agreed to purchase 1,989 Capstone
MicroTurbine Systems over three years depending upon annual forecasts. Williams
may resell or enter into sale-leaseback arrangements with its customers and may
integrate our product into Williams' products or services. Williams acquired the
exclusive right to sell to its affiliated entities. If at any time we commence
negotiations with another party for exclusive distribution rights in a
territory, Williams will also have the right to negotiate with us to distribute
our products in that territory. Williams may not distribute any microturbine
generating less than 250 kilowatts of electricity other than the Capstone
MicroTurbines during the agreement's three year term.
SOURCING AND MANUFACTURING
The Capstone MicroTurbine is designed to achieve high volume, low-cost
production objectives and offers significant manufacturing advantages through
the use of commodity materials and conventional manufacturing processes. Our
manufacturing designs use conventional technology which has been proven in high
volume automotive and turbocharger production for many years. The microturbines
are designed for simple assembly and testing and to facilitate automated
production techniques using less-skilled labor.
Our strategy of out-sourcing the manufacturing of primarily all but our
air-bearing systems and components of the combustion system to a proven vendor
base allows for attractive pricing, quick ramp-up and the use of just-in-time
inventory management techniques. We believe that we can realize both purchase
economies from existing vendors and economies of scale related to our product
development costs as unit volume increases. We manufacture the air-bearings and
combustion system components at our facilities in Woodland Hills, California. We
also assemble the units at that location. We have primary and secondary sources
for all of our components other than the recuperator.
Solar Turbine Corporation, a wholly owned subsidiary of Caterpillar
Corporation, is our sole supplier of recuperator cores. At present we are not
aware of any other suppliers who could produce these cores according to our
specifications and within our time requirements. Accordingly, our dependence
upon Solar is substantial. We have entered into a license agreement with Solar
that would permit us to produce the recuperator cores at our option at any time.
The license agreement allows our use of Solar's intellectual property to produce
the recuperator core. We are required to make payments to Solar pursuant to the
license at varying rates. If we had to develop and produce our own recuperator
cores without using Solar's intellectual property, we estimate it could take up
to three years to be in production. See "Risk Factors -- We may not be able to
obtain recuperator cores from Solar Turbine Corporation, our sole supplier, and
our assembly and production of microturbines may suffer delays and
interruptions".
Senior management has recognized the importance of quality control by
appointing a vice president of quality to oversee the implementation of a
rigorous quality control program, which includes the use of outside consultants.
Before a system is shipped, 100% of all systems go through assembly test
procedures lasting over one hour. In addition, key subassemblies such as the
digital power controller undergo up to 15 hours of burn-in. All center section
subassemblies undergo complete spin test checks where they are spun up to over
96,000 revolutions per minute to ensure perfect balance and operation. When a
microturbine is completely assembled, it is tested in one of our two fully
automated test cells.
Currently, we have the capability to produce approximately 10,000 units per
year at our facilities. During the second quarter of 2000, we plan to move to a
new assembly and test location in the
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neighboring town of Chatsworth, California where we expect to be able to produce
approximately 20,000 units per year.
INTELLECTUAL PROPERTY RIGHTS AND PATENTS
We rely on a combination of patent, trade secret, copyright and trademark
law, and nondisclosure agreements to establish and protect our intellectual
property rights in our products. As of March 15, 2000, we had 24 issued United
States patents and two international patents and several U.S. and international
patent applications on file. These pending patent applications are directed to
various important aspects of our technology. In particular, we believe that our
patents and patents pending for air-bearing systems, combustor systems and
digital control systems are key to our business. Our patents are due to expire
from 2010 to 2017.
RESEARCH AND DEVELOPMENT
Our research and development activities have enabled us to become one of
the first companies to develop a commercially available microturbine that
operates in parallel with the grid. We are the first company to successfully
demonstrate a commercially available microturbine that operates on a stand-alone
basis. We believe that our more than ten years and over 300 man years of
research and development activities provides us with a significant advantage
relative to our competitors.
We have successfully integrated turbo-engineering and control and power
electronics. This is a direct result of the turbo-engineering research and
development and the electronics research and development occurring in the same
location. This has allowed us to immediately discover and solve integration
issues in-house without relying on outsourced research and development. We
believe that our continued in-house research and development, incorporating
turbo-engineering and control with power electronics, will provide us with a
competitive advantage relative to competitors that outsource research and
development of components that are critical to a viable microturbine.
CUSTOMERS
In 1999, sales to Williams, worth $1.9 million, accounted for 28% of our
sales revenue. We had accounts receivable due from Williams and Advanced
Vehicular Systems of approximately $275,000 and $277,000, respectively, and each
represented approximately 11% of total accounts receivable at the end of 1999.
Additionally, in 1999 and 2000, we entered into agreements whereby each of our
Japanese distributors, Mitsubishi, Takuma, Active Power, and Meidensha-Sumitomo
is required to prepay for 100 microturbine units. These prepaid orders account
for approximately 25% of our contractual purchase commitments. Further, in June
of 1999 we entered into a supply agreement with Williams in which Williams
agreed to purchase a maximum of 1,989 Capstone MicroTurbine systems over three
years, depending upon annual forecasts.
COMPETITION
The market for our products is highly competitive and is changing rapidly
with the interplay of a number of factors. The Capstone MicroTurbine competes
with existing technologies such as the utility grid and reciprocating engines,
and may also compete with emerging distributed generation technologies,
including photovoltaics, wind powered systems, fuel cells and other
microturbines. As many of our distributed generation competitors are well
established firms, they derive advantages from production economies of scale, a
worldwide presence, and greater resources which they can devote to product
development or promotion.
We compete with the power grid in instances in which the costs of
connecting to the grid from remote locations are high, reliability and power
quality are of critical importance, or in situations where peak shaving could be
economically advantageous due to highly variable electricity prices. Since the
Capstone MicroTurbine provides a highly reliable source of power and can operate
on multiple fuel
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sources, we believe it offers a level of flexibility and reliability not
currently offered by other current technologies such as reciprocating engines.
Our competitors which produce reciprocating engines have products and
markets that are well developed and technologies that have been proven for some
time. A reciprocating engine is similar in design to internal combustion engines
used in automobiles. Reciprocating engines are popular for back-up power
applications but are not typically intended for primary use due to high levels
of emissions, noise and low reliability. These technologies are currently
produced in part by Caterpillar, Interstate Detroit Diesel and Cummins.
Our microturbine may also compete with other distributed generation
technologies, including photovoltaics (solar power) and wind powered systems.
The main drawbacks to photovoltaics and wind powered systems are their
dependence on weather conditions and their high capital costs.
Although the market for fuel cells is still developing, a number of
companies are focused on the residential and vehicular fuel cell markets
including Plug Power, Avista Labs, H Power and Ballard Power Systems. Another
developer of fuel cell technology, United Technologies, is focused on developing
fuel cell solutions for large stationary power plants. We believe that none of
these fuel cell technologies will compete directly with our microturbines in the
short run. However, over the medium-to-long term, fuel cell technologies that
compete directly with our products may be introduced.
We may also compete with several well established companies developing
microturbines. We believe a number of major automotive and industrial companies
have in-house microturbine development efforts, including in part Honeywell
(AlliedSignal), Elliott/General Electric, NREC (Ingersoll Rand), Toyota,
Mitsubishi Heavy Industries, Volvo/ABB, Turbo Genset and Williams International.
DTE Energy Co., Pratt & Whitney Canada Corp. and The Turbo Genset Co. recently
formed a joint venture for developing a miniturbine. Although we believe these
companies have established microturbine development programs, we also believe we
are the only company currently producing commercial units. We expect our first
mover advantage to allow us to quickly develop the market for Capstone
MicroTurbines, however we expect all of these companies to enter into commercial
production of microturbines in the future.
In the long-term we believe that the greatest competitive threat will arise
from Japanese competitors, many of which have unique design capabilities and
have greater resources than us. Our Japanese partners may be able to produce
microturbines or develop alternative technologies, either on their own or in
collaboration with others, including our competitors. They may develop products
or components better suited to integration with their systems than our products.
Our Japanese partners and/or competitors possess a natural advantage in
marketing to potential purchasers or distributors in the Pacific Rim, a prime
market for various applications of the Capstone MicroTurbine.
COMPANY BACKGROUND
We were organized in 1988. In April 1993, Benjamin M. Rosen, Chairman of
Compaq Computer Corporation, and his brother, Dr. Harold A. Rosen, former Vice
President of Hughes Aircraft Company, became interested in our Company for
vehicular applications. Since then, the Rosens, together with the Sevin Rosen
Funds and Canaan Partners, were joined by other investors including Rho
Management, Fletcher Challenge Limited (a leading New Zealand corporation),
Vulcan Ventures, Inc. (an affiliate of Paul Allen), Cascade Investments (an
affiliate of Bill Gates), Southern Union Company, Mitsubishi Corporation, Takuma
Co., Ltd., Sumitomo Corporation, Meidensha Corporation, Active Power
Corporation, Hydro-Quebec, Kyushya Electric EDPC and Star Ventures of Munich,
Germany. Prior to this offering, we had raised over $260 million from our
investors.
DETAILED MICROTURBINE DESCRIPTION
The current Model 330 Capstone MicroTurbine is a reliable, compact, low
emission, power generation system which generates approximately 30 kilowatts of
electric power as a stand-alone
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<PAGE> 44
power source or in conjunction with traditional power sources. We are developing
a microturbine which will generate 60+ kilowatts of power. As an alternative
power source, our microturbines may replace or efficiently supplement existing
sources of electric power.
The Capstone MicroTurbine consists of a turbogenerator and digital power
controller combined with ancilliary systems such as a fuel system as shown
below:
System Overview Graphic
The turbogenerator includes a mechanical combustor system and a single
moving assembly rotating on our patented air-bearings at up to 96,000
revolutions per minute. The combustor system operates on a variety of fuels and
at full power achieves NOx emissions levels in the exhaust of less than nine
parts per million per volume of NOx and unburned hydrocarbons for natural gas
and less than 25 parts per million per volume for diesel, significantly less
than the 1,000 to 3,000 parts per million emission standard of a reciprocating
diesel fuel generator set. As a result of our patented air-bearings,
microturbines do not require lubrication and do not utilize liquid cooling,
keeping maintenance costs throughout the microturbine's estimated 40,000 hour
life extremely low.
The digital power controller is a state-of-the-art, air cooled, insulated
gate bipolar transistor based inverter with advanced digital signal processor
based micro-electronics. The advantages of digital electronics over analog
electronics include accuracy, flexibility, and repeatability. In addition, we
are taking advantage of the example set by the computer industry: digital data
processing results in higher reliability with increasingly lower cost. The
digital power controller controls and manages the microturbine using proprietary
software and advanced algorithms. The digital power controller:
- starts the turbogenerator and controls its load;
- manages the speed, fuel flow, and exhaust temperature of the
microturbine;
- converts the variable frequency (1,600 hertz maximum) and variable
voltage power produced by the generator into a usable output of either
50/60 hertz AC or option DC; and
- provides digital communications to externally maintain and control the
equipment.
In addition, the digital power controller's application software provides
an advantage to end users by allowing them to remotely operate and manage the
microturbine. Unlike the technology of other power sources that require manual
monitoring and maintenance, the microturbine allows end users to remotely and
efficiently monitor performance, fuel input, power generation and time of
operation using our proprietary communications software which can interface with
standard personal computers using our application software. This remote
capability provides end users with power generation flexibility and cost
savings.
The Model 330 was initially designed to operate connected to an electric
utility grid and uses a high pressure, natural gas fuel source. We can easily
vary and modify the basic microturbine to
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<PAGE> 45
accommodate a variety of applications and needs. We have operated with different
fuels including a variety of carbon-based fuels such as propane, sour gas,
kerosene and diesel. The combustor system remains the same for all fuels, except
for the fuel injectors, which currently vary between liquid and gaseous fuels.
The Capstone MicroTurbine's multi-fuel capability provides significant
competitive advantages with respect to the markets in which we may operate. We
offer other accessories including rotary gas compressors with digital controls,
batteries with digital controls for stand-alone or grid connected operations,
packaging options, and miscellaneous parts such as frames and exhaust ducting
and installation hardware where required.
TURBOGENERATOR AIR FLOWS
[CAPSTONE'S MICROTURBINE GENERATOR]
TYPICAL OPERATION OF A MICROTURBINE
Air is drawn into the air inlet by the compressor impeller. The compressor
impeller increases the pressure of the air and ejects it into the recuperator.
The recuperator is a heat exchanger that heats the air as it passes through it
to approximately 1,000 degrees fahrenheit. Preheating the air substantially
lessens the amount of fuel needed, thus increasing the efficiency of the unit.
The preheated air leaves the recuperator and enters the combustion chamber where
it is mixed with the fuel and burned. The fuel is controlled and delivered to
the combustion chamber for ignition and combustion by injectors and the
combustor system. The mixture of combusted gas enters the turbine where it is
then expanded. As the mixture expands, it causes the turbine to rotate. The
turbine is directly coupled to the compressor and generator shaft, and as the
turbine rotates, the compressor and generator rotate at a speed of up to 96,000
revolutions per minute, and generate up to approximately 30 kilowatts of
electricity. The combusted gas mixture leaves the turbine in the form of exhaust
at a temperature of up to approximately 1,200 degrees fahrenheit and flows
through the recuperator where it heats the cooler air brought into the
compressor through the impeller. As the combusted gas mixture mixes with that
cooler air, the exhaust cools to a temperature of approximately 500 degrees
fahrenheit and is discharged through the exhaust pipe. In order to improve the
energy efficiency further, we are testing higher operating temperatures.
There is only one moving assembly in the entire turbogenerator, which
consists of the rotating generator shaft, the compressor wheel, and the turbine
rotor. This rotating assembly is supported by three radial air bearings and one
double acting air bearing. Air bearings avoid the need for oil lubrication
resulting in low maintenance requirements and high reliability. The entire
system is air-cooled, which avoids liquid cooling, thereby resulting in low
maintenance requirements.
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<PAGE> 46
We have achieved Underwriters' Laboratories certification for our initial
product and will continue to qualify our products under Underwriters'
Laboratories approval. We plan to achieve ISO 9001 certification in the future.
The International Organization for Standardization provides a methodology by
which manufacturers can obtain quality certification.
EMPLOYEES
At March 15, 2000 we employed 169 regular employees. No employees are
covered by any collective bargaining arrangements with respect to his or her
employment by us. We believe that our relationships with our employees are good.
FACILITIES
Currently, our principal administrative, sales and marketing, research and
development and support facilities consist of an aggregate of approximately
89,000 square feet of office space, warehouse space and assembly and test space
in and around Woodland Hills, California. We occupy these spaces under nine
separate leases. However, we plan on relocating our corporate headquarters and
the majority of our operations to 21211 Nordhoff Street in Chatsworth during the
year 2000. We entered into a lease for that premise that expires on December 31,
2009 or ten years following our possession of the property and the expiration of
an early possession period of 60 days exclusive of extensions. The square
footage for our new property is approximately 98,370 square feet and our payment
under that lease will be $30,000 per month for the first six months, and will
rise to $60,000 on the seventh month with incremental increases thereafter. As a
result of our decision to relocate, we will have allowed eight of our nine
leases to expire at the end of their extended terms, and we will permit these
eight leases to expire at different times during the period from May 1, 2000 to
September 1, 2000. Management is attempting to sublet certain of these leases
prior to the termination date. We have renewed one lease for our property at
6025 Yolanda Avenue in Tarzana which consists of 12,120 square feet. This
property will serve as our microturbine testing facility. This lease will expire
on July 31, 2001 and our payment under this lease is $9,084 a month.
LEGAL PROCEEDINGS
A shareholder, Craig Drill Capital, L.P. with Craig Drill Capital Limited,
has asserted fraud and misrepresentation claims arising out of the purchase of
$15 million of our Series E Preferred Stock. In the course of the discussions
concerning the claims, the shareholder's attorneys have given us a draft
complaint to be filed in the Superior Court for the County of Los Angeles,
California, asserting various state law claims against us and some of our
present and former officers and directors arising out of alleged
misrepresentations and omissions in connection with our 1997 offering of Series
E Preferred Stock. In the past, we and the shareholder had entered into a number
of agreements tolling any statutes of limitation that otherwise would have been
applicable. We and representatives of the shareholder have had discussions in an
effort to resolve the dispute and these discussions continue. We are currently
evaluating our options in connection with this potential litigation and intend
to vigorously defend these claims.
On February 11, 1998, we filed a complaint against Michael Irvine, a former
employee, alleging trade secret misappropriation, breached contract and other
related causes of action in the Superior Court for the County of Orange,
California. The former employee filed a cross-complaint alleging wrongful
termination, breach of contract, and other related causes of actions. The relief
requested in the cross complaint included declaratory relief as well as lost
earnings and incidental, general, special, and punitive damages, but none of
these amounts were specified in the cross-complaint. We settled our claims
against the former employee receiving a permanent injunction that prevents that
former employee from disclosing or using any confidential information. With
respect to the cross-complaint, we prevailed on summary judgment in February
1999. The former employee has since filed a notice of appeal and the parties
have filed briefs on the issue. We intend to vigorously defend these claims.
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<PAGE> 47
MANAGEMENT
DIRECTOR, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Our executive officers, directors and key employees, their positions and
their ages as of March 16, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ake Almgren............................... 53 President, Chief Executive Officer and Director
Jeffrey Watts............................. 49 SVP Finance & Administration, CFO, Secretary
William Treece............................ 59 SVP, Strategic Technology Development
Paul Chancellor........................... 46 Senior Vice President, Engineering
Gabriel Tashjian.......................... 34 Senior Vice President, Sales
Mark Kuntz................................ 37 Vice President, Marketing
Joel Wacknov.............................. 30 Vice President, Power Electronics Group
Daniel Callahan........................... 52 Vice President, Quality
Lloyd Kirchner............................ 36 Vice President, Supply Management
Paul Berner............................... 39 Director of Operations
Richard Aube.............................. 31 Director
John Jaggers.............................. 49 Director, Vice Chairman of the Board
Jean-Rene Marcoux......................... 55 Director
Benjamin M. Rosen......................... 67 Director
Peter Steele.............................. 41 Director
Eric Young................................ 43 Director
</TABLE>
AKE ALMGREN Dr. Almgren joined us in July 1998 as President and Chief
Executive Officer after a 26 year career at ASEA Brown Boveri Limited, a
worldwide power solutions company. While there, Dr. Almgren held the position of
Business Area Manager for Distribution Transformers worldwide where he managed
the operation of 36 plants in 28 countries. He has also been President of ABB
Power T&D Company, President of ABB Power Distribution, and President of ABB
Power Systems during his tenure at ABB. In addition, Dr. Almgren has also been
President of Autoliv, an automotive restraint company. Dr. Almgren holds a Ph.D.
in Engineering from Linkopings Tekniska Hogskola in Sweden and a Masters of
Mechanical Engineering from the Royal Institute of Technology in Stockholm,
Sweden. He is a citizen of Sweden and has worked and lived in the United States
during the last nine years.
JEFFREY WATTS Mr. Watts has been our Chief Financial Officer since 1995 and
also serves as our Senior Vice President of Finance and Administration and
Secretary. Mr. Watts has over 20 years experience in financial management and
strategic planning for companies including IBM Corporation, Deloitte & Touche
LLP, a professional services firm, and McKinsey & Company, Inc. Prior to joining
us, he was Senior Vice President and Chief Financial Officer of P-Com, Inc., a
telecommunications equipment supplier, where he led it through various private
financings, an initial public offering and its first secondary offering. He
holds a BA degree in Economics from the University of California Berkeley and an
MBA from the University of Chicago.
WILLIAM TREECE Mr. Treece joined us in 1997 as our Vice President of
Engineering and in 1998 became our Senior Vice President of Engineering. Prior
to joining us, Mr. Treece had a 24 year career with Sundstrand Aerospace, a
large aerospace company, where he held a number of positions including Director
of Engineering, Director of Operations, and Director of Commercial programs.
During his career, Mr. Treece has worked on all aspects of turbine development,
manufacturing and marketing. He holds a BS in Mechanical Engineering from
Indiana Institute of Technology and has done graduate work in engineering and
business at the University of Southern California and San Diego State
University.
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<PAGE> 48
PAUL CHANCELLOR Mr. Chancellor joined us in 2000 as Senior Vice President
of Engineering. From July, 1996 until the time he joined Capstone, Mr.
Chancellor served as Vice President of Support Services for ABB, Power
Generation Inc., whose key products are gas and steam turbine generators. In
this capacity he led a group that included supply management, information
systems, quality, and document management through its formation period. Prior to
this, from January 1995 through July of 1996, Mr. Chancellor was Vice President
of Engineering for Power Generation Inc. where he led a group of 80 people and
was responsible for over $10 million in engineering time and $150 million in
purchased materials and equipment, annually. Mr. Chancellor earned his BS in
Mechanical Engineering and his MSME at Auburn University, as well as a diploma
from the Von Karman Institute in Brussels, Belgium.
GABRIEL TASHJIAN Mr. Tashjian joined us in March of 2000 as Senior Vice
President of Sales. From 1988 to March, 2000 Mr. Tashjian worked in sales and
operations for General Electric in a number of its divisions including GE Power
Systems and GE Energy Services. Most recently, Mr. Tashjian served as Manager,
Commercial Operations for GE Energy Services. Mr. Tashjian's career with General
Electric has included extensive international experience, including his term as
Sales Director for Central and Eastern Europe, from October 1995 to March of
1998, where he led the sales, marketing and business development activities in
23 central and eastern European countries. Mr. Tashjian received his BS in
Electrical Engineering from the University of Southern California.
MARK KUNTZ Mr. Kuntz joined us in 2000 as Vice President of Marketing.
Prior to joining Capstone, Mr. Kuntz served as Vice President and General
Manager of Unicom Distributed Energy, a holding company for the utility
Commonwealth Edison, where he was responsible for bringing that company's
turbogenerator power system to market and for developing new business
opportunities in distributed generation. Before his position at Unicom, Mr.
Kuntz was Director of National Accounts for Lennox Industries, where he provided
sales, marketing and customer service, as well as distribution and technical
support to retail, restaurant and institutional customers. Mr. Kuntz received a
BS in Mechanical Engineering from Cal Poly, San Luis Obispo, and a MBA from
Southern Methodist University.
JOEL WACKNOV Mr. Wacknov joined us in 1996 as an electrical engineer and
was subsequently promoted to Vice President in 1999. He previously worked with
AeroVironment, an electrical control company. Mr. Wacknov holds a BSEE from UCLA
and a MSEE from the University of Wisconsin.
DANIEL CALLAHAN Mr. Callahan joined us in 2000 as Vice President of
Quality. Prior to his start with Capstone, Mr. Callahan spent over 16 years in
quality control for a number of companies, including over ten years with Hewlett
Packard and its related companies. From 1994 until 2000, Mr. Callahan was
Quality and Reliability Manager, Optoelectronics Division, for LumiLeds
Lighting, which was recently spun off from Hewlett Packard as part of Agilent
Technologies. In this capacity, Mr. Callahan achieved annual budget reductions
from $6 million to $900,000 over a three year period, implemented an electronic
documentation system for a worldwide network, and implemented industry quality
control standards, including ISO 9000, TQM and TQC. Mr. Callahan received a BS
in Systems Engineering from the United States Naval Academy and a MS in Physics
from the U.S. Naval Postgraduate School.
LLOYD KIRCHNER Mr. Kirchner joined us in 1997 as mechanical systems
engineer and was subsequently promoted to Vice President of Supply Management in
1999. Previously he was with Amoco Power Resources Corporation, an integrated
oil company, for over ten years. Mr. Kirchner holds a BSME from Rice University
and an MBA from the University of Chicago.
PAUL BERNER Mr. Berner joined us in 1995 as a design engineer. He has held
a variety of engineering and operations assignments since then. He was formerly
with Sundstrand Aerospace, a large aerospace company, in a variety of
engineering and operations assignments. Mr. Berner holds a BS in Mechanical
Engineering from San Diego State University.
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<PAGE> 49
RICHARD AUBE Mr. Aube became our director in 2000. Mr. Aube is currently a
Managing Director of The Beacon Group, LLC, a private investment and strategic
advisory firm based in New York. Mr. Aube joined The Beacon Group in 1993,
focusing on the firm's investment activities in the energy sector. Prior to
joining The Beacon Group, Mr. Aube was an investment banker in the Natural
Resources Group at Morgan Stanley & Co, Incorporated. Mr. Aube is a director of
Generac Portable Products.
JOHN JAGGERS Mr. Jaggers has been our director since 1993. Mr. Jaggers is
also a general partner and the Chief Financial Officer of Sevin Rosen Funds, a
group of venture capital funds. Mr. Jaggers joined Sevin Rosen, a current
stockholder, in 1988, focusing on software and information services. Prior to
joining Sevin Rosen, Mr. Jaggers spent eight years in the venture capital and
corporate financing activities of Rotan Mosle Inc., where he specialized in new
technologies and small, rapidly growing companies. Mr. Jaggers received his
Bachelors and Masters degrees in Electrical Engineering from Rice University. He
received his MBA from Harvard University.
JEAN-RENE MARCOUX Mr. Marcoux became our director in 2000. Mr. Marcoux
first joined Hydro-Quebec in 1969 and for over ten years occupied several
positions in IREQ, its research institute. Mr. Marcoux returned in 1997 to serve
as President and Chief Executive Officer of Hydro-Quebec CapiTech and General
Manager Technology Marketing and Affiliates for Hydro-Quebec, the fourth largest
utility in the world. Prior to that, he held positions related to business
development with GEC-Althom and ABB.
BENJAMIN M. ROSEN Mr. Rosen has been our director since 1993. Mr. Rosen is
Chairman of the Board of Directors of Compaq Computer Corporation, a personal
computer manufacturer, and is also a co-founder of Sevin Rosen Funds, a venture
capital firm managing a several hundred million dollar portfolio. Mr. Rosen is
also a member of the Board of Directors of Ask Jeeves. Mr. Rosen is vice-
chairman of the Board of Trustees of the California Institute of Technology, a
member of the Board of Managers of Memorial Sloan-Kettering Cancer Center, and a
member of the Board of Overseers of Columbia Business School. Mr. Rosen received
a BS degree in Electrical Engineering from Caltech, an MS in Electrical
Engineering from Stanford University and an MBA from Columbia University.
PETER STEELE Mr. Steele is the Director of International New Ventures
within Fletcher Challenge Energy. In this capacity Mr. Steele is responsible for
leading the companies international growth ambitions. In his 18 years of
experience with Fletcher Challenge Energy, a New Zealand based energy,
construction and pulp and paper company, Mr. Steele has managed operations in
several Asian countries including: Indonesia, Thailand, Philippines, China and
most recently held the position of Chief Operating Officer for Fletcher
Challenge Energy Brunei. Mr. Steele is a professional engineer and resides in
Auckland, New Zealand.
ERIC YOUNG Mr. Young has been our director since 1993. Mr. Young is a
cofounder of Canaan Partners, a venture capital investment firm, and has served
as a general partner since its inception in 1987. From 1979 to 1987 Mr. Young
held various management positions with General Electric Co. and G.E. Venture
Capital, a venture capital investment firm and subsidiary of General Electric.
Mr. Young is also a director of several private entities. Mr. Young holds an MBA
from Northwestern University and a BS in Mechanical Engineering from Cornell
University.
BOARD COMPOSITION
Effective upon the closing of this offering, the number of our directors
will be fixed at seven. Our board of directors will be divided into three
classes, each of whose members will serve for a staggered three-year term. At
each annual meeting of stockholders, a class of directors will be elected for a
three-year term to succeed the directors of the same class whose terms are then
expiring.
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<PAGE> 50
BOARD COMMITTEES
Effective upon the closing of this offering, we will have an Audit
Committee and a Compensation Committee. The members of the Audit Committee will
be made up of Messrs. Aube, Marcoux and Steele. The Audit Committee will be
responsible for recommending to the board of directors the engagement of our
outside auditors and reviewing our accounting controls and the results and scope
of audits and other services provided by our auditors. The Compensation
Committee will be made up of Messrs. Jaggers, Rosen and Young. The Compensation
Committee will be responsible for reviewing and recommending to the board of
directors the amount and type of non-stock compensation to be paid to senior
management and establishing and reviewing general policies relating to
compensation and benefits of employees.
DIRECTOR COMPENSATION
Directors who are employees and non-employee directors receive no
compensation for their services as directors. However, they are reimbursed for
the expenses they incur in attending the board or committee meetings.
All directors are eligible to participate in our 2000 stock option plans.
Non-employee directors are eligible to participate in our 2000 stock incentive
plan. Upon initial election or appointment to the board of directors, new
non-employee directors will receive stock options to purchase
shares of common stock which will become exercisable in cumulative monthly
installments and will become fully vested on the fourth anniversary of the date
of grant. Each year of a non-employee director's tenure, the director will
receive stock options to purchase shares. These annual options
will become exercisable in cumulative monthly installments starting after one
year and will become fully vested on the fourth anniversary of the date of
grant. Employee directors are eligible to participate in our 2000 employee stock
purchase plan as long as they meet eligibility requirements, including not
owning, immediately after an option is granted, five percent or more of the
voting power of all classes of stock. Our 1993 stock incentive plan does not
provide for grants of stock options to directors.
ACCELERATED VESTING
The board has adopted an accelerated vesting schedule with respect to
options granted to Dr. Almgren, our chief executive officer, and Mr. Watts, our
chief financial officer, such that these executive officers' options immediately
vest upon an acquisition of Capstone or an acquisition of 50% of the voting
power or economic interest of Capstone.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation that will be in effect at the time of this
offering limits the liability of directors to the maximum extent permitted by
Delaware law. Delaware law provides that directors of a corporation will not be
personally liable for monetary damages for breach of their fiduciary duties as
directors, except liability for any of the following:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
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<PAGE> 51
Our bylaws that will be in effect at the time of this offering will provide
that we shall indemnify our directors and executive officers and may indemnify
our other officers and employees and other agents to the fullest extent
permitted by law. We believe that indemnification under our bylaws covers at
least negligence and gross negligence on the part of indemnified parties. Our
bylaws also permit us to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
such capacity, regardless of whether the bylaws would permit indemnification.
We will enter into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, indemnify our directors and executive officers
for certain expenses, including attorneys' fees, judgments, fines and settlement
amounts incurred by any such person in any action or proceeding, including any
action by us arising out of such person's services as our director or executive
officer, any of our subsidiaries or any other company or enterprise to which the
person provides services at our request. We believe that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us as described
above, we have been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is therefore
unenforceable.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid in the year
ended December 31, 1999, to the following executive officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------------
NUMBER
OF SECURITIES
ANNUAL COMPENSATION UNDERLYING
-------------------- OPTIONS ALL OTHER
NAME YEAR SALARY($) BONUS($) GRANTED(#) COMPENSATION
---- ---- --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Ake Almgren..................................... 1999 $200,000 $100,000 2,075,000 --
President and Chief Executive Officer 1998 106,154 125,000 1,300,000
Jeffrey Watts................................... 1999 $153,462 $ -- 475,500 --
Senior Vice President Finance & 1998 145,000 -- -- --
Administration, CFO, Secretary 1997 136,222 -- -- --
William Treece.................................. 1999 $146,338 $ -- 200,000 --
Senior Vice President, Engineering 1998 145,000 -- -- --
1997 94,135 -- 150,000 --
</TABLE>
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<PAGE> 52
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock options granted
during 1999 to our executive officers listed in the Summary Compensation Table.
During 1999, we granted options to purchase an aggregate of 4,921,200 shares of
common stock to employees. The exercise price per share for these options was
less than the fair market value of the common stock as of the grant date.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE MARKET EXPIRATION GRANT DATE
NAME GRANTED(1) FISCAL YEAR PRICE PRICE DATE PRESENT VALUE(2)
---- ---------- ------------- -------- ------ ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Ake Almgren..................... 2,075,000 42% $0.20 $0.34 5/1/2009 $371,010
Jeffrey Watts................... 475,500 10% $0.20 $0.34 5/1/2009 $ 85,019
William Treece.................. 200,000 4% $0.20 $0.34 5/1/2009 $ 35,760
</TABLE>
- ---------------
(1) All options were granted under our stock option plan and have a ten-year
term. Of the options shown in this table, 100% vest 05/01/2003. Vested
options become immediately exercisable upon a sale of the company or an
initial public offering.
(2) The grant date present value was calculated using a minimum value option
valuation model, using the assumptions set forth in note 6 to the notes of
our financial statements.
FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the number and value
of unexercised options to purchase common stock held as of December 31, 1999 by
our executive officers listed in the Summary Compensation Table. There was no
public trading market for our common stock as of December 31, 1999. Accordingly,
the values of the unexercised in-the-money options have been calculated on the
basis of $3.60 per share, the fair market value of our common stock at the end
of fiscal year 1999, less the applicable exercise price multiplied by the number
of shares that may be acquired on exercise.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES DECEMBER 31, 1999(#) DECEMBER 31, 1999($)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ake Almgren.......... -- -- 762,481 2,612,519 2,408,269 8,546,731
Jeffrey Watts........ -- -- 315,453 434,797 1,080,992 1,478,596
William Treece....... -- -- 87,500 262,500 262,500 867,500
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY
OPTIONS/SARS BASED
ON PUBLIC OFFERING
PRICE($)
---------------------------
NAME EXERCISABLE UNEXERCISABLE
---- ----------- -------------
<S> <C> <C>
Ake Almgren..........
Jeffrey Watts........
William Treece.......
</TABLE>
STOCK OPTION PLANS
1993 INCENTIVE STOCK PLAN
We have a 1993 incentive stock option plan that allows some of our
employees and consultants the ability to acquire an ownership interest in our
company. Under this plan, we have reserved for issuance 13,000,000 shares of
common stock. The 1993 plan allows us to grant:
- incentive stock options;
- nonstatutory stock options; and
- stock purchase rights.
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Options and stock purchase rights may be granted to employees and
consultants, while incentive stock options may be granted only to employees. As
of February 29, 2000, 10,795,286 options had been granted under this plan.
Options that were granted under this plan that subsequently have expired or have
been canceled may be reissued under this plan. As of February 29, 2000, there
were under our 1993 plan outstanding options for 8,550,445 shares. In addition,
the options previously granted under this plan will continue to vest in
accordance with this plan and vested options will be exercisable for shares of
common stock upon completion of the offering.
The exercise price of common stock underlying an option may be greater,
less than or equal to fair market value. The exercise price of an incentive
stock option granted to an employee who owns:
- 10% or less of the voting power of all classes of stock, may not be less
than 100% of the fair market value of the underlying shares of common
stock on the date of the grant; and
- more than 10% of the voting power of all classes of stock, may not be
less than 110% of the fair market value of the underlying shares of
common stock on the date of the grant.
The exercise price of common stock underlying a nonstatutory stock option
granted to an employee or consultant who owns:
- 10% or less of the voting power of all classes of stock, may not be less
than 85% of the fair market value of the underlying shares of common
stock on the date of the grant; and
- more than 10% of the voting power of all classes of stock, may not be
less than 110% of the fair market value of the underlying shares of
common stock on the date of the grant.
In the case of a stock purchase right, the per share exercise price of the
common stock underlying the right granted to a person who owns:
- 10% or less of the voting power of all classes of stock, may not be less
than 85% of the fair market value of the underlying shares of common
stock on the date of the grant; and
- more than 10% of the voting power of all classes of stock, may not be
less than 100% of the fair market value of the underlying shares of
common stock on the date of the grant.
The maximum term of an option is 10 years from the date of the grant,
though the option agreement may set forth a shorter term. The term is five years
for an option granted to an employee who, at the time of the grant, owns stock
representing more than 10% of the voting power of all classes of stock. Options
are typically subject to vesting schedules, which do not exceed five years.
Options may be exercised for specified periods, generally 30 days, after the
termination of the optionee's employment or other service relationship with us,
and are generally non-transferable. The term of a nonstatutory stock option may
be extended under some circumstances for a period of six months upon the death
of the optionee. If the board determines to grant a stock purchase right, a
stock purchase agreement or stock bonus agreement must be executed no later than
six months from the date of the grant. In some instances, we have a repurchase
option upon the purchaser's voluntary or involuntary termination. The repurchase
price is the fair market value for such shares on the date the right of
repurchase is triggered.
Upon the exercise of options or the grant of purchase right, the board
determines the method of payment, and may consist of:
- cash;
- check;
- promissory note or other deferred payment arrangement;
- delivery of shares of common stock that have a fair market value on the
date of surrender equal to the aggregate exercise price; or
- any combination of methods above or other method to the extent permitted
by sections 408 or 409 of the California General Corporation Law.
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The 1993 plan may be administered by the board of directors or a committee
appointed by the board. Subject to the provisions of the plan, the board may
select the individuals eligible to receive awards, determine or modify the terms
and conditions of the awards granted, determine fair market value and exercise
price within specific parameters, waive vesting provisions, and generally
administer and interpret the plan.
Upon specified events, including a stock split, reverse stock split, stock
dividend, combination or reclassification, we will adjust proportionately:
- the number of shares of common stock covered by each outstanding option
or purchase right;
- the number of shares of common stock that have been authorized under the
plan but as to which no options or purchase rights have been granted or
which have been returned to the plan or repurchased upon a holder's
termination or otherwise; and
- the price per share of common stock covered by each outstanding option or
purchase right.
In the event of our dissolution or liquidation, all options and purchase
rights not previously exercised will terminate immediately prior to the
consummation of that action. In the event of certain transactions, we and the
other parties to the transactions may agree to treat all the outstanding awards
in a different manner. These transactions include a merger or consolidation in
which we are not the survivor or in which shares of our stock are converted into
cash, securities or other property; the sale of all or substantially all of our
assets; a liquidation or dissolution that we initiate; and a transaction in
which any person becomes the beneficial owner, directly or indirectly, of 30% or
more of our outstanding capital stock on a fully diluted and as-converted basis.
2000 EQUITY INCENTIVE PLAN
Our 2000 equity incentive plan was adopted by our board of directors on
, 2000 and approved by our stockholders on , 2000 as
a successor plan to our 1993 incentive stock plan. Under the 2000 plan, a total
of shares of common stock have been reserved for issuance.
The 2000 plan is substantially the same as the 1993 plan, except that it
contemplates the issuance of stock after the initial public offering of our
common stock being made by this prospectus. The 2000 plan provides for the
discretionary grant of incentive stock options (as defined in Section 422 of the
Internal Revenue Code), nonstatutory stock options, stock purchase rights and
stock bonus rights to employees, consultants and members of the board of
directors. The 2000 Plan provides that our non-employee directors will be
granted options to purchase shares of common stock on the date our
stock begins public trading or on their initial election to the board of
directors if after the date our stock begins public trading. The 2000 plan also
provides for formula grants to our non-employee directors of options to purchase
shares of common stock on the date of each annual meeting of our
stockholders following which the non-employee director will continue to serve on
our board of directors.
Our board of directors or a committee thereof may administer the 2000 Plan.
Starting with the date our stock begins public trading, the 2000 plan will be
administered by a committee composed of two or more independent directors. The
administrator determines the terms of the options or other awards granted,
including the exercise price of the options or other awards, the number of
shares subject to each option or other award (up to per year per
participant), the exercisability thereof, and the form of consideration payable
upon exercise. In addition, the administrator may amend, suspend or terminate
the 2000 plan, provided that no action may affect any share of common stock
previously issued and sold or any option previously granted under the 2000 plan
without the consent of the holder. With respect to any participant who owns
stock possessing more than 10% of the voting power of all classes of our
outstanding capital stock, the exercise price of any incentive stock option
granted must be at least equal 110% of the fair market value on the
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grant date and the term must not exceed five years. The term of all other
options granted under the 2000 plan may not exceed ten years.
In the case of restricted stock, unless the administrator determines
otherwise, the restricted stock purchase agreement will grant us a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment or consulting relationship with our company for any
reason, including death or disability. The purchase price for shares repurchased
pursuant to a restricted stock purchase agreement must be the original price
paid by the purchaser. Options and other awards granted under the 2000 plan are
generally not transferable by the optionee, and each option and other award is
exercisable during the lifetime of the optionee only by the optionee. Options
granted under the 2000 plan must generally be exercised within three months
after the end of optionee's status as an employee, director or consultant, or
within one year after the optionee's termination by disability or death,
respectively, but in no event later than the expiration of the option's term. If
an optionee is terminated for cause, the option terminates immediately. The 2000
Plan provides that, in the event of a merger with or into another corporation,
the administrator will have the authority, but not the obligation to accelerate
the vesting of each outstanding option and other award.
EMPLOYEE STOCK PURCHASE PLAN
2000 EMPLOYEE STOCK PURCHASE PLAN
The 2000 employee stock purchase plan was adopted by our board of directors
on , 2000 and by our stockholders on , 2000. A total of
shares of common stock may be sold under the purchase plan. As of
the date of this prospectus, no shares have been issued under the purchase plan.
The purchase plan is administered by a committee composed of not less than two
members of the board of directors who are "non-employee directors" within the
meaning of Rule 16b-3 adopted by the SEC under Section 16(b) of the Securities
Exchange Act.
The purchase plan, which is intended to qualify under section 423 of the
Internal Revenue Code, contains consecutive offer periods that are generally
months in duration. The offer periods start on and end on
the last day of , except for the first offer period, which will
commence on the date immediately preceding the first date on which a share of
common stock is traded on an exchange or quoted on Nasdaq or a successor
quotation system and end on , 200 . Employees are eligible to
participate if they are customarily employed by us or any participating
subsidiary for more than twenty hours per week and more than five months per
year. However, no employee may be granted a right to purchase stock under the
purchase plan (1) to the extent that, immediately after the grant of the right
to purchase stock, the employee would own, or be treated as owning, stock
possessing 5% or more of the total combined voting power or value of all classes
of our capital stock or (2) to the extent that his or her rights to purchase
stock under all of our employee stock purchase plans accrues at a rate which
exceeds $25,000 worth of stock for each calendar year.
The purchase plan permits participants to purchase common stock through
payroll deductions of up to 15% of the participant's base compensation. Base
compensation is defined as the participant's total base compensation which he or
she receives on each payday as compensation for services to our company,
excluding overtime payments, sales commissions, incentive compensation, bonuses,
expense reimbursements, fringe benefits and other special payments. The maximum
number of shares a participant may purchase with respect to a single purchase
period is shares. Amounts deducted and accumulated by the
participant are used to purchase shares of common stock at the end of each
purchase period. The price of stock purchased under the purchase plan is 85% of
the lesser of the fair market value of the common stock (1) the first day of the
purchase period or (2) the last day of the purchase period. Participants may end
their participation at any time other than the final 15 days of an offer period,
and they will be paid their payroll deductions to date. Participation ends
automatically upon termination of employment with us.
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Rights to purchase stock granted under the purchase plan are not
transferable by a participant other than by will, the laws of descent and
distribution, or as otherwise provided under the purchase plan. The purchase
plan provides that, upon certain specified events, including a recapitalization,
reclassification, stock split, reverse stock split, stock dividend,
reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, liquidation, dissolution, or disposition of all or substantially all
of our assets, the board has discretion to adjust the exercise price of any
option as well as the number and kind of shares for which options may be granted
or which are subject to outstanding options. Our board of directors has the
authority to amend or terminate the purchase plan, except that a shareholder
vote is required to amend the purchase plan either to change the number of
shares of stock that may be sold pursuant to options under the purchase plan, or
to alter the requirements for eligibility to participate in the purchase plan,
or in any manner that would cause the plan to no longer be an "employee stock
purchase plan" within the meaning of Section 423(b) of the Internal Revenue
Code. The purchase plan will terminate in , 2010, unless terminated
earlier in accordance with its provisions.
EMPLOYMENT AGREEMENTS
We have entered into a letter agreement with Ake Almgren, our President and
Chief Executive Officer. During his employment Dr. Almgren will receive a base
salary plus a bonus of up to $100,000 based on the achievement of annual
objectives and stock options under Capstone Turbine Corporation's Stock Option
Plan, originally granted in the amount of 1,300,000 shares vesting over four
years. Upon termination of his employment, Dr. Almgren will receive an amount
equaling the monthly rate of the base salary for the six months following
termination. For 1999, Dr. Almgren's base salary was $200,000.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On May 16, 1995, we entered into a Preferred Stock Purchase Agreement for
Series B Preferred Stock pursuant to which Fletcher Challenge Distributed
Generation, Inc. purchased 3,333,334 shares of Series B Preferred. In connection
with the Series B preferred financing, we and Fletcher Challenge Power Marketing
Limited, a New Zealand corporation and an affiliate of Fletcher Challenge,
entered into a Marketing and Licensing Agreement dated May 16, 1995. This
agreement provided that Fletcher Challenge Power Marketing have the exclusive
marketing rights for seven years with respect to our products throughout the
world outside of the United States, Canada, Mexico, Europe and Africa. We have
subsequently reacquired these marketing and licensing rights under the terms of
the Marketing Rights Buyback Agreement, dated as of July 14, 1999, entered into
by us, Awatea Holdings Limited, Fletcher Challenge and Fletcher Challenge Power
Marketing. Among other things, the Buyback Agreement provides for our repurchase
of Fletcher Challenge's Power Marketing marketing rights. As part of the
repurchase agreement we paid $9 million and will pay an additional $11 million
from the proceeds of this offering. On February 24, 2000 we also issued
1,250,000 shares of Series G preferred for no additional consideration to
Awatea. Peter Steele is a director designee of Fletcher Challenge to our board.
Sales made to Fletcher Challenge and an affiliate were $247,000 in 1999.
On January 17, 1997, we issued 3,125,000 shares of our Series D Preferred
to various investors, some of whom were our officers, directors or 5%
shareholders. On August 22, 1997 we issued 5,865,814 shares of our Series E
Preferred Stock to various investors. An additional 4,587,331 shares of Series E
Preferred Stock were issued on November 19, 1997. On May 31, 1999, we issued
11,095,496 shares of Series F Preferred Stock, in addition to warrants to
acquire 6,250,004 shares of common stock, to various investors, some of whom
were our directors or 5% shareholders. On February 24, 2000, we issued
35,683,979 shares of Series G preferred stock to various investors some of whom
were our officers, directors or 5% shareholders.
We have sold several of our products to Fletcher Challenge Energy, Canada
and Fletcher Challenge Power Marketing, New Zealand for aggregate proceeds of
approximately $357,000. Fletcher Challenge Power Marketing, New Zealand
purchased one microturbine in 1995 and three units in 1996 for proceeds of
approximately $109,000. In 1999 we sold six units to Fletcher Challenge Power
Marketing, New Zealand for resale to Japanese customers for approximately
$178,000. Fletcher Challenge Energy Canada purchased two microturbines in 1999
for aggregate proceeds of approximately $69,000, the same price other customers
paid.
During 1997 and 1998, Fletcher Challenge reimbursed us $137,000 and
$39,000, respectively, for the use of our office facilities as well as for other
expenses. As of December 31, 1998, we had a $17,000 receivable for these
expenses.
During 1997, we purchased from Rosen Motors, of which our present and
former directors Benjamin Rosen and Dr. Harold Rosen, respectively, were
principal officers, equipment and improvements in the amount of $590,000 and
assumed several leases.
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PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock by:
- all persons known by us to own beneficially 5% or more of the common
stock;
- each of our directors;
- the executive officers listed in the Summary Compensation Table; and
- all directors and executive officers as a group.
Unless otherwise indicated, the address for each stockholder on this table
is c/o Capstone Turbine Corporation, 6430 Independence, Woodland Hills, CA
91367. A person has beneficial ownership of shares if he has the power to vote
or dispose of the shares. This power can be exclusive or shared, direct or
indirect. In addition, a person is considered by SEC rules to beneficially own
shares underlying options that are presently exercisable or will become
exercisable within 60 days. The shares listed in this table below under "Number
of Shares Underlying Options" include shares issuable upon the exercise of
options that are presently exercisable or will become exercisable within 60 days
of February 29, 2000.
As of February 29, 2000, there were 110,369,379 shares of our common stock
outstanding, after giving effect to the conversion of all shares of preferred
stock into common stock. To calculate a shareholder's percentage of beneficial
ownership, we must include in the numerator and denominator those shares
underlying options that the shareholder is considered to beneficially own.
Shares underlying options held by other shareholders, however, are disregarded
in this calculation. Therefore, the denominator used in calculating beneficial
ownership among our shareholders may differ.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED PRIOR TO OFFERING SHARES
----------------------------------------------- BENEFICIALLY
NUMBER OF OWNED AFTER
NUMBER OF SHARES OFFERING
OUTSTANDING UNDERLYING ----------------
NAME OF BENEFICIAL OWNER SHARES OPTIONS TOTAL PERCENT NUMBER PERCENT
------------------------ ----------- ---------- ---------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Peter Steele(1)................ 13,568,621 -- 13,568,621 12.29%
RHO Management Trust I(2)...... 10,461,655 -- 10,461,655 9.48%
Southern Union Co.(3).......... 6,946,562 -- 6,946,562 6.29%
John Jaggers(4)................ 6,903,614 -- 6,903,614 6.26%
Richard Aube(5)................ 6,250,000 -- 6,250,000 5.66%
Vulcan Ventures, Inc.(6)....... 5,899,827 -- 5,899,827 5.35%
Benjamin M. Rosen(7)........... 5,820,994 -- 5,820,994 5.27%
Eric Young(8).................. 4,045,182 4,045,182 3.67%
Jean-Rene Marcoux(9)........... 2,000,000 -- 2,000,000 1.81%
Dr. Ake Almgren(10)............ 200,000 844,271 1,044,271 0.95%
Jeffrey Watts(11).............. 341,783 144,386 486,169 0.44%
William Treece(12)............. -- 100,000 100,000 0.09%
All directors and executive
officers as a group (9
persons)..................... 39,130,192 1,088,657 40,218,849 36.41%
</TABLE>
- ---------------
(1) Director designee for Awatea (Fletcher Challenge). Includes 12,215,310
shares in preferred stock, 1,038,543 shares of common stock warrants, and
314,768 shares of preferred stock warrants. Mr. Steele disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest
therein.
(2) Includes 7,854,692 shares in preferred stock, 2,317,890 shares of common
stock warrants, and 289,073 shares of preferred stock warrants.
(3) Includes 3,821,562 shares of preferred stock and 3,125,000 shares of common
stock warrants.
(4) Director designee and general partner of various affiliated venture capital
partnerships managed by Sevin Rosen Funds. Includes 58,299 shares in common
stock, 6,255,352 shares in preferred
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stock, 426,530 shares of common stock warrants and 163,433 shares of
preferred stock warrants all held by various venture capital partnerships
managed by Sevin Rosen Funds. Mr. Jaggers disclaims beneficial ownership of
such shares except to the extent of his pecuniary interest therein.
(5) Director designee for Beacon Group Energy Investment Fund. Consists of
6,250,000 shares in preferred stock. Mr. Aube disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest
therein.
(6) Includes 5,518,001 shares in preferred stock and 381,826 shares of
preferred stock warrants.
(7) Director. Includes 31,635 shares in common stock, 5,381,547 shares in
preferred stock, 292,134 shares of common stock warrants and 115,678 shares
of preferred stock warrants.
(8) Director designee of the Canaan Partnership Funds. Includes 53,847 shares
in common stock, 3,687,340 shares in preferred stock, 216,349 shares of
common stock warrants and 87,646 shares of preferred stock warrants. Mr.
Young disclaims beneficial ownership of such shares except to the extent of
his pecuniary interest therein.
(9) Director designee for Hydro-Quebec. Consists of 2,000,000 shares in
preferred stock. Mr. Marcoux disclaims beneficial ownership of such shares
except to the extent of his pecuniary interest therein.
(10) President, CEO and Director. Consists of 844,271 shares of common stock
issuable upon exercise of options exercisable within 60 days of February
29, 2000.
(11) SVP Finance & Administration, CFO and Secretary. Consists of 144,386 shares
of common stock issuable upon exercise of options exercisable within 60
days of February 29, 2000.
(12) SVP Engineering. Consists of 100,000 shares of Common Stock issuable upon
exercise of options exercisable within 60 days of February 29, 2000.
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DESCRIPTION OF CAPITAL STOCK
The Company, is authorized to issue up to 135,000,000 shares of common
stock, $0.001 par value per share, and 80,000,000 shares of preferred stock,
$0.001 par value.
COMMON STOCK
As of February 29, 2000, our outstanding common stock consisted of
92,107,629 shares of common stock, after giving effect to the conversion of all
shares of preferred stock into common stock upon the closing of this offering,
held by 287 shareholders of record. Holders of common stock are entitled to one
vote for each share held of record on all matters on which shareholders may
vote, and do not have cumulative voting rights in the election of directors.
Holders of common stock are entitled to receive, as, when and if declared by the
board of directors from time to time, such dividends and other distributions in
cash, stock or property from our assets or funds legally available for such
purposes subject to any dividend preferences that may be attributable to our
outstanding preferred stock.
No preemptive, conversion, redemption or sinking fund provisions apply to
the common stock. All outstanding shares of common stock are fully paid and
non-assessable. In the event of our liquidation, dissolution or winding up,
holders of common stock are entitled to share ratably in the assets available
for distribution.
PREFERRED STOCK
Upon the closing of this offering, we will have no outstanding shares of
preferred stock. Our board of directors, without further action by the
shareholders, is authorized to issue an aggregate of 80,000,000 shares of
preferred stock. We have no plans to issue a new series of preferred stock. Our
board of directors may issue preferred stock with dividend rates, redemption
prices, preferences on liquidation or dissolution, conversion rights, voting
rights and any other preferences, which rights and preferences could adversely
affect the voting power of the holders of common stock. Issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions or other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or could discourage or delay a
third party from acquiring control.
WARRANTS
At February 29, 2000, we had outstanding warrants to acquire 15,417,880
shares of common and preferred stock to investors and 198,608 shares of common
and preferred stock to equipment lessors. These warrants expire on dates ranging
from the consummation of this offering to December, 2003. The exercise price and
number of shares of stock issuable upon the exercise of each of the warrants may
be adjusted upon the occurrence of certain events, including stock splits, stock
dividends, reorganizations, or merger. In addition, some of the warrants and
shares of stock issuable upon exercise of those warrants have registration
rights.
REGISTRATION RIGHTS
After the consummation of this offering, the holders of approximately
million shares of common stock will be entitled to registration rights with
respect to the registrable securities. These rights are provided under the terms
of the registrable securities and agreements between us and the holders of those
securities. These agreements and the registrable securities provide demand
registrations rights. In addition, pursuant to these agreements, the holders of
the securities are entitled to require us to include their registrable
securities in registration statements we file under the Securities Act of 1933.
Registration of shares of common stock pursuant to the exercise of registration
rights under the Securities Act would result in those shares becoming freely
tradable without restriction under the Securities Act immediately upon the
effectiveness of such registration.
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RIGHTS AGREEMENT
We have in place two rights agreements by and among us and several of our
preferred stockholders which grant the stockholders rights to include their
shares in a registration statement filed by us, including in connection with
this offering. The underwriter participating may limit the number of shares
offered by the stockholders Among other things, the rights agreements provide
that in connection with some issuances of securities each holder who is a party
to the rights agreement may purchase an amount of such securities and on
substantially the same terms and conditions as the issuance as determined by a
formula intended to ensure that those holders can maintain their proportional
interest in us on a fully diluted basis.
PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BY-LAWS WHICH MAY HAVE AN
ANTI-TAKEOVER EFFECT
A number of provisions of our articles of incorporation and by-laws which
will be effective upon completion of this offering concern matters of corporate
governance and the rights of shareholders. These provisions, as well as the
ability of our board of directors to issue shares of preferred stock and/or to
set the voting rights, preferences and other terms, may be deemed to have an
anti-takeover effect and may discourage takeover attempts not first approved by
our board of directors, including takeovers which shareholders may deem to be in
their best interests. If takeover attempts are discouraged, temporary
fluctuations in the market price of our common stock, which may result from
actual or rumored takeover attempts, may be inhibited. These provisions,
together with our classified board of directors and the ability of our board of
directors to issue preferred stock without further shareholder action, also
could delay or frustrate the removal of incumbent directors or the assumption of
control by shareholders, even if the removal or assumption would be beneficial
to our shareholders. These provisions also could discourage or make more
difficult a merger, tender offer or proxy contest, even if favorable to the
interests of shareholders, and could depress the market price of our common
stock. Our board of directors believes that these provisions are appropriate to
protect out interests and of our shareholders. Our board of directors has no
present plans to adopt any further measures or devices which may be deemed to
have an "anti-takeover effect."
TRADING ON THE NASDAQ NATIONAL MARKET SYSTEM
We have applied to have our common stock approved for quotation on the
Nasdaq under the symbol "WATS".
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock will be
.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of common stock in the public market following
the offering could adversely affect the market price of the common stock and
adversely affect our ability to raise capital at a time and on terms favorable
to us.
Of the shares to be outstanding after the offering, the
shares of common stock offered by us and approximately
additional shares of common stock will be freely tradeable without restriction
in the public market unless such shares are held by "affiliates," as that term
is defined in Rule 144(a) under the Securities Act. For purposes of Rule 144, an
"affiliate" of an issuer is a person that, directly or indirectly through one or
more intermediaries, controls, or is controlled by or is under common control
with, such issuer. The remaining shares of common stock to be outstanding after
the offering are "restricted securities" under the Securities Act and may be
sold in the public market upon the expiration of specified holding periods under
Rule 144, subject to the volume, manner of sale and other limitations of Rule
144.
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In addition, as of February 29, 2000, there were outstanding warrants to
purchase 15,716,288 shares of common and preferred stock, and options issued and
outstanding to purchase 8,550,455 shares of common stock. An additional
2,204,714 shares were reserved for issuance under our option plans. We intend to
register the shares of common stock issued or reserved for issuance under our
option plans or separate option agreements as soon as practicable following the
date of this prospectus.
Holders of approximately 91.8 million shares of common stock are entitled
to registration rights with respect to such shares for resale under the
Securities Act. If such holders, by exercising their registration rights, cause
a large number of shares to be registered and sold in the public market, these
sales could have an adverse effect on the market price for the common stock.
LOCK-UP ARRANGEMENTS
Our executive officers and directors and certain other shareholders have
agreed not to sell or otherwise dispose of any shares of common stock for a
period of 180 days after the date of this prospectus without the prior written
consent of Goldman, Sachs & Co. We have agreed not to sell or otherwise dispose
of any shares of our common stock for a period of 180 days after the date of
this prospectus. See "Underwriting".
VALIDITY OF COMMON STOCK
The validity of the shares of common stock offered hereby will be passed
upon for us by Latham & Watkins, Los Angeles, California and for the
underwriters by Sullivan & Cromwell, New York, New York.
EXPERTS
Deloitte & Touche LLP, independent auditors, have audited our financial
statement and financial statement schedule at December 31, 1998 and 1999, and
for each of the two years in the period ended December 31, 1999, as set forth in
their reports. We have included our financial statements and financial statement
schedules in the prospectus and elsewhere in the registration statement in
reliance on Deloitte & Touche LLP's reports, given on their authority as experts
in accounting and auditing. Ernst & Young LLP, independent auditors, have
audited our financial statements and financial statement schedule at December
31, 1997, and for the year ended December 31, 1997, as set forth in their report
(which contain an explanatory paragraph describing conditions that raise
substantial doubt about our ability to continue as a going concern as described
in Note 1 to those financial statements). We have included our financial
statements and financial statement schedules in the prospectus and elsewhere in
the registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
CHANGE OF AUDITORS
In August 1998, the Board of Directors elected to change our independent
auditors, from Ernst & Young, LLP, to Deloitte & Touche LLP. In connection with
Ernst & Young LLP's audit of the financial statements for the years ended
December 31, 1995, 1996 and 1997, and in connection with the subsequent period
up to August 1998, there were no disagreements with Ernst & Young LLP on any
matters of accounting principles or practices, financial statements disclosure
or auditing scope or procedures, nor any reportable events. Ernst & Young LLP's
report on our financial statements for the years ended December 31, 1995, 1996
and 1997 contained no adverse opinion or disclaimer of opinion and was not
modified or qualified as to uncertainty, audit scope or accounting principles
except for a going concern emphasis paragraph for each of the three years. The
decision to change auditors was approved by our board of directors. We have
provided Ernst & Young LLP with a copy of the disclosure contained in this
section of the prospectus.
59
<PAGE> 63
UNDERWRITING
Capstone and the underwriters named below have entered into an underwriting
agreement with respect to the shares being offered. Subject to conditions, each
underwriter has severally agreed to purchase the number of shares indicated in
the following table. Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, and Morgan Stanley & Co. Incorporated are the representatives of
the underwriters.
<TABLE>
<CAPTION>
Number of Shares
Underwriters ----------------
<S> <C>
Goldman, Sachs & Co. .......................................
Merrill Lynch, Pierce, Fenner & Smith ......................
Incorporated
Morgan Stanley & Co. Incorporated ..........................
-------
Total...........................................
=======
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
[ ] shares from Capstone to cover such sales. They may exercise that
option for 30 days. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in approximately the same proportion
as set forth in the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by Capstone. Such amounts are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid by Capstone
----------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share........................................... $ $
Total............................................... $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
initial offering price. If all the shares are not sold at the initial offering
price, the representatives may change the offering price and the other selling
terms.
Capstone, its directors, officers and persons owning its common stock have
agreed with the underwriters not to dispose of or hedge any of their common
stock or securities convertible into or exchangeable for shares of common stock
during the period from the date of this prospectus continuing through the date
180 days after the date of this prospectus, except with the prior written
consent of the representatives. This agreement does not apply to gifts or
transfers to affiliates or transactions under any existing employee benefit
plans. See "Shares Eligible for Future Sale" for a discussion of various
transfer restrictions.
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among Capstone and the
representatives. Among the facts to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be our historical performance, estimates of the business
potential and earnings prospects of Capstone, an assessment of our management
and the consideration of the above factors in relation to market valuation of
companies in related businesses.
At Capstone's request, the underwriters have reserved up to
shares of the common stock offered hereby for sale, at the initial public
offering price, to employees, customers and
60
<PAGE> 64
other friends of Capstone through a directed share program. The number of shares
available for sale to the general public will be reduced to the extent these
persons purchase the reserved shares. We cannot assure you that any of the
reserved shares will be so purchased. Any reserved shares not so purchased will
be offered by the underwriters to the general public on the same basis as other
shares offered hereby.
Capstone will apply to have the common stock included for quotation on the
Nasdaq National Market under the symbol of "WATS".
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales discretionary accounts to exceed 5% of
the total number of shares offered.
Capstone estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$ .
Capstone has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
61
<PAGE> 65
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 (including the exhibits and schedules thereto) under the
Securities Act and the rules and regulations thereunder, for the registration of
the common stock offered hereby. This prospectus is part of the registration
statement. This prospectus does not contain all the information included in the
registration statement because we have omitted parts of the registration
statement as permitted by the Securities and Exchange Commission's rules and
regulations. For further information about us and our common stock, you should
refer to the registration statement. Statements contained in this prospectus as
to any contract, agreement or other document referred to are not necessarily
complete. Where the contract or other document is an exhibit to the registration
statement, each statement is qualified by the provisions of that exhibit.
You can inspect and copy all or any portion of the registration statements
or any reports, statements or other information we file at the public reference
facility maintained by the Securities and Exchange Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices at
Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may call the Securities
and Exchange Commission at 1-800-SEC-0330 for further information about the
operation of the public reference rooms. Copies of all or any portion of the
registration statement can be obtained from the Public Reference Section of the
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, the registration statement is publicly
available through the Securities and Exchange Commission's site on the
Internet's World Wide Web, located at http://www.sec.gov.
We will also file annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission. You can also
request copies of these documents, for a copying fee, by writing to the
Securities and Exchange Commission. We intend to furnish to our stockholders
annual reports containing audited financial statements for each fiscal year.
62
<PAGE> 66
CAPSTONE TURBINE CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report of Deloitte & Touche LLP....... F-2
Independent Auditors' Report of Ernst & Young LLP........... F-3
Financial Statements as of December 31, 1998 and 1999 and
for the Years Ended December 31, 1997, 1998 and 1999:
Balance Sheets............................................ F-4
Statements of Operations.................................. F-5
Statements of Stockholders' Deficiency.................... F-6
Statements of Cash Flows.................................. F-7
Notes to Financial Statements............................. F-8
</TABLE>
F-1
<PAGE> 67
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Capstone Turbine Corporation:
We have audited the accompanying balance sheets of Capstone Turbine Corporation
(the "Company") as of December 31, 1998 and 1999, and the related statements of
operations, stockholders' deficiency, and cash flows for the years then ended.
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 of America. 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, such financial statements present fairly, in all material
respects, the financial position of Capstone Turbine Corporation as of December
31, 1998 and 1999, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
March 20, 2000
F-2
<PAGE> 68
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Capstone Turbine Corporation
We have audited the accompanying statement of operations, stockholders' equity,
and cash flows for the year ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of Capstone Turbine Corporation's operations
and cash flows for the year ended December 31, 1997, in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Capstone Turbine Corporation will continue as a going concern. As more fully
described in Note 1, the Company has incurred significant operating losses and
continues to need to raise additional funding. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
/s/ ERNST & YOUNG LLP
Woodland Hills, California
April 3, 1998
F-3
<PAGE> 69
CAPSTONE TURBINE CORPORATION
BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
PRO FORMA
1998 1999 (UNAUDITED)
------------ ------------- -------------
(NOTE 12)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents (Note 2)......................... $ 4,943,000 $ 6,858,000
Accounts receivable, net of allowance for doubtful accounts
of $3,000 in 1998 and $50,000 in 1999.................... 79,000 2,425,000
Accounts receivable from related parties (Note 10)......... 17,000
Inventory (Note 3)......................................... 8,703,000 8,803,000
Prepaid expenses........................................... 808,000 2,217,000
------------ ------------- -------------
Total current assets..................................... 14,550,000 20,303,000
------------ ------------- -------------
Equipment and Leasehold Improvements (Notes 2 and 7):
Machinery, equipment, and furniture........................ 8,938,000 11,824,000
Leasehold improvements..................................... 182,000 137,000
Molds and tooling.......................................... 397,000 541,000
------------ ------------- -------------
9,517,000 12,502,000
Less accumulated depreciation and amortization............. 2,706,000 4,570,000
------------ ------------- -------------
Total equipment and leasehold improvements............... 6,811,000 7,932,000
------------ ------------- -------------
Deposits on Fixed Assets (Note 7)........................... 4,340,000 3,374,000
Other Assets................................................ 69,000 422,000
Intangible Assets, Net (Note 10)............................ 4,896,000
------------ ------------- -------------
Total.................................................... $ 25,770,000 $ 36,927,000
============ ============= =============
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
Current Liabilities:
Accounts payable........................................... $ 1,230,000 $ 1,728,000
Accrued salaries and wages................................. 520,000 677,000
Other accrued liabilities.................................. 3,957,000 2,340,000
Accrued warranty reserve................................... 873,000 3,168,000
Deferred revenue (Notes 2 and 10).......................... 4,696,000
Current portion of capital lease obligations (Note 7)...... 1,051,000 1,400,000
------------ ------------- -------------
Total current liabilities................................ 7,631,000 14,009,000
------------ ------------- -------------
Long-Term Portion of Capital Lease Obligations (Note 7)..... 3,398,000 4,499,000
------------ ------------- -------------
Accrued Dividends Payable (Note 5).......................... 4,268,000 6,175,000 --
------------ ------------- -------------
Commitments and Contingencies (Note 7)
Redeemable Preferred Stock, 80,000,000 Shares Authorized
(Notes 5 and 11):
Series A preferred stock, $.001 par value; 6,570,000 shares
issued and outstanding (involuntary liquidation
preference of $6,570,000, net of unamortized accretion of
origination fees of $49,000 and $37,000) at December 31,
1998 and 1999, respectively; no shares issued or
outstanding pro forma (unaudited)........................ 6,521,000 15,183,000 --
Series B preferred stock, $.001 par value; 3,333,334 shares
issued and outstanding (involuntary liquidation
preference of $5,000,000, net of unamortized accretion of
origination fees of $44,000 and $34,000) at December 31,
1998 and 1999, respectively; no shares issued or
outstanding pro forma (unaudited)........................ 4,956,000 8,928,000 --
Series C preferred stock, $.001 par value; 7,655,018 shares
issued and outstanding (involuntary liquidation
preference of $15,310,000, net of unamortized accretion
of origination fees of $341,000 and $266,000) at December
31, 1998 and 1999, respectively; no shares issued or
outstanding pro forma (unaudited)........................ 14,969,000 23,324,000 --
Series D preferred stock, $.001 par value; 3,125,000 shares
issued and outstanding (involuntary liquidation
preference of $12,500,000, net of unamortized accretion
of origination fees of $18,000 and $14,000) at December
31, 1998 and 1999, respectively; no shares issued or
outstanding pro forma (unaudited)........................ 12,482,000 14,313,000 --
Series E preferred stock, $.001 par value; 10,664,111
shares issued and outstanding (involuntary liquidation
preference of $63,985,000, net of unamortized accretion
of origination fees of $1,283,000 and $995,000) at
December 31, 1998 and 1999, respectively; no shares
issued or outstanding pro forma (unaudited).............. 62,696,000 62,984,000 --
Series F preferred stock, $.001 par value; 11,129,246
shares issued and outstanding (involuntary liquidation
preference of $22,258,000, net of unamortized accretion
of origination fees of $2,697,000) at December 31, 1999;
no shares issued or outstanding pro forma (unaudited).... -- 20,903,000 --
Promissory notes associated with Series G preferred
stock.................................................... -- 10,834,000 $ 10,834,000
------------ ------------- -------------
Total redeemable preferred stock......................... 101,624,000 156,469,000 10,834,000
------------ ------------- -------------
Stockholders' (Deficiency) Equity (Notes 5, 6, and 11):
Common stock, $.001 par value; 135,000,000 shares
authorized; 3,618,776 and 3,963,044 shares (57,002,260
shares pro forma) issued and outstanding at December 31,
1998 and 1999, respectively.............................. 4,000 4,000 57,000
Additional paid-in capital................................. 151,757,000
Accumulated deficit........................................ (91,155,000) (144,229,000) (144,229,000)
------------ ------------- -------------
Total stockholders' (deficiency) equity.................. (91,151,000) (144,225,000) 7,585,000
------------ ------------- -------------
Total.................................................... $ 25,770,000 $ 36,927,000 $ 36,927,000
============ ============= =============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 70
CAPSTONE TURBINE CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues (Notes 2 and 10):
Product revenue.............................. $ 1,510,000 $ 76,000 $ 6,694,000
Contract revenue............................. 113,000 8,000 --
------------ ------------ ------------
Total revenues............................ 1,623,000 84,000 6,694,000
Cost of Goods Sold (Note 3).................... 8,147,000 5,335,000 15,629,000
------------ ------------ ------------
Gross Profit (Loss)............................ (6,524,000) (5,251,000) (8,935,000)
Operating Costs and Expenses:
Research and development..................... 13,281,000 19,019,000 9,151,000
Selling, general, and administrative......... 10,946,000 10,257,000 11,191,000
------------ ------------ ------------
Total operating costs and expenses........ 24,227,000 29,276,000 20,342,000
Interest Income................................ 873,000 1,437,000 452,000
Interest Expense............................... (168,000) (309,000) (721,000)
Other (Expense)/Income......................... (506,000) 327,000 17,000
------------ ------------ ------------
Profit (Loss) Before Income Taxes.............. (30,552,000) (33,072,000) (29,529,000)
Provision for Income Taxes (Note 4)............ 1,000 1,000 1,000
------------ ------------ ------------
Net Income (Loss).............................. (30,553,000) (33,073,000) (29,530,000)
Preferred Stock Dividends and Accretion........ (1,419,000) (2,096,000) (26,700,000)
------------ ------------ ------------
Net Loss Attributable to Common Stockholders... $(31,972,000) $(35,169,000) $(56,230,000)
============ ============ ============
Weighted Average Common Shares Outstanding..... 2,831,994 3,300,796 3,820,403
============ ============ ============
Net Loss Per Share of Common Stock -- Basic and
Diluted...................................... $ (11.29) $ (10.65) $ (14.72)
============ ============ ============
Weighted Average Shares Outstanding -- Pro
Forma (Unaudited) (Note 12).................. 56,859,619
------------
Pro Forma Loss Per Share -- Basic and Diluted
(Unaudited) (Note 12)........................ $ (0.52)
============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 71
CAPSTONE TURBINE CORPORATION
STATEMENT OF STOCKHOLDERS' DEFICIENCY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ADDITIONAL
SHARES PAID-IN ACCUMULATED
OUTSTANDING AMOUNT CAPITAL DEFICIT TOTAL
----------- ------ ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997......... 2,588,732 $3,000 $ $ (24,179,000) $ (24,176,000)
Issuance of common stock....... 73,899 41,000 41,000
Exercise of stock options and
warrants..................... 395,127 50,000 50,000
Accretion of preferred stock... (91,000) (115,000) (206,000)
Dividends accrued for Series A
preferred stock.............. (297,000) (297,000)
Dividends accrued for Series B
preferred stock.............. (143,000) (143,000)
Dividends accrued for Series C
preferred stock.............. (302,000) (302,000)
Dividends accrued for Series D
preferred stock.............. (209,000) (209,000)
Dividends accrued for Series E
preferred stock.............. (262,000) (262,000)
Net loss....................... (30,553,000) (30,553,000)
--------- ------ ---------- ------------- -------------
Balance, December 31, 1997....... 3,057,758 3,000 -- (56,060,000) (56,057,000)
Exchange of common stock (Note
5)........................... (304,399) (70,000) (70,000)
Exercise of stock options...... 865,417 1,000 144,000 145,000
Accretion of preferred stock... (74,000) (296,000) (370,000)
Dividends accrued for Series
A preferred stock............ (329,000) (329,000)
Dividends accrued for Series B
preferred stock.............. (157,000) (157,000)
Dividends accrued for Series C
preferred stock.............. (333,000) (333,000)
Dividends accrued for Series D
preferred stock.............. (231,000) (231,000)
Dividends accrued for Series E
preferred stock.............. (676,000) (676,000)
Net loss....................... (33,073,000) (33,073,000)
--------- ------ ---------- ------------- -------------
Balance, December 31, 1998....... 3,618,776 4,000 -- (91,155,000) (91,151,000)
Common stock warrants granted
(Note 5)..................... 2,969,000 2,969,000
Common stock options granted
(Note 6)..................... 135,000 135,000
Exercise of stock options and
warrants..................... 344,268 53,000 53,000
Accretion of preferred stock... (3,157,000) (21,637,000) (24,794,000)
Dividends accrued for Series A
preferred stock.............. (363,000) (363,000)
Dividends accrued for Series B
preferred stock.............. (174,000) (174,000)
Dividends accrued for Series C
preferred stock.............. (368,000) (368,000)
Dividends accrued for Series D
preferred stock.............. (255,000) (255,000)
Dividends accrued for Series E
preferred stock.............. (747,000) (747,000)
Net loss....................... (29,530,000) (29,530,000)
--------- ------ ---------- ------------- -------------
Balance, December 31, 1999....... 3,963,044 $4,000 $ -- $(144,229,000) $(144,225,000)
========= ====== ========== ============= =============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 72
CAPSTONE TURBINE CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................. $(30,553,000) $(33,073,000) $(29,530,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization...................... 944,000 1,660,000 2,356,000
Provision for inventory reserve.................... 3,918,000 681,000 1,120,000
Inventory writedown to net realizable value........ 4,225,000
Loss on sale of equipment.......................... 150,000 30,000 239,000
Non-employee stock compensation.................... 41,000 1,050,000 80,000
Employee stock compensation........................ 131,000
Changes in operating assets and liabilities:
Accounts receivable.............................. 233,000 51,000 (2,329,000)
Prepaid expenses and other assets................ (864,000) 360,000 (1,328,000)
Inventory........................................ (5,638,000) (9,318,000) (1,220,000)
Accounts payable................................. 3,952,000 (3,856,000) 497,000
Accrued salaries and wages....................... 206,000 106,000 157,000
Other accrued liabilities........................ 2,178,000 1,930,000 (1,617,000)
Accrued warranty reserve......................... 424,000 (55,000) 2,295,000
Deferred revenue................................. (707,000) (30,000) 4,696,000
------------ ------------ ------------
Net cash used in operating activities......... (25,716,000) (36,239,000) (24,453,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment and leasehold
improvements....................................... (3,524,000) (4,016,000) (2,449,000)
Proceeds from sale of equipment...................... 1,183,000 3,140,000 2,338,000
Deposits on fixed assets............................. (2,207,000) (2,133,000) (78,000)
Intangible assets.................................... (5,000,000)
------------ ------------ ------------
Net cash used in investing activities......... (4,548,000) (3,009,000) (5,189,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations............... (226,000) (517,000) (1,119,000)
Exercise of stock options............................ 50,000 145,000 41,000
Exercise of warrants................................. 12,000
Net proceeds from issuance of Series D preferred
stock.............................................. 12,475,000
Net proceeds from issuance of Series E preferred
stock.............................................. 61,064,000
Net proceeds from issuance of Series F preferred
stock.............................................. 21,789,000
Proceeds from promissory notes associated with Series
G preferred stock.................................. 10,834,000
------------ ------------ ------------
Net cash provided by (used in) financing
activities.................................. 73,363,000 (372,000) 31,557,000
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents... 43,099,000 (39,620,000) 1,915,000
Cash and Cash Equivalents, Beginning of Year........... 1,464,000 44,563,000 4,943,000
------------ ------------ ------------
Cash and Cash Equivalents, End of Year................. $ 44,563,000 $ 4,943,000 $ 6,858,000
============ ============ ============
Supplemental Disclosures of Cash Flow Information --
Cash paid during the year for:
Interest........................................... $ 168,000 $ 309,000 $ 630,000
Income taxes....................................... $ 1,000 $ 1,000 $ 1,000
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 73
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1. DESCRIPTION OF THE COMPANY
Capstone Turbine Corporation (the "Company") was formed to develop,
manufacture, and market turbine generator sets for use in stationary, vehicular,
and other electrical distributed generation applications. The Company was
organized in 1988, but has only been commercially producing the turbine
generator sets since 1998. Because the Company is in the early stages of selling
the products with relatively few customers, the Company has had uneven order
flow from period to period.
The Company has incurred significant operating losses since its inception.
Management anticipates incurring additional losses until the Company can produce
sufficient revenues to cover costs. There can be no assurance that the Company
will achieve or sustain profitability or positive cash flow from its operations.
To date, the Company has funded its activities primarily through private
equity offerings. The Company received proceeds of approximately $137,500,000
through the issuance of Series G preferred stock in a private placement which
closed on February 24, 2000. The Company expects to obtain additional funding
through private or public equity offerings until such time as it achieves
positive cash flow from operations; however, there can be no assurance that such
financing will be available on terms satisfactory to the Company or that
positive operating cash flows will be achieved.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS -- The Company considers only those investments that are
highly liquid, readily convertible to cash, and mature within three months from
the date of purchase as cash equivalents.
DEPRECIATION AND AMORTIZATION -- Depreciation and amortization are provided
using the straight-line method over estimated useful lives of the related
assets, ranging from three to five years. Leasehold improvements are amortized
over the period of the lease or the estimated useful life of the asset,
whichever is shorter. Amortization of assets under capital leases is included
with depreciation and amortization expense. Depreciation and amortization
expense was $944,000, $1,660,000 and $2,356,000 for the years ended December 31,
1997, 1998 and 1999, respectively.
PRODUCT AND CONTRACT REVENUES -- Product revenue is recognized upon
shipment of the product to the customer. Contract revenue derived from research
and development projects is recognized as revenues are earned. All research and
development contracts are performed on a best-efforts basis.
WARRANTY POLICY -- Estimated future warranty obligations are provided for
by charges to operations in the period in which the related revenue is
recognized.
DEFERRED REVENUE -- Deferred revenue consists of customer deposits.
Deferred revenue will be recognized upon shipment of the product to the
customer.
ACCOUNTING FOR STOCK-BASED COMPENSATION -- Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," was effective for the Company beginning January 1, 1996. SFAS No.
123 requires expanded disclosures of stock-based compensation arrangements with
employees and encourages (but does not require) compensation cost to be measured
based on the fair value of the equity instrument awarded. Under SFAS No. 123,
the fair value of stock-based awards to employees is calculated through the use
of option pricing models even though such models were developed to estimate the
fair value of freely tradable and fully transferable options, without vesting
restrictions, which significantly differ from the Company's stock
F-8
<PAGE> 74
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
option awards. Companies are permitted, however, to continue to apply Accounting
Principle Board Opinion ("APB Opinion") No. 25, "Accounting for Stock Issued to
Employees," which recognizes compensation cost based on the intrinsic value of
the equity instrument awarded. The Company has elected to continue to apply APB
Opinion No. 25 in its employee stock-based compensation arrangements (see Note
6).
RISK CONCENTRATIONS -- Financial instruments that potentially subject the
Company to concentrations of credit risk consist primarily of cash equivalents
and accounts receivable. The Company places its cash equivalents with high
credit quality institutions.
Two customers account for 31% and 22% of the Company's revenues for the
year ended December 31, 1997. The Company had no other customers which represent
10% or more of its sales. The Company had sales to a single customer of
$1,858,000 that represented approximately 28% of the Company's revenues for the
year ended December 31, 1999. The Company has net accounts receivable from two
customers of approximately $275,000 and $277,000, respectively, that each
represented approximately 11% of total accounts receivable at December 31, 1999.
There is a sole source of recuperator cores, a key component, used in the
Company's products. The Company is not aware of any other suppliers who would
produce these cores to the Company's specifications and time requirements.
Although the Company has a license agreement which would permit the production
of the cores in-house in the event the vendor terminates production, the Company
would not be able to assume production without significant delays and
interruptions.
ESTIMATES AND ASSUMPTIONS -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make certain estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
NET LOSS PER COMMON SHARE -- Basic loss per common share is computed using
the weighted-average number of common shares outstanding for the period. Diluted
loss per common share reflects the potential dilution that could occur if
securities were exercised or converted into common stock. The weighted-average
number of common shares outstanding, was 2,831,994, 3,300,796 and 3,820,403 in
1997, 1998 and 1999, respectively. The impact of common stock options,
outstanding preferred stock, warrants for preferred stock, and warrants for
common stock have not been included for purposes of the computation of diluted
earnings per share as their inclusion would have had an antidilutive effect on
the per-share amounts for the periods presented; therefore, diluted loss per
share is equal to basic loss per share. Antidilutive common stock options and
warrants were 4,375,847, 5,696,107 and 23,838,570 in 1997, 1998 and 1999,
respectively.
SUPPLEMENTAL CASH FLOW INFORMATION -- During 1997, 1998 and 1999, the
Company financed machinery purchases of $1,230,000, $3,162,000 and $2,467,000,
respectively, through capital lease obligations.
During 1998 and 1999, the Company issued approximately $1,534,000 and
$76,000, respectively, of preferred stock for services rendered by several
vendors, of which approximately $1,050,000 and $76,000 was expensed during 1998
and 1999, respectively, and approximately $484,000 was accrued at December 31,
1997. The expense was recorded at the fair value of services received.
During 1999, the Company granted 20,000 common stock options to a
consultant. The fair value of these options was determined to be $37,000 of
which $4,000 was recorded as expense in 1999. The remaining $33,000 will be
recognized over the vesting period.
F-9
<PAGE> 75
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
RECLASSIFICATIONS -- Certain reclassifications were made to the 1997 and
1998 financial statements in order to conform to the 1999 presentation.
SEGMENT REPORTING -- In June 1997, the Financial Accounting Standards Board
issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 131 establishes additional standards for segment
reporting in financial statements and is effective for fiscal years beginning
after December 15, 1997. The Company currently operates in only one segment, and
hence, separate segment reporting is not applicable.
NEW ACCOUNTING PRONOUNCEMENT -- In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instrument and
Hedging Activities." SFAS No. 133 establishes accounting and reporting standards
for derivative instruments. It requires the recognition of all derivatives as
either assets or liabilities in the statement of position and measurement of the
instruments at fair value. The Company is required to adopt SFAS No. 133, as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of SFAS No. 133," on January 1,
2001 and is currently evaluating the impact on the financial statements.
3. INVENTORIES
Inventories are stated at the lower of standard cost (which approximates
actual cost on the first-in, first-out method) or market. The amounts below are
net of $2,537,000 and $3,243,000 of obsolescence reserves at December 31, 1998
and 1999, respectively.
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Raw materials........................................... $7,954,000 $7,579,000
Work in process......................................... 749,000 1,036,000
Finished goods.......................................... 188,000
---------- ----------
$8,703,000 $8,803,000
========== ==========
</TABLE>
F-10
<PAGE> 76
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
4. INCOME TAXES
Significant components of the Company's deferred income tax assets
(liabilities) and related valuation allowance at December 31, 1998 and 1999 are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Current deferred income tax assets:
Inventory................................................. $ 2,820,000 $ 1,389,000
Warranty reserve.......................................... 374,000 1,356,000
Other..................................................... 1,623,000 1,033,000
Current deferred income tax liabilities:
State taxes............................................... (2,733,000) (3,968,000)
Other..................................................... (265,000) (549,000)
------------ ------------
Net current deferred income tax asset (liability)........... 1,819,000 (739,000)
------------ ------------
Long-term deferred assets:
Net operating loss carryforwards.......................... 32,704,000 43,656,000
Tax credit carryforwards.................................. 4,051,000 8,117,000
------------ ------------
Net long-term deferred income tax asset..................... 36,755,000 51,773,000
Valuation allowance......................................... (38,574,000) (51,034,000)
------------ ------------
Total deferred income tax asset............................. $ -- $ --
============ ============
</TABLE>
Due to the uncertainty surrounding the timing of realizing the benefits of
its favorable tax attributes in future income tax returns, the Company has
placed a valuation allowance against its otherwise recognizable deferred income
tax assets.
The Company's net operating loss and tax credit carryforwards for federal
and state income tax purposes at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
EXPIRATION
PERIOD
------------
<S> <C> <C>
Federal NOL................................................ $105,742,000 2008 to 2019
State NOL.................................................. 88,178,000 2000 to 2004
Federal tax credit carryforwards........................... 4,750,000 2008 to 2014
State tax credit carryforwards............................. 3,367,000 2008 to 2014
</TABLE>
The net operating losses and federal and state tax credits can be carried
forward to offset future taxable income, if any. Utilization of the net
operating losses and tax credits are subject to an annual limitation due to the
ownership change limitations provided by the Internal Revenue Code of 1986 and
similar state provisions.
F-11
<PAGE> 77
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
A reconciliation of income tax benefit to the federal statutory rate
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Federal income tax at the statutory
rate............................. $(10,388,000) $(11,245,000) $(10,040,000)
State taxes, net of federal
benefit.......................... (2,121,000) (2,017,000) (2,610,000)
Other.............................. (1,411,000) (3,277,000) 190,000
Valuation allowance................ 13,920,000 16,539,000 12,460,000
------------ ------------ ------------
$ -- $ -- $ --
============ ============ ============
</TABLE>
5. CAPITAL STRUCTURE
The preferred stock is convertible into common stock at each holder's
option at any time after issuance. In the event of a public offering of the
Company's equity securities in the amount of $30 million or greater and at a
price no less than $8.00 per share, as adjusted, or an affirmative vote of the
stockholders of each class of stock, all preferred stock will automatically be
converted into common stock.
Preferred stock, in most circumstances, is convertible to common stock on a
one-for-one basis. The conversion rates may change in the event of a stock
split, combination or, if any additional shares are issued at less than an
earlier preferred stock series original issue price. If additional shares are
issued at a price less than earlier issuances, the conversion rate is increased
for those series by a factor based upon the original number of shares, the new
shares issued and the total amount of consideration received by the Company for
the new shares. As a result of the Series F preferred stock issuance on May 31,
1999, Series B, C, D, and E preferred stock are now convertible at a factor of
1.17, 1.28, 1.50 and 1.59, respectively. The voting rights of the Series A,
Series B, Series C, Series D, Series E and Series F preferred stock are equal to
the number of shares of common stock into which such shares may be converted.
Preferred stock must be redeemed by the Company if it receives written
certification on or before August 30, 2002 that no less than 75 percent of the
preferred stockholders have elected in favor of redemption. The Series A, Series
B, Series C, Series D, Series E and Series F preferred stock redemption price is
equal to the greater of $1.00, $1.50, $2.00, $4.00, $6.00 and $2.00 per share,
respectively, or the fair market value per share at the redemption date. In the
event that the preferred stockholders elect in favor of redemption, the
preferred stock will be redeemed in two equal installments on or about January
1, 2003 and January 1, 2004.
The Company is accreting the difference between the redemption value and
the net proceeds received in each preferred stock offering under the effective
interest method. During 1999, the fair value of Series A, B, C, D and F exceeded
the stated value which resulted in additional accretion of $8,650,000,
$3,962,000, $8,280,000, $1,827,000 and $1,342,000, respectively.
Each share of Series A, B, C, D, E and F preferred stock entitles the
holder to receive dividends at an annual rate of $.10, $.15, $.20, $.40, $.60
and $.20 per share, respectively, at the discretion and declaration of the Board
of Directors. Dividends are payable in cash unless conversion to common stock
occurs prior to payment. Upon conversion, unpaid dividends shall be deemed
waived by the holders of all preferred stock. Until April 1, 1998, July 30,
2000, July 30, 2001, December 31, 2001, August 30, 2002, and February 26, 2004,
the rights to dividends upon the issued and outstanding shares of Series A, B,
C, D, E and F preferred stock, respectively, is non-cumulative, unless and until
F-12
<PAGE> 78
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
such dividends have been declared by the Board of Directors. After April 1,
1998, July 30, 2000, July 30, 2001, December 31, 2001, August 30, 2002, and
February 26, 2004, the rights to dividends at a minimum of the respective rates
from that date become cumulative regardless of formal declaration from the Board
of Directors for Series A, B, C, D, E and F, respectively.
The Company records the preferred stock dividend accrual under the
effective interest method. The actual cash liability was $493,000 and $1,150,000
at December 31, 1998 and 1999, respectively. No dividends have been declared or
paid as of December 31, 1999.
In 1999, the Company received $10,834,000 in exchange for promissory notes
associated with the Series G preferred stock from various stockholders. These
notes represent promissory notes to the respective stockholders and bear
interest from the deposit date until stock issuance at 5.54%. Interest expense
associated with these notes was $90,000 for the year ended December 31, 1999 all
of which is payable on the stock issuance date.
During 1998, the Company issued 170,000 shares of Series A, 53,407 shares
of Series B and 80,992 shares of Series E preferred stock to various common
stockholders in a one-for-one exchange for common stock.
In the event of liquidation, dissolution, or winding up the Company, the
preferred stockholders, on a pro rata basis, shall be entitled to receive assets
available for distribution, prior to any distribution to common stockholders.
The following table summarizes the Company's common and preferred stock
warrants outstanding as of December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
--------------------------------------- ----------------------------------------
NUMBER OF NUMBER OF
SHARES EXERCISE SHARES EXERCISE
ISSUABLE PRICE EXPIRATION DATE ISSUABLE PRICE EXPIRATION DATE
--------- -------- ---------------- ---------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
February 26,
Common stock warrants............ 122,022 $0.10 July 31, 1999 13,994,374 $0.20 2006
=========
150,000 0.30 August 30, 2006
67,676 3.00 October 31, 2006
----------
14,212,050
==========
Preferred stock warrants:
Class A........................ 92,000 $1.00 December 5, 2003 92,000 $1.00 December 5, 2003
Class C........................ 30,303 3.30 July 31, 2001 30,303 3.30 July 31, 2001
February 28, February 28,
Class C........................ 1,020,322 2.00 2003 1,020,322 2.00 2003
--------- ----------
1,142,625 1,142,625
========= ==========
</TABLE>
In 1999, the Company granted 14,487,050 common stock warrants. 13,994,374
warrants were issued to Series F preferred stock stockholders. The fair value on
the date of grant was approximately $2,645,000 which was recorded as additional
paid-in capital. 150,000 common stock warrants were granted to two stockholders
relating to the Series G financing. The fair value on the date of grant was
approximately $263,000 which was recorded as additional paid-in capital. 67,676
common stock warrants were granted to a lessor. The fair value on the date of
grant was approximately $61,000 which was recorded as a prepaid asset and
additional paid-in capital (see Note 10). The prepaid asset is being amortized
as rent expense over the related lease term. The Company also granted 275,000
warrants to two stockholders relating to the Series G financing. The fair value
of $483,000 was recorded as a liability at December 31, 1999, upon issuance in
January 2000 the fair value was recorded as additional paid-in capital. These
common stock warrants expire on August 31, 2006.
F-13
<PAGE> 79
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
6. STOCK OPTION PLANS
The Company has an Incentive Stock Option Plan, which provides for the
granting of options for the purchase of up to 13,000,000 shares of the Company's
common stock. Under terms of the plan, options may be granted to employees,
non-employee directors and consultants. Options principally vest over periods up
to four years from the date of grant and generally expire ten years from such
grant.
Prior to 1999, the Company issued common stock options at exercise prices
equal to, or greater than, the fair value of its common stock. Accordingly, no
stock-based compensation was recorded for those periods.
During 1999, the Company issued common stock options at less than the fair
value of its common stock. Accordingly, the Company recorded stock-based
compensation of $131,000 to expense in 1999. This 1999 expense was included in
cost of goods sold, research and development and selling, general and
administrative expenses in the amount of $2,000, $24,000 and $105,000,
respectively. At December 31, 1999, the Company had $977,000 in deferred stock
compensation related to such options which will be recognized as stock-based
compensation expense through 2003.
Information relating to the outstanding stock options is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at January 1, 1997......................... 2,942,538 0.16
Granted.............................................. 801,500 0.56
Exercised............................................ (395,127) 0.13
Canceled............................................. (237,711) 0.21
---------
Outstanding at December 31, 1997..................... 3,111,200 0.26
Granted.............................................. 2,673,500 0.79
Exercised............................................ (865,417) 0.17
Canceled............................................. (487,823) 0.33
---------
Outstanding at December 31, 1998....................... 4,431,460 0.59
Granted.............................................. 4,921,200 0.22
Exercised............................................ (222,246) 0.18
Canceled............................................. (646,519) 0.61
---------
Outstanding at December 31, 1999....................... 8,483,895 0.38
=========
</TABLE>
F-14
<PAGE> 80
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Additional information regarding options outstanding at December 31, 1999,
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS
---------------------------------- EXERCISABLE
NUMBER OF WEIGHTED- ------------
SHARES AVERAGE EXERCISABLE
OUTSTANDING AT REMAINING AT
DECEMBER 31, CONTRACTUAL LIFE DECEMBER 31,
EXERCISE PRICES 1999 (IN YEARS) 1999
--------------- -------------- ---------------- ------------
<S> <C> <C> <C>
$0.10.................................. 47,970 4.7 47,970
0.15.................................. 265,003 5.8 259,071
0.20.................................. 5,142,669 9.1 959,057
0.30.................................. 106,500 9.8
0.40.................................. 142,000 7.3 92,156
0.60.................................. 2,285,353 8.2 1,196,506
1.50.................................. 494,400 8.8 132,895
--------- ---------
8,483,895 8.7 2,687,655
========= =========
</TABLE>
As of December 31, 1999, 2,687,655 shares were exercisable and 2,747,662
shares were available for future grant.
If the Company recognized employee stock option-related compensation
expense in accordance with SFAS No. 123 and used the minimum value method for
determining the fair value of options granted after December 31, 1994, its net
loss attributable to common stockholders and net loss per share -- basic and
diluted would have been $32,026,000 and $11.31, respectively, for the year ended
December 31, 1997, $35,370,000 and $10.72, respectively, for the year ended
December 31, 1998 and $56,739,000 and $14.85, respectively, for the year ended
December 31, 1999.
In computing the impact of SFAS No. 123, the weighted-average fair value of
$.16, $.22 and $.27 for 1997, 1998 and 1999 stock option grants, respectively,
was estimated at the dates of grant using the minimum value model with the
following assumptions for 1997, 1998 and 1999: risk-free interest rate of
approximately 6.0, 5.3 and 5.4 percent, and no assumed dividend yield. The
weighted average expected life of the options was 6, 6, and 4 years for 1997,
1998 and 1999, respectively.
For purposes of determining the SFAS No. 123 pro forma compensation
expense, the weighted-average fair value of the options is amortized over the
vesting period.
7. COMMITMENTS AND CONTINGENCIES
At December 31, 1998 and 1999, respectively, the Company had equipment
under capital leases with a cost of $5,235,000 and $7,703,000 and accumulated
amortization of $969,000 and $2,276,000, respectively. The lease terms range
from three to five years. The deferred gain on sale-leaseback capital lease
obligations was $167,000 and $122,000 as of December 31, 1998 and 1999,
respectively, which is being recognized as an offset to amortization expense
over the useful life of the asset. The capital lease obligations are
collateralized by the related assets.
The Company leases office, manufacturing and warehouse space under various
non-cancelable operating leases. Rent expense related to these leases amounted
to approximately $347,000, $819,000 and $954,000 for the years ended December
31, 1997, 1998 and 1999, respectively.
F-15
<PAGE> 81
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
At December 31, 1999, the Company's commitments under noncancelable
operating and capital leases were as follows:
<TABLE>
<CAPTION>
1999
------------------------
YEAR ENDING OPERATING CAPITAL
DECEMBER 31: LEASES LEASES
------------ ---------- ----------
<S> <C> <C>
2000.................................................. $ 755,000 $2,098,000
2001.................................................. 723,000 1,880,000
2002.................................................. 756,000 1,477,000
2003.................................................. 772,000 1,445,000
2004.................................................. 794,000 595,000
Thereafter............................................ 4,578,000 --
---------- ----------
Total minimum lease payments....................... $8,378,000 7,495,000
----------
Less amount representing interest....................... 1,596,000
----------
Net present value....................................... 5,899,000
Less current portion.................................... 1,400,000
----------
Long-term portion....................................... $4,499,000
==========
</TABLE>
At December 31, 1998 and 1999, the Company has approximately $134 million
and $132 million, respectively, of commitments under a long-term purchase
agreement for components and subassembly units which expires on August 25, 2007.
The Company also has $4,340,000 and $3,374,000 of deposits with several
companies for machinery and tooling for future production in the normal course
of business, respectively. The Company is committed to purchase approximately $2
million of the components and subassembly units in 2000.
The Company has a $1 million standby letter of credit which serves as a
guarantee for one of the purchase commitments. This letter of credit expires on
March 31, 2000.
A stockholder of the Company alleges damages as a result of alleged
representations made by the Company and some of the Company's present and former
officers in connection with the Series E Preferred Stock offering in 1997. In
the opinion of management, it is not possible to determine what effect, if any,
the ultimate resolution of this case will have on the Company's financial
statements.
The Company is involved in various other legal proceedings, claims, and
litigation arising in the ordinary course of business. In the opinion of
management, the outcome of such legal proceedings, claims, and litigation will
not have a material adverse affect the Company's financial statements.
8. EQUIPMENT LEASE LINE
During 1997, the Company entered into an equipment lease line agreement
with a leasing institution that provides for sale-leaseback transactions up to a
cumulative maximum of $20,000,000. The equipment lease line was renewed during
1999 for one year and provides for sale-leaseback transactions up to a maximum
of $10,000,000. Under this revised agreement, $4,394,000 was available for
future financing transactions at December 31, 1999.
9. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution 401(k) profit-sharing plan in
which all employees are eligible to participate. Employees may contribute up to
15 percent of their eligible compensation.
F-16
<PAGE> 82
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Employees are fully vested in their contributions to the plan. The plan also
provides for both Company matching and discretionary contributions, which are to
be determined by the Board of Directors. No Company contributions have been made
to the plan since its inception.
10. RELATED PARTY TRANSACTIONS
During 1997, an affiliated company ceased operations. The Company purchased
equipment and improvements in the amount of $590,000 from the affiliated
company. Additionally, the Company assumed leases for certain facilities
previously occupied by the affiliated company.
During 1997 and 1998, the Company was reimbursed $137,000 and $39,000,
respectively, by a related company, for the use of the Company's office facility
as well as for other expenses, and had a $17,000 receivable from that Company
for these expenses as of December 31, 1998.
In 1999, the Company entered into non-exclusive marketing agreements with
two distributors. These agreements include product purchase and equity
investment commitments in Series G preferred stock on behalf of the
distributors. Sales to these distributors were $1 million in 1999 and deferred
revenue amounted to approximately $4.2 million as of December 31, 1999.
Promissory notes related to Series G preferred stock from these distributors
amounted to $6.2 million as of December 31, 1999.
In conjunction with the Series B preferred stock issuance in 1995 a
shareholder acquired the exclusive marketing rights for certain territories. In
1999, the Company reacquired these marketing rights. As part of the agreement
the Company paid $5 million which was capitalized as an intangible asset and is
being amortized over the agreement term (6 years). Accumulated amortization was
$104,000 as of December 31, 1999. Additionally, the Company is obligated to pay
a royalty on future sales in the territory for the six-year period. The
agreement stipulates additional stock consideration of $5 million which is
contingent upon future stock issuances. The criteria for payment of the stock
consideration were not met as of December 31, 1999. In January 2000, the Company
paid an additional $4 million in cash. On February 24, 2000, the Company issued
1,250,000 shares of the Series G preferred stock for no further consideration in
fulfillment of the stock issuance obligation (See Note 11). Sales made to this
stockholder and an affiliate were $247,000 in 1999.
The Company has existing warrants with a lessor to purchase 30,303 shares
of Series C preferred stock at a per share price equal to $3.30 per share which
were issued in 1996.
During 1999, the Company granted a lessor 67,676 common stock warrants. The
fair value on the date of grant was approximately $61,000 which was recorded as
additional paid-in capital. Additional shares may be purchased by the lessor
upon the Company obtaining additional financing under the Equipment lease line
agreement. The lessor can exercise the warrants for no consideration and receive
in exchange the number of common stock shares which represent the difference
between the fair market value on the date exercised and the exercise price.
Certain vendors of the Company are also stockholders to which payments of
$1,417,000, $4,587,000 and $3,370,000 were made during 1997, 1998 and 1999,
respectively. The accounts payable to stockholders was $290,000 and $189,000 as
of December 31, 1998 and 1999, respectively. Capital lease obligations to
stockholders were $4,423,000 and $5,633,000 as of December 31, 1998 and 1999,
respectively.
F-17
<PAGE> 83
CAPSTONE TURBINE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
11. SUBSEQUENT EVENT
On February 24, 2000, the Company closed the Series G preferred stock
issuance for $4.00 per share in a private placement. Proceeds to the Company
approximated $137,500,000. 35,683,979 shares of Series G were issued which
includes 1,250,000 shares issued to an existing stockholder for no consideration
(see Note 10) and 58,979 shares issued to holders of promissory notes for
accrued interest. A beneficial conversion feature, if appropriate, will be
determined based upon the difference between the Series G preferred stock price
and the fair value of the common stock into which the preferred stock is
convertible. This amount will be accounted for as an increase in additional
paid-in capital and an insubstance dividend to the preferred stockholders in the
first quarter of 2000 and accordingly will increase the loss applicable to
common stockholders.
The Company is committed to issue 1,232,628 common stock warrants at a per
share exercise price of $0.40 to a vendor for services rendered in conjunction
with the Series G preferred stock offering. The fair value of these warrants
will be recorded as origination fees at the time of issuance.
12. PRO FORMA INFORMATION
PRO FORMA BALANCE SHEET INFORMATION (UNAUDITED) -- The Board of Directors
authorized the Company to file a registration statement with the Securities and
Exchange Commission permitting the Company to sell shares of common stock in an
initial public offering ("IPO"). If the IPO is consummated, all shares of Series
A, Series B, Series C, Series D, Series E and Series F preferred stock will
automatically convert into shares of common stock at the conversion rates as
discussed in Note 5. The unaudited pro forma balance sheet information reflects
the conversion of the preferred stock as though it occurred as of December 31,
1999.
PRO FORMA NET LOSS PER SHARE (UNAUDITED) -- The following table sets forth,
the computation of the unaudited pro forma basic and diluted loss per share for
the year ended December 31, 1999, assuming the conversion of the Series A, B, C,
D, E and F preferred stock into shares of the Company's common stock effective
upon the closing of the Company's IPO as if the conversion occurred at the date
of issuance.
<TABLE>
<S> <C>
Numerator --
Net loss available to common stockholders................. $(29,530,000)
Denominator:
Weighted average common shares outstanding................ 3,820,403
Conversion of Series A preferred stock.................... 6,570,000
Conversion of Series B preferred stock.................... 3,911,445
Conversion of Series C preferred stock.................... 9,834,930
Conversion of Series D preferred stock.................... 4,681,647
Conversion of Series E preferred stock.................... 16,911,948
Conversion of Series F preferred stock.................... 11,129,246
------------
Shares used in pro forma calculation........................ 56,859,619
------------
Pro forma basic and diluted loss per share.................. $ (0.52)
============
</TABLE>
* * * * * *
F-18
<PAGE> 84
- ----------------------------------------------------------
- ----------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its dates.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary...................... 1
Risk Factors............................ 6
Forward-Looking Statements.............. 17
Use of Proceeds......................... 18
Dividend Policy......................... 18
Capitalization.......................... 19
Dilution................................ 20
Selected Historical Financial Data...... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 22
Business................................ 27
Management.............................. 44
Certain Relationships and Related
Transactions.......................... 54
Principal Shareholders.................. 55
Description of Capital Stock............ 57
Shares Eligible for Future Sale......... 58
Validity of Common Stock................ 59
Experts................................. 59
Change of Auditors...................... 59
Underwriting............................ 60
Where You Can Find More Information..... 62
Index to Financial Statements........... F-1
</TABLE>
----------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as an underwriter and with respect to an unsold allotment or
subscription.
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
Shares
CAPSTONE TURBINE CORPORATION
Common Stock
----------------------
[LOGO]
----------------------
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
Representatives of the Underwriters
- ----------------------------------------------------------
- ----------------------------------------------------------
<PAGE> 85
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses payable by us in
connection with the offering (excluding underwriting discounts and commissions):
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
----------------- ----------
<S> <C>
SEC Registration Fee........................................ $ 30,360
NASD Filing Fee............................................. 12,000
Nasdaq National Market Listing Fee..........................
Accounting Fees and Expenses................................
Legal Fees and Expenses.....................................
Printing Expenses...........................................
Blue Sky Qualification Fees and Expenses....................
Transfer Agent's Fee........................................
Miscellaneous...............................................
----------
Total....................................................... $
==========
</TABLE>
The amounts set forth above, except for the Securities and Exchange Commission
and National Association of Securities Dealers, Inc. fees, are in each case
estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors and any corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act. Our certificate of incorporation and our bylaws provide for
indemnification of our directors, officers, employees and other agents to the
extent permitted by the Delaware General Corporation Law. We have also entered
into agreements with our directors and executive officers that require Capstone
among other things to indemnify them against certain liabilities that may arise
by reason of their status or service as directors and officers liability
insurance, which provides coverage against certain liabilities including
liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) Issuances of Shares of Preferred Stock and Preferred Stock Warrants
On January 17, 1997, Capstone issued and sold 3,125,000 shares of its
Series D Preferred Stock to eighteen accredited investors for an aggregate
purchase price equal to $12,500,000. This issuance was deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act or Regulation D promulgated thereunder as a sale by an issuer not
involving a public offering.
On August 22, 1997 and November 21, 1997, Capstone issued and sold
5,865,814 and 4,587,331 shares of its Series E Preferred Stock, respectively to
seventy-four accredited investors for an aggregate purchase price equal to
$63,979,000. This issuance was deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act or Regulation D
promulgated thereunder as a sale by an issuer not involving a public offering.
On May 31, 1999 and September 2, 1999, Capstone issued and sold convertible
promissory notes in the aggregate principal amount of $22,190,992 that were
converted into 11,095,496 shares of Series F preferred stock to sixty-six
accredited investors. This issuance was deemed to be exempt
II-1
<PAGE> 86
from registration under the Securities Act in reliance on Section 4(2) of the
Securities Act or Regulation D promulgated thereunder as a sale by an issuer not
involving a public offering.
On February 24, 2000 Capstone issued and sold 35,683,979 shares of its
Series G Preferred Stock to 140 accredited investors for an aggregate purchase
price equal to $137,500,000. This issuance was deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act or Regulation D promulgated thereunder as a sale by an issuer not
involving a public offering.
(b) Issuances of Common Stock and Common Stock Warrants
Between September 14, 1988 and March 1, 2000, Capstone issued 5,884,431
shares of its common stock, of which 1,567,022 shares were issued upon exercise
of warrants and 2,244,831 shares were issued upon exercise of stock options.
Capstone has remaining issued and unexercised warrants exercisable for
15,616,488 shares of its common stock. This amount includes warrants exercisable
for 275,000 shares of common stock to two accredited investors as well as
Capstone's commitment to issue warrants exercisable for 1,132,628 shares of
common stock in connection with the Series G offering. Certain warrants were
issued in connection with the Bridge Notes convertible into Series F Preferred
Stock to sixty-one accredited investors. The issuance was deemed to be exempt
from registration under the Securities Act in reliance on Section 4(2) of the
Securities Act or Regulation D promulgated thereunder as a sale by an issuer not
involving a public offering.
(c) Issuances of Options to Employees, Directors and Consultants.
Between September 14, 1988 and March 1, 2000, Capstone issued options
exercisable for 10,795,286 shares (net of cancellations) of its common stock
pursuant to Capstone's 1993 Incentive Stock Option Plan to approximately 120
individuals. Of this amount as of February 29, 2000, 2,244,831 options had been
executed, 2,517,379 options are issued and exercisable, and 6,033,076 options
are issued and require further vesting before they are exercisable. Of the
issued shares of the Series C Preferred Stock, 35,000 shares were issued
pursuant to employment agreements and 18,407 shares were issued for consulting
services rendered. Of the shares of Series E Preferred Stock issued, 45,500
shares were issued through stock option agreements and 164,340 shares were
issued for services rendered and through other arrangements. These grants were
deemed to be exempt from registration under the Securities Act in reliance on
Rule 701 promulgated under Section 3(b) of the Securities Act as a transaction
to compensatory benefit plans and contracts relating to compensation as provided
under Rule 701. The recipients of securities in each of the foregoing
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the instruments representing such securities
issued in such transaction.
II-2
<PAGE> 87
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NO.
- ------- ----------- ----
<S> <C> <C>
1.1* Form of Underwriting Agreement..............................
3.1 Articles of Incorporation of Capstone Turbine...............
3.2* Form of Amended and Restated Certificate of Incorporation of
Capstone Turbine............................................
3.3 By-laws of Capstone Turbine.................................
3.4* Amended and Restated By-laws of Capstone Turbine............
4.1* Specimen certificate for shares of common stock, $.01 par
value, of Capstone Turbine..................................
5.1* Opinion of Latham & Watkins as to the legality of the
securities being offered....................................
9.1 Investor Rights Agreement...................................
10.2 Lease between registrant and Northpark Industrial -- Leahy
Division LLC, dated December 1, 1999, for leased premises at
21211 Nordhoff Street, Chatsworth, California...............
10.3 1993 Incentive Stock Option Plan............................
16.1 Letter from Ernst & Young LLP regarding change in
independent auditors........................................
23.1 Consent of Deloitte & Touche LLP............................
23.2 Consent of Ernst & Young LLP................................
23.3 Consent of Latham & Watkins (included in exhibit 5.1).......
24.1 Powers of Attorney (included on signature page).............
27.1 Financial Data Schedule.....................................
</TABLE>
- ---------------
* To be filed by amendment
(b) Financial Statement Schedules
<TABLE>
<S> <C>
(1) Independent Auditors' Report of Deloitte & Touche LLP...
S-1
(2) Independent Auditors' Report of Ernst & Young LLP.......
S-2
(3) Schedule II -- Valuation and Qualifying Accounts........
S-3
</TABLE>
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in
II-3
<PAGE> 88
reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as of the
time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 89
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Woodland Hills, State of
California, on March 22, 2000.
Capstone Turbine Corporation
By: /s/ AKE ALMGREN
------------------------------------
Ake Almgren
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ake Almgren and Jeff Watts, and each of them,
with full power to act without the other, such person's true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign this Registration Statement, and any and all amendments
thereto (including post-effective amendments), and to file the same, with
exhibits and schedules thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
each and every act and thing necessary or desirable to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this to the
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ AKE ALMGREN President, Chief Executive March 22, 2000
- ----------------------------------------------------- Officer and Director
Ake Almgren (Principal Executive Officer)
/s/ JEFFREY WATTS Chief Financial Officer March 22, 2000
- ----------------------------------------------------- (Principal Financial Officer
Jeffrey Watts and Principal Accounting
Officer)
/s/ RICHARD AUBE Director March 22, 2000
- -----------------------------------------------------
Richard Aube
/s/ JOHN JAGGERS Director March 22, 2000
- -----------------------------------------------------
John Jaggers
/s/ JEAN-RENE MARCOUX Director March 22, 2000
- -----------------------------------------------------
Jean-Rene Marcoux
</TABLE>
II-5
<PAGE> 90
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ BENJAMIN M. ROSEN Director March 22, 2000
- -----------------------------------------------------
Benjamin M. Rosen
/s/ PETER STEELE Director March 22, 2000
- -----------------------------------------------------
Peter Steele
/s/ ERIC YOUNG Director March 22, 2000
- -----------------------------------------------------
Eric Young
</TABLE>
II-6
<PAGE> 91
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
To the Board of Directors and Stockholders of
Capstone Turbine Corporation:
We have audited the financial statements of Capstone Turbine Corporation as of
and for the years ended December 31, 1998 and 1999, and have issued our report
thereon dated March 20, 2000; such report is included elsewhere in this
Registration Statement. Our audits also included the financial statement
schedule listed in Item 16(b). The financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statement schedule based on our audits. In our opinion,
such financial statement schedule for the years ended December 31, 1998 and
1999, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
March 20, 2000
S-1
<PAGE> 92
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We have audited the statement of operations, stockholders' equity, and cash
flows of Capstone Turbine Corporation for the year ended December 31, 1997, and
have issued our report thereon dated April 3, 1998 (included elsewhere in this
Registration Statement). Our audit also included the financial statement
schedule for the year ended December 31, 1997 listed in Item 16(b) of this
Registration Statement. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audit.
In our opinion, the financial statement schedule for the year ended December 31,
1997 referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
Woodland Hills, California
April 3, 1998
S-2
<PAGE> 93
SCHEDULE II
CAPSTONE TURBINE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
THREE YEAR PERIOD ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS DEDUCTIONS BALANCE
BEGINNING CHARGED TO FROM AT END
OF YEAR OPERATIONS RESERVES OF YEAR
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts year
ended:
December 31, 1997...................... $ -- $ 10,000 $ -- $ 10,000
December 31, 1998...................... 10,000 3,000 10,000 3,000
December 31, 1999...................... 3,000 50,000 3,000 50,000
Reserve for inventory obsolescence year
ended:
December 31, 1997...................... 180,000 3,918,000 48,000 4,050,000
December 31, 1998...................... 4,050,000 681,000 2,194,000 2,537,000
December 31, 1999...................... 2,537,000 1,120,000 414,000 3,243,000
Warranty reserve year ended:
December 31, 1997...................... 504,000 1,159,000 735,000 928,000
December 31, 1998...................... 928,000 261,000 316,000 873,000
December 31, 1999...................... 873,000 2,643,000 348,000 3,168,000
</TABLE>
S-3
<PAGE> 94
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Articles of Incorporation of Capstone Turbine.
3.2* Form of Amended and Restated Certificate of Incorporation of
Capstone Turbine.
3.3 By-laws of Capstone Turbine.
3.4* Amended and Restated By-laws of Capstone Turbine.
4.1* Specimen certificate for shares of common stock, $.01 par
value, of Capstone Turbine.
5.1* Opinion of Latham & Watkins as to the legality of the
securities being offered.
9.1 Investor Rights Agreement
10.2 Lease between registrant and Northpark Industrial -- Leahy
Division LLC, dated December 1, 1999, for leased premises at
21211 Nordhoff Street, Chatsworth, California.
10.3 1993 Incentive Stock Option Plan
16.1 Letter from Ernst & Young LLP regarding change in
independent auditors
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Ernst & Young LLP
23.3 Consent of Latham & Watkins (included in exhibit 5.1)
24.1 Powers of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment
(b) Financial Statement Schedule
(1) Independent Auditors' Report of Deloitte & Touche LLP
(2) Independent Auditors' Report of Ernst & Young LLP
(3) Schedule II -- Valuation and Qualifying Accounts
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
CAPSTONE TURBINE CORPORATION
The undersigned, Ake Almgren and Jeffrey R. Watts, hereby certify that:
ONE: They are the duly elected and acting President and Secretary,
respectively, of Capstone Turbine Corporation.
TWO: The Articles of Incorporation of this corporation are hereby
amended and restated to read in their entirety as follows:
ARTICLE I
The name of the corporation is Capstone Turbine Corporation (the
"Corporation").
ARTICLE II
The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III
The Corporation shall have the authority to issue two (2) classes of
shares to be designated respectively "Preferred Stock" and "Common Stock." The
total number of shares of stock that the Corporation shall have the authority to
issue is Three Hundred Fifteen Million (315,000,000) shares of capital stock,
par value $.001 per share. The total number of shares of Preferred Stock that
the Corporation shall have authority to issue is One Hundred Thirty Million
(130,000,000), par value $.001 per share. The total number of shares of Common
Stock that the Corporation shall have the authority to issue is One Hundred
Eighty-Five Million (185,000,000), par value $.001 per share.
The Preferred Stock authorized by these Articles of Incorporation may be
issued from time to time in one or more series. The Board of Directors is hereby
authorized within the limitations and restrictions stated in these Articles of
Incorporation to fix or alter the dividend rights, dividend rate, conversion
rights, voting rights, rights and terms of redemption, including sinking fund
provisions, the redemption price or prices, the liquidation preferences and the
other preferences, powers, rights, qualifications, limitations and restrictions
of any wholly unissued Series of Preferred Stock (not including any Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or Series G
Preferred Stock) and the number of shares constituting any such Series and the
designation thereof, or any of them.
<PAGE> 2
The Board of Directors is further authorized to increase or decrease the
number of shares of any Series of Preferred Stock, the number of which was fixed
by it, subsequent to the issue of shares of that series, but not below the
number of shares of such Series then outstanding, subject to the limitations and
restrictions stated in the resolution of the Board of Directors originally
fixing the number of shares of such series. In case the number of shares of any
Series shall be so decreased, the shares constituting such decrease shall resume
the status which they had prior to the adoption of the resolution originally
fixing the number of shares of such series.
ARTICLE IV
Six Million Seven Hundred Thousand (6,700,000) shares of the Preferred
Stock are hereby designated as Convertible Preferred Stock, Series A ("Series A
Preferred Stock"). Three Million Three Hundred Thirty Three Thousand Three
Hundred and Thirty Four (3,333,334) shares of the Preferred Stock are hereby
designated as Convertible Preferred Stock, Series B ("Series B Preferred
Stock"). Eight Million Eight Hundred Thousand (8,800,000) shares of the
Preferred Stock are hereby designated as Convertible Preferred Stock, Series C
("Series C Preferred Stock"). Three Million One Hundred Twenty Five Thousand
(3,125,000) shares of the Preferred Stock are hereby designated as Convertible
Preferred Stock, Series D ("Series D Preferred Stock"). Ten Million Seven
Hundred Thousand (10,700,000) shares of the Preferred Stock are hereby
designated as Convertible Preferred Stock, Series E ("Series E Preferred
Stock"). Eleven Million Five Hundred Thousand (11,500,000) shares of Preferred
Stock are hereby designated as Senior Convertible Preferred Stock, Series F
("Series F Preferred Stock"). Thirty-Seven Million Five Hundred Thousand
(37,500,000) shares of the Preferred Stock are hereby designated as Senior
Convertible Preferred Stock, Series G ("Series G Preferred Stock"). The relative
preferences, powers, rights, qualifications, limitations and restrictions in
respect of the Common Stock, Series A Preferred Stock, the Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, the Series F Preferred Stock and the Series G Preferred Stock, are as
follows:
(a) Voting Rights.
(i) Each holder of record of shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock and Series G Preferred Stock
shall be entitled to vote on all matters on which shareholders are entitled to
vote and, except as otherwise expressly provided herein, shall be entitled to
the number of votes equal to the largest whole number of shares of Common Stock
into which such shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock,
Series F Preferred Stock or Series G Preferred Stock, as applicable, could be
converted, pursuant to the provisions of subparagraph (d) hereof, on the record
date for the determination of the shareholders entitled to vote on such matters
or, if no such record date is established, in accordance with California law.
(ii) Each holder of record of shares of Common Stock shall be
entitled to one vote for each share thereof held. Except as otherwise expressly
provided herein or as required by law, the holders of Series A Preferred
-2-
<PAGE> 3
Stock, the holders of Series B Preferred Stock, the holders of Series C
Preferred Stock, the holders of Series D Preferred Stock, the holders of the
Series E Preferred Stock, the holders of the Series F Preferred Stock, the
holders of Series G Preferred Stock and the holders of Common Stock shall vote
together and not as separate classes.
(iii) The Corporation shall not create a new series or class of
shares having rights, preferences or privileges prior to the shares of the
Series G Preferred Stock, or increase the rights, preferences or privileges of
any series or class having rights, preferences or privileges prior the shares of
the Series G Preferred Stock, without the approval of holders of a majority of
the outstanding shares of the Series G Preferred Stock.
(b) Dividend Rights.
(i) Each issued and outstanding share of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, Series F Preferred Stock and Series G Preferred
Stock shall entitle the holder of record thereof to receive, when, as and if
declared by the Board of Directors, out of any funds legally available therefor,
dividends in cash at the annual rate per share of Ten Cents ($.10), Fifteen
Cents ($.15), Twenty Cents ($.20), Forty Cents ($.40), Sixty Cents ($.60),
Twenty Cents ($.20) and Forty Cents ($.40), respectively (or such greater amount
per share as such Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock or Series G Preferred Stock would be entitled if such Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or Series G
Preferred Stock were converted into Common Stock), as adjusted for stock splits,
stock dividends, recapitalizations, reclassifications and similar events
(together herein referred to as "Recapitalization Events"), payable quarterly or
otherwise as the Board of Directors may from time to time determine. Dividends
and distributions (other than those solely in Common Stock) may be paid, or
declared and set aside for payment, upon shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock in any calendar year only if dividends shall have been
paid, or declared and set aside for payment on account of all shares of Series F
Preferred Stock and Series G Preferred Stock then issued and outstanding, at the
aforesaid applicable rate for such calendar year. Dividends and distributions
(other than those solely in Common Stock) may be paid, or declared and set aside
for payment, upon shares of Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock in any calendar year only
if dividends shall have been paid, or declared and set aside for payment on
account of all shares of Series A Preferred Stock then issued and outstanding,
at the aforesaid applicable rate for such calendar year. Dividends and
distributions (other than those payable solely in Common Stock) may be paid, or
declared and set aside for payment, upon shares of Common Stock in any calendar
year only if dividends shall have been paid, or declared and set apart for
payment (subject to the rights of any other Series of Preferred Stock which has
dividend rights senior to the Common Stock, if any), on account of all shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and
Series G Preferred Stock then issued and outstanding, at the aforesaid rates for
such calendar year. Except as hereinafter set forth, the Board of Directors of
the Corporation is under no obligation to pay dividends
-3-
<PAGE> 4
and the dividend preference granted herein to shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, Series F Preferred Stock and Series G Preferred
Stock shall apply only at such time as the Board of Directors may in its
discretion decide to pay or declare and set aside for payment any dividends on
any shares of Common Stock of the Corporation. The dividend preference granted
herein to shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock and Series G Preferred Stock is subject to any prior payments of
dividends required to be made to any senior shares of preferred stock, if any,
which may be issued from time to time by the Corporation.
(ii) Until April 1, 1998 with respect to the Series A Preferred
Stock, July 30, 2000, with respect to the Series B Preferred Stock, July 30,
2001 with respect to the Series C Preferred Stock, December 31, 2001 with
respect to the Series D Preferred Stock, August 30, 2002 with respect to the
Series E Preferred Stock, February 26, 2004 with respect to the Series F
Preferred Stock and March 31, 2005 with respect to the Series G Preferred Stock,
the right to dividends upon the issued and outstanding shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and Series G
Preferred Stock shall be non-cumulative and shall not be deemed to accrue,
whether dividends are earned or whether there be funds legally available
therefor, unless and until said dividends shall have been declared by the Board
of Directors.
(iii) From and after April 1, 1998 with respect to the Series A
Preferred Stock, July 30, 2000 with respect to the Series B Preferred Stock,
July 30, 2001 with respect to Series C Preferred Stock December 31, 2001 with
respect to the Series D Preferred Stock, August 30, 2002 with respect to the
Series E Preferred Stock, February 26, 2004 with respect to the Series F
Preferred Stock and March 31, 2005 with respect to the Series G Preferred Stock,
the right to dividends upon the issued and outstanding shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and Series G
Preferred Stock, respectively, shall be cumulative so that such rights shall be
deemed to accrue from and after April 1, 1998 with respect to the Series A
Preferred Stock, July 30, 2000 with respect to the Series B Preferred Stock,
July 30, 2001 with respect to the Series C Preferred Stock December 31, 2001
with respect to the Series D Preferred Stock, August 30, 2002 with respect to
the Series E Preferred Stock, February 26, 2004 with respect to the Series F
Preferred Stock and March 31, 2005 with respect to the Series G Preferred Stock,
whether earned, or whether there be funds legally available therefor, or whether
said dividends shall have been declared; and if such dividends in respect of any
period beginning April 1, 1998 with respect to the Series A Preferred Stock,
July 30, 2000 with respect to the Series B Preferred Stock, July 30, 2001 with
respect to the Series C Preferred Stock December 31, 2001 with respect to the
Series D Preferred Stock, August 30, 2002 with respect to the Series E Preferred
Stock, February 26, 2004 with respect to the Series F Preferred Stock and March
31, 2005 with respect to the Series G Preferred Stock, shall not have been
declared and either paid or a sum sufficient for the payment thereof set aside
in full, the accumulated unpaid dividends shall first be paid pro rata on the
Series F Preferred Stock and the Series G Preferred Stock with respect to their
respective dividend rates, before any dividend or other distribution (other than
those payable solely in Common Stock) may be paid, or
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declared and set apart for payment, to the holders of shares of Series A
Preferred Stock, Series B Preferred Stock, the Series C Preferred Stock, the
Series D Preferred Stock, the Series E Preferred Stock or Common Stock, and
shall, subject to the last sentence of this subparagraph (iii), next be paid on
the Series A Preferred Stock with respect to its dividend rate, before any
dividend or other distribution (other than those payable solely in Common Stock)
may be paid, or declared and set apart for payment, to the holders of shares of
Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred
Stock, the Series E Preferred Stock or Common Stock and shall next be fully paid
pro rata on the Series B Preferred Stock, the Series C Preferred Stock, the
Series D Preferred Stock, and the Series E Preferred Stock, before any dividend
or other distribution (other than those payable solely in Common Stock) may be
paid, or declared and set apart for payment to the holders of shares of the
Common Stock, and shall in any event (except as set forth in paragraph
(d)(ii)(D) of this Article IV below) be paid upon conversion of the Series A
Preferred Stock, the Series B Preferred Stock, Series C Preferred Stock, Series
D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and Series
G Preferred Stock, in cash or in Common Stock at its then fair market value, as
determined in good faith by the Board of Directors of the Corporation, and the
Board of Directors shall have the right to determine whether said payment is
made in cash or stock; provided, however, that at the written request of the
holders of a majority of the outstanding shares of Series A Preferred Stock, a
majority of the outstanding shares of Series B Preferred Stock, a majority of
the outstanding shares of the Series C Preferred Stock, a majority of the
outstanding shares of the Series D Preferred Stock, a majority of the
outstanding shares of the Series E Preferred Stock, a majority of the
outstanding shares of Series F Preferred Stock, and a majority of the
outstanding shares of Series G Preferred Stock, the determination of said fair
market value shall be made by an independent reputable investment banking firm
designated by such holders of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, Series F Preferred Stock and Series G Preferred Stock and payment for
such determination shall be made in a manner consistent with Article
IV(e)(ii)(A), (B) and (C) hereof. Any accumulation of dividends on the shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or
Series G Preferred Stock shall not bear interest. If all accrued dividends due
on the Series F Preferred Stock and the Series G Preferred Stock have been paid,
but there exists accrued but unpaid dividends due on the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock or Series E Preferred Stock, the accrued but unpaid dividends due to the
holders of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock shall be
paid before any further dividends are paid to the holders of the Series F
Preferred Stock and Series G Preferred Stock. If all accrued dividends due on
the Series A Preferred Stock have been paid, but there exists accrued but unpaid
dividends due on the Series B Preferred Stock, Series C Preferred Stock, Series
D Preferred Stock or Series E Preferred Stock, the accrued but unpaid dividends
due to the holders of Series B Preferred Stock, Series C Preferred Stock, Series
D Preferred Stock and Series E Preferred Stock shall be paid before any further
dividends are paid to the holders of the Series A Preferred Stock. After the
payment to the holders of Series A Preferred Stock of any dividends accrued but
unpaid for the period of April 1, 1998 to July 30, 2000, no payment of dividends
may be paid to the holders of the Series A Preferred Stock in any year unless
all accrued dividends of the holders of Series B
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Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock in respect of prior years shall have been paid.
(iv) The restrictions on dividends and distributions with respect
to shares of Common Stock, Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock,
Series F Preferred Stock and Series G Preferred Stock set forth in paragraph (b)
hereof are in addition to, and not in derogation of, the other restrictions on
such dividends and distributions set forth herein.
(v) All holders of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, Series F Preferred Stock and Series G Preferred Stock shall, at the time
of any declaration of a dividend or distribution with respect to shares of
Common Stock, be given notice of such declaration, including the amount and
record date for such dividend or distribution, which record date shall be not
less than ten (10) business days after such notice is given (in order to enable
such holders sufficient time to convert all or part of their shares to Common
Stock, if they so choose).
(vi) In the event this Corporation shall declare a distribution
payable in securities of other persons, evidences of indebtedness issued by this
Corporation or other persons, assets (excluding cash dividends) or options or
rights to purchase any such securities or evidences of indebtedness, then, in
each such case the holders of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, Series F Preferred Stock and Series G Preferred Stock shall be entitled
to a proportionate share of any such distribution as though the holders of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and
Series G Preferred Stock were the holders of the number of shares of Common
Stock of the Corporation into which their respective shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or Series G
Preferred Stock are convertible as of the record date fixed for the
determination of the holders of Common Stock of the Corporation entitled to
receive such distribution.
(c) Liquidation Rights.
(i) Except as set forth below, in the event of a voluntary or
involuntary liquidation, dissolution, or winding up of the Corporation (a
"Liquidation"), the holders of record of shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock and Series G Preferred Stock,
on a pro rata basis, shall be entitled to receive, prior and in preference to
any distribution of any assets of the Corporation to the holders of the Common
Stock by reason of their ownership thereof, but subject to the rights of any
Series of preferred shares issued from time to time by the Corporation that has
rights senior to the Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock and Series G Preferred Stock on a Liquidation, out of the assets
of the Corporation legally available therefor, One Dollar ($1.00) per share of
Series A Preferred Stock (the "Original Series A Issue Price"),
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<PAGE> 7
One Dollar and Fifty Cents ($1.50) per share of Series B Preferred Stock (the
"Original Series B Issue Price"), Two Dollars ($2.00) per share of Series C
Preferred Stock (the "Original Series C Issue Price"), Four Dollars ($4.00) per
share of Series D Preferred Stock (the "Original Series D Issue Price"), Six
Dollars ($6.00) per share of Series E Preferred Stock (the "Original Series E
Issue Price"), Two Dollars ($2.00) per share of Series F Preferred Stock (the
"Original Series F Issue Price") and Four Dollars ($4.00) per share of Series G
Preferred Stock (the "Original Series G Issue Price") as appropriately adjusted
for Recapitalization Events, plus a further amount per share equal to dividends,
if any, (i) then declared and unpaid on account of shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, Series F Preferred Stock and Series G Preferred
Stock, and (ii) whether or not declared, then accrued in accordance with the
provisions of subparagraph (b)(ii) hereof, before any payment shall be made or
any assets distributed to the holders of shares of Common Stock. If, upon any
Liquidation, the assets thus distributed among the holders of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and Series G
Preferred Stock shall be insufficient to permit payment to such holders of the
full preferential amounts contemplated by this subparagraph (i), then the entire
assets of the Corporation to be distributed shall be distributed first ratably
among the holders of the Series F Preferred Stock and the Series G Preferred
Stock in accordance with their aggregate liquidation preferences with any
remainder then distributed ratably among the holders of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock in accordance with their aggregate
liquidation preferences.
(ii) After payment to the holders of record of the shares of the
Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred
Stock, the Series D Preferred Stock, the Series E Preferred Stock, the Series F
Preferred Stock and the Series G Preferred Stock of the amounts set forth in the
preceding subparagraph (i) above, the remaining assets of the Corporation shall
be distributed in like amounts per share to the holders of record of the
Corporation's capital stock, with each share of Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock and Series G Preferred Stock being
treated as the number of shares of Common Stock (giving effect to fractional
shares) into which it could then be converted for such purpose; provided,
however, that if the assets and the funds thus distributed would be sufficient
to permit the payment to the holders of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock and Series G Preferred Stock of an
amount in excess of Five Dollars ($5.00) per share of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock or Series G Preferred Stock
(as adjusted for Recapitalization Events), then the holders of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or Series G
Preferred Stock shall be entitled to the full amounts otherwise payable to them
pursuant to the preceding provisions, but shall not be entitled to share in the
remaining assets and funds of the Corporation in excess of Five Dollars ($5.00)
per share of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock or Series G Preferred Stock (as adjusted for Recapitalization
Events), until such time as the holders of Common
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<PAGE> 8
Stock have received or been entitled to receive Five Dollars ($5.00) per share
of Common Stock held, after which payment, the remaining assets of the
Corporation shall be distributed in like amounts per share to the holders of
record of the Corporation's stock, each share of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock and Series G Preferred Stock
being treated as the number of shares of Common Stock (giving effect to
fractional shares) into which it could then be converted for such purpose.
(iii) A consolidation or merger of the Corporation with or into
any other corporation (other than a reincorporation merger) except where the
Corporation is the surviving entity and the shareholders prior to such
consolidation or merger own more than 50% of the capital stock of the surviving
entity generally in the same proportion to each other as existed prior to such
consolidation or merger, or a sale of all or substantially all of the assets of
the Corporation, shall each be deemed, unless holders of record of at least
sixty-seven percent (67%) of the outstanding shares of Preferred Stock vote
otherwise, to be a Liquidation within the meaning of this Paragraph (c) and
shall entitle the holders of the Corporation's Stock to receive at the closing
in cash, securities or other property, valued at the fair market value of such
securities or other property as determined in good faith by the Board of
Directors, amounts as specified in subparagraphs (c)(i) and (c)(ii) above.
(d) Conversion Rights. The holders of the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock and Series G Preferred Stock
shall have conversion rights (the "Conversion Rights") as follows:
(i) Right to Convert. Each holder of record of shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or Series G
Preferred Stock may, at any time, upon surrender to the Corporation of the
certificates therefor at the principal office of the Corporation or at such
other place as the Corporation shall designate, convert all or any part of such
holder's shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock or Series G Preferred Stock into such number of fully paid and
non-assessable shares of Common Stock of the Corporation (as such Common Stock
shall then be constituted) equal to the product of (A) the number of shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or
Series G Preferred Stock which such holder shall then surrender to the
Corporation, multiplied by (B) the number determined by dividing: (1) in the
case of the Series A Preferred Stock, One Dollar ($1.00) by the Conversion Price
(as hereinafter defined) per share for the Series A Preferred Stock in effect at
the time of conversion, (2), in the case of the Series B Preferred Stock, One
Dollar and Fifty Cents ($1.50) by the Conversion Price per share for the Series
B Preferred Stock in effect at the time of conversion, (3), in the case of the
Series C Preferred Stock, Two Dollars ($2.00) by the Conversion Price per share
for the Series C Preferred Stock in effect at the time of conversion, (4), in
the case of the Series D Preferred Stock, Four Dollars ($4.00) by the Conversion
Price per share for the Series D Preferred Stock in effect at the time of
conversion, (5), in the case of the Series E Preferred Stock, Six Dollars
($6.00) by the Conversion Price per share for the Series E Preferred Stock in
effect at the time of
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<PAGE> 9
conversion, (6), in the case of the Series F Preferred Stock, Two Dollars
($2.00) by the Conversion Price per share for the Series F Preferred Stock in
effect at the time of conversion, (7), in the case of Series G Preferred Stock,
Four Dollars ($4.00) by the Conversion Price per share for the Series G
Preferred Stock in effect at the time of conversion. Promptly following
surrender of such certificates, the holder shall be entitled to receive
certificates evidencing the number of shares of Common Stock into which such
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred
Stock or Series G Preferred Stock are converted.
(ii) Automatic Conversion.
(A) All outstanding shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock and Series G Preferred Stock
shall be deemed automatically converted into such number of shares of Common
Stock as are determined in accordance with subparagraph (d)(i) hereof upon (1)
the consummation of a firm commitment underwritten public offering of the
securities of the Corporation pursuant to a registration statement filed with
the Securities and Exchange Commission pursuant to the Securities Act of 1933,
as amended, where the aggregate gross proceeds to the Corporation resulting from
the sale of such securities (before deduction of underwriting discounts and
expenses of sale) is not less than $30,000,000 and the per share sales price of
such securities before such deductions is not less than Eight Dollars ($8.00),
as adjusted for Recapitalization Events, or (2) the affirmative vote of the
holders of record of at least fifty-one percent (51%) of the outstanding shares
of Preferred Stock voting as a class to that effect (either such event being
hereinafter referred to as an "Automatic Conversion Event"). The affirmative
vote of the holders of at least fifty-one percent (51%) of the Series B
Preferred Stock voting as a class to convert to Common Stock shall also result
in the conversion of all of the outstanding shares of Series B Preferred Stock
to Common Stock, at the Conversion Price set forth herein. The affirmative vote
of the holders of at least seventy-five percent (75%) of the Series C Preferred
Stock voting as a class to convert to Common Stock shall also result in the
conversion of all of the outstanding shares of Series C Preferred Stock to
Common Stock, at the Conversion Price for the Series C Preferred Stock set forth
herein. The affirmative vote of the holders of at least seventy-five percent
(75%) of the Series D Preferred Stock voting as a class to convert to Common
Stock shall also result in the conversion of all of the outstanding shares of
Series D Preferred Stock to Common Stock, at the Conversion Price for the Series
D Preferred Stock set forth herein. The affirmative vote of the holders of at
least seventy-five percent (75%) of the Series E Preferred Stock voting as a
class to convert to Common Stock shall also result in the conversion of all of
the outstanding shares of Series E Preferred Stock to Common Stock, at the
Conversion Price for the Series E Preferred Stock set forth herein. The
affirmative vote of the holders of at least seventy-five percent (75%) of the
Series F Preferred Stock voting as a class to convert to Common Stock shall also
result in the conversion of all of the outstanding shares of Series F Preferred
Stock to Common Stock, at the Conversion Price for the Series F Preferred Stock
set forth herein. The affirmative vote of the holders of at least seventy-five
percent (75%) of the Series G Preferred Stock voting as a class to convert to
Common Stock shall also result in the conversion of all of the outstanding
shares of Series G Preferred Stock to Common Stock, at the Conversion Price for
the Series G Preferred Stock set forth herein.
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(B) In addition to the Automatic Conversion Events set
forth in subparagraph (A) above, if any holder of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock or Series G Preferred Stock
(by itself or together with affiliated persons or entities which affiliation
shall include (X) any venture fund related to a holder of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, Series F Preferred Stock or Series G Preferred
Stock by virtue of having at least two common individuals who are officers,
employees, directors or partners of the entities that are general partners or
managers of such venture funds or (Y) any partner of such venture fund; any such
person or entity, hereinafter an "Affiliate") fails to participate in any
particular financing by the Corporation, consisting of a bridge loan for a term
not in excess of one year or the offering of Convertible Securities (as
hereinafter defined) (an "Additional Offering") where a majority of the Board of
Directors has designated that such financing is subject to this paragraph, by
acquiring in such bridge loan financing or Additional Offering such portion of
the principal amount of the financing or such number of shares as shall equal
the product of (i) the principal amount of the bridge loan or the number of
shares to be offered in the Additional Offering, as the case may be, if any,
offered to all holders of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock,
Series F Preferred Stock and Series G Preferred Stock, as determined in good
faith by the Board of Directors, multiplied by (ii) a fraction: (a) the
numerator of which is the number of shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock and Series G Preferred Stock held by
such holder (by itself or together with any Affiliate) at the time of such
Additional Offering, and (b) the denominator of which is the total number of
shares of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock and Series G Preferred Stock then outstanding, in each case
determined on the basis of the number of shares of Common Stock into which such
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred
Stock or Series G Preferred Stock would be convertible at the Conversion Price
for Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred
Stock or Series G Preferred Stock that would be in effect immediately after the
transaction, assuming all holders of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock or Series G Preferred Stock
participated in the bridge loan financing or purchased their respective pro rata
shares in such Additional Offering (the "Pro Rata Share"), then to the extent of
the percentage of the Pro Rata Share not so acquired by the holder of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or Series G
Preferred Stock (or by an Affiliate of such holder) ("Refused Percentage") the
number of outstanding shares of such holder's Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock or Series G Preferred Stock determined
by multiplying the Refused Percentage by all outstanding shares of such holder's
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or
Series G Preferred Stock ("Converted Percentage") shall be automatically
converted into such number of fully paid
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and non-assessable shares of Common Stock of the Corporation (as such Common
Stock shall then be constituted) equal to the product of (x) the Converted
Percentage multiplied by (y) the number determined by dividing, in the case of
the Series A Preferred Stock, One Dollar ($1.00) by the Conversion Price for the
Series A Preferred Stock, in the case of the Series B Preferred Stock, One
Dollar and Fifty Cents ($1.50) by the Conversion Price for the Series B
Preferred Stock, in the case of the Series C Preferred Stock, Two Dollars
($2.00) by the Conversion Price for the Series C Preferred Stock, in the case of
the Series D Preferred Stock, Four Dollars ($4.00) by the Conversion Price for
the Series D Preferred Stock, in the case of the Series E Preferred Stock, Six
Dollars ($6.00) by the Conversion Price for the Series E Preferred Stock, in the
case of the Series F Preferred Stock, Two Dollars ($2.00) by the Conversion
Price for the Series F Preferred Stock and in the case of the Series G Preferred
Stock, Four Dollars ($4.00) by the Conversion Price for the Series G Preferred
Stock (in each case, all such Conversion Prices to be as adjusted pursuant to
subparagraphs (d)(iv)(B)-(F), but without giving any effect to any prior or
concurrent adjustments to any Conversion Price pursuant to subparagraph
(d)(iv)(A)) per share for the Series A Preferred Stock, the Series B Preferred
Stock, the Series C Preferred Stock, the Series D Preferred Stock, the Series E
Preferred Stock, the Series F Preferred Stock or the Series G Preferred Stock
(such event being hereinafter referred to as an "Additional Automatic Conversion
Event"), provided that no event described in this sentence will be deemed to be
an Additional Automatic Conversion Event unless the portion of the bridge loan
financing or Additional Offering offered to the holders of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, Series F Preferred Stock and Series G Preferred
Stock is offered to all of the holders of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock and Series G Preferred Stock and
thereby subjects all such holders to the consequences of non-participation in
such bridge loan financing or Additional Offering.
(C) On or after the date of occurrence of an Automatic
Conversion Event or an Additional Automatic Conversion Event, and in any event
within 10 days after receipt of notice, by mail, postage prepaid from the
Corporation of the occurrence of such Event, each holder of record of shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or
Series G Preferred Stock, as the case may be, shall surrender such holder's
certificates evidencing the Converted Percentage of such shares at the principal
office of the Corporation or at such other place as the Corporation shall
designate, and shall thereupon be entitled to receive certificates evidencing
the number of shares of Common Stock into which such shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or Series G
Preferred Stock are converted (plus additional certificates representing shares
of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or
Series G Preferred Stock not so converted, if any). On the date of the
occurrence of an Automatic Conversion Event or an Additional Automatic
Conversion Event, each holder of record of shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock or Series G Preferred Stock,
as applicable, shall be deemed to be the holder of record of the Common Stock
issuable upon such conversion, notwithstanding that the certificates
representing such
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<PAGE> 12
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred
Stock or Series G Preferred Stock shall not have been surrendered at the office
of the Corporation, that notice from the Corporation shall not have been
received by any holder of record of shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock or Series G Preferred Stock, or that
the certificates evidencing such shares of Common Stock shall not then be
actually delivered to such holder.
(D) In the event of the conversion of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, Series F Preferred Stock or Series G Preferred
Stock upon the occurrence of an Automatic Conversion Event or an Additional
Automatic Conversion Event, the right to receive any declared or accrued and
unpaid dividends on the shares of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, Series F Preferred Stock or Series G Preferred Stock, as the case may be,
so converted shall be deemed waived by the holders of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock or Series G Preferred Stock
whose shares are being converted pursuant thereto.
(iii) For purposes of these Articles of Incorporation:
"Additional Shares of Common Stock" shall mean all shares of
Common Stock issued (or, pursuant to subparagraphs (d)(iv)(A), deemed to be
issued) by the Corporation, other than shares of Common Stock issued or
issuable:
(A) upon conversion of shares of Preferred Stock;
(B) to officers, directors, or employees of, or
consultants to, the Corporation pursuant to a stock grant or sale or option plan
or other employee stock incentive program approved by the Board of Directors;
(C) as a dividend or distribution on Preferred Stock, or
Common Stock to the extent set forth in subparagraphs (d)(iv)(C) and (D) hereof,
and
(D) to equipment lessors, banks, lenders, customers or
vendors in connection with financings, sales, or incentive arrangements with
lessors, lenders, or customers.
"Common Stock Outstanding" shall include all Common Stock issued
and outstanding and issuable upon exercise of all outstanding Options and
conversion of all outstanding Convertible Securities.
"Conversion Price" shall mean the price at which shares of the
Common Stock shall be deliverable upon conversion of the Series A Preferred
Stock, the Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or Series G
Preferred Stock as adjusted from time to time as herein provided. The initial
Conversion Price per share for shares of Series A Preferred
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Stock shall be the Original Series A Issue Price. The initial Conversion Price
per share for shares of Series B Preferred Stock shall be the Original Series B
Issue Price. The initial Conversion Price per share for shares of Series C
Preferred Stock shall be the Original Series C Issue Price. The initial
Conversion Price per share for shares of Series D Preferred Stock shall be the
Original Series D Issue Price. The initial Conversion Price per share for shares
of Series E Preferred Stock shall be the Original Series E Issue Price. The
initial Conversion Price per share for shares of Series F Preferred Stock shall
be the Original Series F Issue Price. The initial Conversion Price per share for
shares of Series G Preferred Stock shall be the Original Series G Issue Price.
The Conversion Prices for the Series A Preferred Stock, the Series B Preferred
Stock, the Series C Preferred Stock, the Series D Preferred Stock, the Series E
Preferred Stock, the Series F Preferred Stock and the Series G Preferred Stock
shall be subject to adjustment as herein provided.
"Conversion Shares Outstanding" shall include (i) all outstanding
shares of Common Stock previously issued upon conversion of Preferred Stock, and
(ii) all shares of Common Stock issuable upon conversion of outstanding shares
of Preferred Stock.
"Convertible Securities" shall mean any evidences of
indebtedness, shares or securities, in each case convertible into or
exchangeable for Additional Shares of Common Stock.
"Effective Price" of Additional Shares of Common Stock shall mean
the quotient determined by dividing the total number of Additional Shares of
Common Stock issued or sold, or deemed to have been issued or sold by the
Corporation under subparagraph (d)(iv)(A), into the aggregate consideration
received or deemed to have been received by the Corporation for such issue under
subparagraph (d)(iv)(A).
"Issuance Date" shall mean the actual initial date of issuance of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or
Series G Preferred Stock, as applicable.
"Options" shall mean rights, options or warrants to subscribe for
purchase or otherwise acquire Common Stock or Convertible Securities.
(iv) Adjustments to Conversion Price for Diluting Issues.
(A) Sale of Shares Below Conversion Price.
(1) If at any time or from time to time after an Issuance Date,
the Corporation issues or sells, or is deemed by the express provisions of this
subparagraph (d)(iv)(A) to have issued or sold, Additional Shares of Common
Stock, for an Effective Price per share less than the Conversion Price then in
effect with respect to the series of Preferred Stock first issued on such
Issuance Date, then and in each such case the then existing Conversion Price for
the Series A Preferred Stock, the Series B Preferred Stock, the Series C
Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock, the
Series F Preferred Stock or the Series G Preferred Stock, as applicable, shall
be reduced, as of the opening of business on the date of such issue or sale, to
a price determined by multiplying the Conversion Price for the Series A
Preferred
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<PAGE> 14
Stock, the Series B Preferred Stock, the Series C Preferred Stock, Series D
Preferred Stock, the Series E Preferred Stock, the Series F Preferred Stock or
the Series G Preferred Stock, as applicable, by a fraction (a) the numerator of
which shall be (A) the number of shares of Conversion Shares Outstanding
immediately prior to such issue or sale plus (B) the number of shares of Common
Stock which the aggregate consideration received (or by express provision hereof
deemed to have been received) by the Corporation for the total number of
Additional Shares of Common Stock so issued would purchase at such Conversion
Price for the Series A Preferred Stock, the Series B Preferred Stock, the Series
C Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock,
the Series F Preferred Stock or the Series G Preferred Stock, as applicable, and
(b) the denominator of which shall be (x) the number of shares of Conversion
Shares Outstanding immediately prior to such issue or sale plus (y) the total
number of Additional Shares of Common Stock issued in connection with such issue
or sale. The foregoing formula shall apply to, and shall constitute the sole
adjustment with respect to, any adjustment to any Conversion Price to be made as
a result of any issuance of Additional Shares of Common Stock after any Issuance
Date, regardless of whether occurring before or after the filing of this
amendment and restatement, and any prior formulas and adjustments are hereby
superseded.
(2) For the purpose of making any adjustment required under this
subparagraph (d)(iv)(A), the consideration received by the Corporation for any
issue or sale of securities shall (a) to the extent it consists of cash be
computed at the gross amount of cash received by the Corporation before
deduction of any expenses payable by the Corporation and any underwriting or
similar commissions, compensation or concessions paid or allowed by the
Corporation in connection with such issue or sale, (b) to the extent it consists
of property other than cash, be computed at the fair market value of that
property as determined in good faith by the Board of Directors and (c) if
Additional Shares of Common Stock, Convertible Securities rights or options to
purchase either Additional Shares of Common Stock or Convertible Securities are
issued or sold together with other stock or securities or other assets of the
Corporation for a consideration which covers both, be computed (as provided in
clauses (a) and (b) above) as the portion of the consideration so received that
may be reasonably determined in good faith by the Board of Directors to be
allocable to such Additional Shares of Common Stock, Convertible Securities or
rights or options. Without limiting the foregoing, for avoidance of doubt, the
Board may in its discretion treat any issuance of options, warrants or other
Convertible Securities together with any issuance of stock as one combined
issuance of Additional Shares of Common Stock in exchange for the aggregate
consideration received therefor. In addition, for the purpose of making any
adjustment required under this subparagraph (d)(iv)(A), if the Company issues or
sells Additional Shares of Common Stock in one or more transactions occurring
within any six month period on substantially similar terms, and the Board
determines in good faith that such transactions were part of a single plan of
financing, the Board may elect to make only a single Conversion Price adjustment
hereunder, treating all such transactions as one issuance of Additional Shares
of Common Stock in exchange for the aggregate consideration received therefor,
all occurring on the last date of such transactions.
(3) For the purpose of the adjustment required under this
subparagraph (d)(iv)(A), if at any time or from time to time after an Issuance
Date the Corporation issues or sells any Options or Convertible Securities
(other than options or
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<PAGE> 15
rights exercisable for or convertible into shares of Common Stock referred to in
clause (B) of the definition of Additional Shares of Common Stock), then in each
case the Corporation shall be deemed to have issued at the time of the issuance
of such Options or Convertible Securities the maximum number of Additional
Shares of Common Stock (as set forth in the instruments relating thereto, giving
effect to any provision contained therein for a subsequent adjustment of such
number) issuable upon exercise or conversion thereof and to have received as
consideration for the issuance of such shares an amount equal to the total
amount of the consideration, if any, received by the Corporation for the
issuance of such Options or Convertible Securities plus, in the case of such
Options, the minimum amounts of consideration, if any (as set forth in the
instruments relating thereto, giving effect to any provision contained therein
for a subsequent adjustment of such consideration), payable to the Corporation
upon the exercise of such Options and, in the case of Convertible Securities,
the minimum amounts of consideration, if any, payable to the Corporation (other
than by cancellation of liabilities or obligations evidenced by such Convertible
Securities which were deemed to have been received by the Corporation on
issuance of such Convertible Securities). No further adjustment of the
Conversion Price for Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock or Series G Preferred Stock, adjusted upon the issuance of such
Options or Convertible Securities, shall be made as a result of the actual
issuance of Additional Shares of Common Stock on the exercise of any such
Options or the conversion of any such Convertible Securities; provided, however,
that if any such Options or the conversion privilege represented by any such
Convertible Securities shall expire without having been exercised, or are
exercised for a lesser number of Additional Shares of Common Stock or with a
greater consideration paid to the Corporation than was previously deemed to be
issued or received by the Corporation, the Conversion Price for Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, or Series G
Preferred Stock, as the case may be, adjusted upon the issuance of such Options
or Convertible Securities shall be readjusted to the Conversion Price for Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or Series G
Preferred Stock, as the case may be, which would have been in effect had an
adjustment been made on the basis that the only Additional Shares of Common
Stock so issued were the Additional Shares of Common Stock, if any, actually
issued or sold on the exercise of such Options or rights of conversion of such
Convertible Securities, and such Additional Shares of Common Stock, if any, were
issued or sold for the consideration actually received by the Corporation upon
such exercise, plus the consideration, if any, actually received by the
Corporation for the granting of all such Options, whether or not exercised, plus
the consideration received for issuing or selling the Convertible Securities
actually converted plus the consideration, if any, actually received by the
Corporation (other than by cancellation of liabilities or obligations evidenced
by such Convertible Securities which were deemed to have been received by the
Corporation on issuance of such Convertible Securities) on the conversion of
such Convertible Securities.
(4) In each case of an adjustment or readjustment of the
Conversion Price for the Series A Preferred Stock, the Series B Preferred Stock,
the Series C Preferred Stock, the Series D Preferred Stock, the Series E
Preferred Stock, the Series F Preferred Stock or the Series G Preferred Stock or
the number of shares of Common Stock or other securities issuable upon
conversion of the Series A Preferred Stock, the
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<PAGE> 16
Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred
Stock, the Series E Preferred Stock, the Series F Preferred Stock or the Series
G Preferred Stock, the Corporation, at its expense, shall cause the chief
financial officer of the Corporation to compute such adjustment or readjustment
in accordance with the provisions hereof and prepare a certificate showing such
adjustment or readjustment, and shall mail such certificate, by first class
mail, postage prepaid, to each registered holder of the Series A Preferred
Stock, the Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or Series G
Preferred Stock at the holder's address as shown in the Corporation's books. The
certificate shall set forth such adjustment or readjustment, showing in detail
the facts upon which such adjustment or readjustment is based including a
statement of (a) the consideration received or deemed to be received by the
Corporation for any Additional Shares of Common Stock issued or sold or deemed
to have been issued or sold, (b) the Conversion Price for Series A Preferred
Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D
Preferred Stock, the Series E Preferred Stock, the Series F Preferred Stock or
the Series G Preferred Stock at the time in effect (after giving effect to such
adjustment or readjustment), (c) the number of Additional Shares of Common Stock
and (d) the type and amount, if any, of other property which at the time would
be received upon conversion of the Series A Preferred Stock, the Series B
Preferred Stock, the Series C Preferred Stock, Series D Preferred Stock, the
Series E Preferred Stock, the Series F Preferred Stock or the Series G Preferred
Stock.
(5) Except as expressly provided herein, no adjustment in the
Conversion Price of any share of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, Series F Preferred Stock or Series G Preferred Stock shall be made in
respect of the issue of Additional Shares of Common Stock unless the
consideration per share for such Additional Shares of Common Stock issued or
deemed to be issued by the Corporation is less than the Conversion Price in
effect on the date of, and immediately prior to, such issue, for such share of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or
Series G Preferred Stock, respectively.
(B) Adjustment for Stock Splits and Combinations. If the
Corporation at any time or from time to time after an Issuance Date effects a
subdivision of the outstanding Common Stock, the Conversion Price for Series A
Preferred Stock, the Conversion Price for Series B Preferred Stock, the
Conversion Price for Series C Preferred Stock, the Conversion Price for Series D
Preferred Stock, the Conversion Price for the Series E Preferred Stock, the
Conversion Price for the Series F Preferred Stock and the Conversion Price for
Series G Preferred Stock then in effect immediately before that subdivision
shall be proportionately decreased, and conversely, if the Corporation at any
time or from time to time after an Issuance Date combines the outstanding shares
of Common Stock, the Conversion Price for Series A Preferred Stock, the
Conversion Price for Series B Preferred Stock, the Conversion Price for Series C
Preferred Stock, the Conversion Price for Series D Preferred Stock, the
Conversion Price for Series E Preferred Stock, the Conversion Price for Series F
Preferred Stock and the Conversion Price for Series G Preferred Stock then in
effect immediately before the combination shall be proportionately increased.
Any adjustment under this subparagraph (B) shall become effective at the close
of business on the date the subdivision or combination becomes effective.
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<PAGE> 17
(C) Adjustment for Certain Dividends and Distributions. In
the event the Corporation at any time, or from time to time after an Issuance
Date makes, or fixes a record date for the determination of holders of Common
Stock entitled to receive, a dividend or other distribution payable in
Additional Shares of Common Stock or any right to acquire Common Stock for no
consideration, then and in each such event the Conversion Price for Series A
Preferred Stock, the Conversion Price for Series B Preferred Stock, the
Conversion Price for Series C Preferred Stock, the Conversion Price for Series D
Preferred Stock, the Conversion Price for Series E Preferred Stock, the
Conversion Price for Series F Preferred Stock and the Conversion Price for
Series G Preferred Stock then in effect shall be decreased as of the time of
such issuance or, in the event such a record date is fixed, as of the close of
business on such record date, by multiplying the Conversion Price for such
Series of Preferred Stock then in effect by a fraction (a) the numerator of
which is the number of shares of Common Stock Outstanding immediately prior to
the time of such issuance or the close of business on such record date, and (b)
the denominator of which shall be the number of shares of Common Stock
Outstanding immediately prior to the time of such issuance or the close of
business on such record date plus the total number of shares of Common Stock
issuable in payment of such dividend or distribution; provided, however, that if
such record date is fixed and such dividend is not fully paid or if such
distribution is not fully made on the date fixed therefor, the Conversion Price
for Series A Preferred Stock, the Conversion Price for Series B Preferred Stock,
the Conversion Price for Series C Preferred, the Conversion Price for Series D
Preferred Stock, the Conversion Price for Series E Preferred Stock, the
Conversion Price for Series F Preferred Stock and the Conversion Price for
Series G Preferred Stock shall be recomputed accordingly as of the close of
business on such record date and thereafter the Conversion Price for Series A
Preferred Stock, the Conversion Price for Series B Preferred Stock, the
Conversion Price for Series C Preferred Stock, the Conversion Price for Series D
Preferred Stock, the Conversion Price for Series E Preferred Stock, the
Conversion Price for Series F Preferred Stock and the Conversion Price for
Series G Preferred Stock shall be adjusted pursuant to this subparagraph
(d)(iv)(C) as of the time of actual payment of such dividends or distributions.
(D) Adjustments for Other Dividends and Distributions. In
the event the Corporation at any time or from time to time after the Issuance
Date makes, or fixes a record date for the determination of holders of Common
Stock entitled to receive, a dividend or other distribution payable in
securities of the Corporation other than shares of Common Stock, then in each
such event provision shall be made so that the holders of Series A Preferred
Stock, the holders of Series B Preferred Stock, the holders of Series C
Preferred Stock, the holders of Series D Preferred Stock, the holders of Series
E Preferred Stock, the holders of Series F Preferred Stock and the holders of
Series G Preferred Stock shall receive upon conversion thereof, in addition to
the number of shares of Common Stock receivable thereupon, the amount of
securities of the Corporation which they would have received had their Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or Series G
Preferred Stock been converted into Common Stock on the date of such event and
had they thereafter, during the period from the date of such event to and
including the date of conversion, retained such securities receivable by them as
aforesaid during such period, subject to all other adjustments called for during
such period under this paragraph (d) with respect to the rights of the holders
of the Series A Preferred Stock, the holders of Series B Preferred Stock, the
holders of Series C Preferred Stock, the holders of Series D Preferred
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<PAGE> 18
Stock, the holders of Series E Preferred Stock, the holders of Series F
Preferred Stock and the holders of Series G Preferred Stock, as the case may be.
(E) Adjustment for Reclassification Exchange and
Substitution. If the Common Stock issuable upon the conversion of Series A
Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the
Series D Preferred Stock, the Series E Preferred Stock, the Series F Preferred
Stock or the Series G Preferred Stock is changed into the same or a different
number of shares of any class or classes of stock, whether by recapitalization,
reclassification or otherwise (other than a subdivision or combination of
shares, a stock dividend or a reorganization, provided for elsewhere in this
paragraph (d)), then and in any such event each holder of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, Series F Preferred Stock and Series G Preferred
Stock shall have the right thereafter to convert such stock into the kind and
amount of stock and other securities and property receivable upon such
recapitalization, reclassification or other change, by holders of the number of
shares of Common Stock into which such shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock or Series G Preferred Stock
might have been converted immediately prior to such recapitalization,
reclassification or change, all subject to further adjustment as provided
herein.
(F) Reorganizations. If at any time or from time to time
there is a capital reorganization of the Common Stock (other than a
recapitalization, subdivision, combination, reclassification or exchange of
shares provided for elsewhere in this paragraph (d)), then, as a part of such
reorganization, provision shall be made so that the holders of Series A
Preferred Stock, the holders of the Series B Preferred Stock, the holders of the
Series C Preferred Stock, the holders of the Series D Preferred Stock, the
holders of the Series E Preferred Stock, the holders of the Series F Preferred
Stock and the holders of Series G Preferred Stock shall thereafter be entitled
to receive, upon conversion of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, Series F preferred Stock or Series G Preferred Stock, as applicable, the
number of shares of stock or cash or other securities or property of the
Corporation to which a holder of Common Stock deliverable upon conversion would
have been entitled on such capital reorganization. In any such case, appropriate
adjustment shall be made in the application of the provisions of this paragraph
(d) with respect to the rights of holders of the Series A Preferred Stock, the
holders of the Series B Preferred Stock, the holders of the Series C Preferred
Stock, the holders of the Series D Preferred Stock, the holders of the Series E
Preferred Stock, the holders of the Series F Preferred Stock and the holders of
the Series G Preferred Stock after the reorganization to the end that the
provisions of this paragraph (d) (including adjustment of the Conversion Price
for Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred
Stock or Series G Preferred Stock then in effect and the number of shares
purchasable upon conversion of Series A Preferred Stock, the Series B Preferred
Stock, the Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock or Series G Preferred Stock) shall be
applicable after that event and be as nearly equivalent to the provisions hereof
as may be practicable.
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<PAGE> 19
(v) No Impairment. The Corporation will not, by amendment of
these Articles of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, other than as duly approved by a majority in interest of
the Common Stock and a majority in interest of the Preferred Stock avoid or seek
to avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation but will at all times in good faith
assist in the carrying out of all the provisions of this paragraph (d) and in
the taking of all such action as may be necessary or appropriate in order to
protect the Conversion Rights of the holders of the Series A Preferred Stock,
the holders of the Series B Preferred Stock, the holders of the Series C
Preferred Stock, the holders of the Series D Preferred Stock, the holders of the
Series E Preferred Stock, the holders of the Series F Preferred Stock and the
holders of the Series G Preferred Stock against dilution or other impairment.
The Corporation shall at all times reserve and keep available out of its
authorized but unissued Common Stock the full number of shares of Common Stock
deliverable upon the conversion of all the then outstanding shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and Series G
Preferred Stock and shall take all such action and obtain all such permits or
orders as may be necessary to enable the Corporation lawfully to issue such
Common Stock upon the conversion of Series A Preferred Stock, the Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock or Series G Preferred Stock.
(vi) Notices of Record Date. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend which is the same as cash dividends paid in
previous quarters) or other distribution, the Corporation shall mail to each
holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred
Stock and Series G Preferred Stock at least twenty (20) days prior to the date
specified herein, a notice specifying the date on which any such record is to be
taken for the purpose of such dividend or distribution.
(e) Redemption. The Series A Preferred Stock, the Series B Preferred
Stock, the Series C Preferred Stock, the Series D Preferred Stock, the Series E
Preferred Stock, the Series F Preferred Stock and the Series G Preferred Stock
shall, at the election of the holders of the Series A Preferred Stock, the
Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred
Stock, the Series E Preferred Stock, the Series F Preferred Stock and the Series
G Preferred Stock, as the case may be, be redeemed by the Corporation in two
equal installments in accordance with the following provisions:
(i) Election to Redeem. The Corporation shall redeem the Series A
Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the
Series D Preferred Stock, the Series E Preferred Stock, the Series F Preferred
Stock and the Series G Preferred Stock at the times, and pursuant to the terms,
set forth below, if the Corporation receives written certification (the
"Redemption Certificate") that holders of no less than seventy-five percent
(75%) of the then outstanding shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, the Series
E Preferred Stock, the Series F Preferred Stock and the Series G Preferred Stock
(the "Electing
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<PAGE> 20
Holders") voting together as a class have elected in favor of redemption (the
"Redemption Election"). The Redemption Certificate shall be signed by the
Electing Holders and shall be delivered to the Corporation at its principal
office, on or before August 30, 2002.
(ii) Redemption Price. The Series A Preferred Stock, the Series B
Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock, the
Series E Preferred Stock, the Series F Preferred Stock and the Series G
Preferred Stock shall be redeemed by the Corporation paying in cash, out of
funds legally available therefor, an amount equal to (A) the greater of (1) One
Dollar ($1.00) per share in the case of the Series A Preferred Stock, One Dollar
Fifty Cents ($1.50) per share in the case of the Series B Preferred Stock, Two
Dollars ($2.00) per share in the case of the Series C Preferred Stock, Four
Dollars ($4.00) per share in the case of the Series D Preferred Stock, Six
Dollars ($6.00) per share in the case of the Series E Preferred Stock, Two
Dollars ($2.00) per share in the case of the Series F Preferred Stock and Four
Dollars ($4.00) per share in the case of the Series G Preferred Stock (adjusted
for any Recapitalization Events with respect to such shares) or (2) the fair
market value per share (exclusive of the value of any declared or accrued but
unpaid dividends) as of a date within forty-five (45) days after receipt by the
Corporation of the Redemption Certificate, determined as set forth below, plus
(B) a further amount per share equal to dividends, if any, (1) then declared and
unpaid on account of such Series of Preferred Stock and (2) whether or not
declared, then accrued in accordance with the provisions of subparagraph
(b)(iii) hereof to and including the date fixed for redemption (the "Redemption
Price"). The fair market value of the Series A Preferred Stock, the Series B
Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock, the
Series E Preferred Stock, the Series F Preferred Stock and the Series G
Preferred Stock shall be determined as follows: the Board of Directors shall
determine the fair market value of the Series A Preferred Stock, the Series B
Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock, the
Series E Preferred Stock, the Series F Preferred Stock and the Series G
Preferred Stock; provided, however, that (A) if the Board of Directors
determines that the fair market value of each share of Series A Preferred Stock
is greater than One Dollar ($1.00), that the fair market value of each share of
the Series B Preferred Stock is greater than One Dollar and Fifty Cents ($1.50),
that the fair market value of each share of the Series C Preferred Stock is
greater than Two Dollars ($2.00), that the fair market value of each share of
the Series D Preferred Stock is greater than Four Dollars ($4.00), that the fair
market value of each share of the Series E Preferred Stock is greater than Six
Dollars ($6.00), that the fair market value of each share of the Series F
Preferred Stock is greater than Two Dollars ($2.00) or that the fair market
value of each share of the Series G Preferred Stock is greater than Four Dollars
($4.00) (adjusted for any Recapitalization Events with respect to such shares),
the Corporation shall promptly give the shareholders notice thereof and the
holders of a majority of the Corporation's then outstanding Common Stock shall
have the right to contest such determination by giving notice thereof to the
Corporation within fifteen (15) days of the receipt of the Corporation's notice,
and in such event the fair market value of the Series A Preferred Stock, the
Series B Preferred Stock, the Series C Preferred Stock, Series D Preferred
Stock, the Series E Preferred Stock, the Series F Preferred Stock or the Series
G Preferred Stock, as the case may be, shall be determined by an independent
appraiser paid by the Corporation and mutually acceptable to the Corporation,
the holders of a majority of the Common Stock and the holders of a majority of
the then outstanding Preferred Stock or (B) if the holders of a majority of the
then outstanding Series A Preferred Stock, the Series B Preferred Stock, Series
C Preferred
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Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred
Stock or Series G Preferred Stock contest the determination of the Board of
Directors, then the fair market value of the Series A Preferred Stock, the
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock or Series G Preferred Stock,
as the case may be, shall be determined by an independent appraiser mutually
acceptable to the Corporation and the holders of a majority of the then
outstanding Series A Preferred Stock, the Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock or Series G Preferred Stock. In the event that the holders of a
majority of the Series A Preferred Stock, the Series B Preferred Stock, the
Series C Preferred Stock, the Series D Preferred Stock, the Series E Preferred
Stock, the Series F Preferred Stock or the Series G Preferred Stock contest the
Board of Director's fair market value determination with respect to such series
of Preferred Stock, the cost of appraisal shall be borne as follows:
(A) if the fair market value determined by the independent
appraiser is less than or equal to ninety percent (90%) of the fair market value
as determined by the Board of Directors, then cost of appraisal shall be borne
by the holders of such Series of Preferred Stock pro rata based on the number of
shares held;
(B) if the fair market value determined by the appraiser
is equal to or greater than one-hundred and ten percent (110%) of the fair
market value as determined by the Board of Directors, then the cost of appraisal
shall be borne by the Corporation;
(C) if the fair market value of such Series of Preferred
Stock as determined by the independent appraiser is between ninety and
one-hundred and ten percent (90-110%) of the fair market value as determined by
the Board of Directors, then the cost of appraisal shall be borne 50% by the
Corporation and 50% by the holders of such Series of Preferred Stock, with each
such holder paying a pro rata portion of such cost based on the number of shares
held.
(iii) Mandatory Redemption: Two Installments. The Redemption
Election constitutes an election in favor of a mandatory redemption of all
shares of such Series of Preferred Stock. Such Series of Preferred Stock shall
be redeemed in two equal installments, with the Corporation redeeming 50% of
each holder's Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock or Series G Preferred Stock, as the case may be, in the first
installment and the remaining Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, Series F Preferred Stock or Series G Preferred Stock being redeemed in
the second installment. Subject to the Corporation having funds legally
available therefor, the closing of the first installment shall occur on or about
January 1, 2003 (the "First Redemption Date") and the closing of the second
installment shall take place on or about January 1, 2004 (the "Second Redemption
Date"). If the Corporation shall not have sufficient funds legally available for
redeeming all Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F
Preferred Stock and Series G Preferred Stock at the First Redemption Date or the
Second Redemption Date, respectively, the Corporation shall, (i) subject to the
rights of any Series of Preferred Stock that has redemption rights senior or
equal to the Series F Preferred Stock or the Series G Preferred
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<PAGE> 22
Stock, first redeem all shares of Series F Preferred Stock and Series G
Preferred Stock (or, in the absence of funds legally sufficient therefor, a pro
rata share in accordance with their respective aggregate number of shares), and
(ii) with any remainder funds, subject to the rights of any Series of Preferred
Stock that has redemption rights senior or equal to the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock, then redeem a pro rata portion of each
holder's shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock in
accordance with their respective aggregate number of shares. The Corporation
shall make such redemption payments out of funds legally available therefor and
shall redeem the remaining shares to have been redeemed in such installment as
soon as practicable after the Corporation has funds legally available therefor.
(iv) Redemption Notice. If the Redemption Election has been
received, the Corporation shall mail, postage prepaid, not less than thirty (30)
days nor more than sixty (60) days prior to the First and Second Redemption
Dates, written notice thereof (the "Redemption Notice"), to each holder of
record of the Series of Preferred Stock as to which the Redemption Election has
been exercised with a copy thereof to each other holder of Preferred Stock, in
each case at its post office address last shown on the records of the
Corporation. Each such Redemption Notice shall state:
(A) The number of shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock or Series G Preferred Stock
held by the holder that the Corporation shall redeem on the Redemption Date
specified in the Redemption Notice;
(B) The Redemption Date and Redemption Price;
(C) The date upon which the holder's conversion rights (as
set forth in paragraph (d) above) as to such shares terminate, which termination
shall be five days before the Redemption Date; and
(D) That the holder is to surrender to the Corporation, in
the manner and at the place designated, its certificate or certificates
representing the shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock,
Series F Preferred Stock or Series G Preferred Stock to be redeemed.
(v) Surrender of Certificates: Payment. On or before each
Redemption Date, each holder of shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock or Series G Preferred Stock to be
redeemed on such Redemption Date, unless such holder has exercised its right to
convert the shares as provided in paragraph (d) hereof, shall surrender the
certificate or certificates representing such shares to the Corporation, in the
manner and at the place designated in the Redemption Notice, and thereupon the
Redemption Price for such shares shall be payable to the order of the person
whose name appears on such certificate or certificates as the owner thereof, and
each surrendered certificate shall be cancelled and retired. In the event that
fewer than all of the shares
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<PAGE> 23
represented by such certificate are redeemed, a new certificate representing the
unredeemed shares shall be issued forthwith.
(vi) Rights Subsequent to Redemption. If the Redemption Notice
shall have been duly given, and if on each Redemption Date the Redemption Price
therefor is either paid or made available for payment through the deposit
arrangement specified in subparagraph (e)(vii) below, then notwithstanding that
the certificates evidencing any of the shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, Series F Preferred Stock or Series G Preferred Stock
so called for redemption shall not have been surrendered, the dividends with
respect to such shares shall cease to accrue after the applicable Redemption
Date and all rights with respect to such shares shall forthwith terminate after
such Redemption Date, except only the right of the holders to receive the
Redemption Price without interest upon surrender of their certificate or
certificates therefor.
(vii) Deposit of Funds. On or prior to each Redemption Date, the
Corporation shall deposit as a trust fund with any bank or trust company, having
a capital and surplus of at least $100,000,000, a sum equal to the aggregate
Redemption Price of all shares of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, Series F Preferred Stock and Series G Preferred Stock called for
redemption on such Redemption Date and not yet redeemed or converted, with
irrevocable instructions and authority to the bank or trust company to pay, on
and after each such Redemption Date, the Redemption Price to the respective
holders upon the surrender of their stock certificates. From and after the date
of such deposit (but not prior to each Redemption Date), the shares so called
for redemption on such Redemption Date shall be deemed to have been redeemed.
The deposit shall constitute full payment of the shares to their holders, and
from and after each Redemption Date the shares redeemed on such Redemption Date
shall be deemed to be no longer outstanding, and the holders thereof shall cease
to be shareholders with respect to such shares and shall have no rights with
respect thereto except the rights to receive, from the bank or trust company,
payment of the Redemption Price of the shares, without interest, upon surrender
of their certificates therefor. Any funds so deposited and unclaimed at the end
of one year from the Second Redemption Date shall be released or repaid to the
Corporation, after which the holders of shares called for redemption shall be
entitled to receive payment of the Redemption Price only from the Corporation.
ARTICLE V
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<PAGE> 24
(a) The liability of the directors of the Corporation for monetary
damages shall be eliminated to the fullest extent permissible under California
law as it now exists or may hereafter be amended in a manner more favorable for
directors.
(b) The Corporation is authorized to provide indemnification of agents
(as defined in Section 317 of the California Corporations Code) through bylaw
provisions, agreements with agents, vote of shareholders or disinterested
directors, or otherwise, to the fullest extent permissible under California law.
(c) Any amendment, repeal or modification of any provision of this
Article V shall not adversely affect any right or protection of an agent of the
Corporation existing at the time of such amendment, repeal or modification.
THREE: The foregoing amendment and restatement has been approved by the
Board of Directors of the Corporation.
FOUR: The foregoing amendment and restatement has been duly approved by
the requisite number of shares of the Corporation in accordance with Sections
902 and 903 of the California Corporations Code. The total number of outstanding
shares of Common Stock of the Corporation is 5,791,589, the total number of
outstanding shares of Series A Preferred Stock of the Corporation is 6,570,000,
the total number of outstanding shares of Series B Preferred Stock is 3,333,334,
the total number of outstanding shares of Series C Preferred Stock of the
Corporation is 7,655,018, the total number of outstanding shares of Series D
Preferred Stock of the Corporation is 3,125,000, the total number of outstanding
shares of Series E Preferred Stock of the Corporation is 10,664,111 and the
total number of outstanding shares of Series F Preferred Stock of the
Corporation is 11,204,246. The number of shares voting in favor of the amendment
and restatement equaled or exceeded the vote required, which was more than 50%
of the Common Stock and more than 50% of each of the Series A Preferred Stock,
the Series B Preferred Stock, the Series C Preferred Stock, the Series D
Preferred Stock, the Series E Preferred Stock and the Series F Preferred Stock,
each voting as a separate class.
* * * * *
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<PAGE> 25
IN WITNESS WHEREOF, the undersigned have executed this certificate on
February 18, 2000.
/s/ AKE ALMGREN
--------------------------------------
Ake Almgren
President and Chief Executive Officer
/s/ JEFFREY R. WATTS
--------------------------------------
Jeffrey R. Watts
Secretary and Chief Financial Officer
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<PAGE> 26
VERIFICATION
The undersigned certify under penalty of perjury that they have read the
foregoing Amended and Restated Articles of Incorporation and know the contents
thereof, and that the statements therein are true and correct.
Executed at Woodland Hills, California, on February 18, 2000.
/s/ AKE ALMGREN
--------------------------------------
Ake Almgren
President and Chief Executive Officer
/s/ JEFFREY R. WATTS
--------------------------------------
Jeffrey R. Watts
Secretary and Chief Financial Officer
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<PAGE> 1
EXHIBIT 3.3
BYLAWS
OF
CAPSTONE TURBINE CORPORATION
HISTORY OF ACTIONS TAKEN
RELATED TO BYLAWS DATE
----------------- ----
Adoption April 28, 1997
- ----------------------------- -------------------------------
Amended October 8, 1997
- ----------------------------- -------------------------------
Amended March 11, 1999
- ----------------------------- -------------------------------
Amended February 14, 2000
- ----------------------------- -------------------------------
- ----------------------------- -------------------------------
- ----------------------------- -------------------------------
- ----------------------------- -------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I CORPORATE OFFICES....................................................2
1.1 PRINCIPAL OFFICE........................................................2
1.2 OTHER OFFICES...........................................................2
ARTICLE II MEETINGS OF SHAREHOLDERS.............................................2
2.1 PLACE OF MEETINGS.......................................................2
2.2 ANNUAL MEETING..........................................................2
2.3 SPECIAL MEETINGS........................................................2
2.4 NOTICE OF SHAREHOLDERS' MEETINGS........................................3
2.5 MANNER OF GIVING NOTICE. AFFIDAVIT OF NOTICE...........................3
2.6 QUORUM..................................................................4
2.7 ADJOURNED MEETING: NOTICE...............................................4
2.8 VOTING..................................................................5
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT.......................5
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.................6
2.11 RECORD DATE FOR SHAREHOLDER NOTICE: VOTING: GIVING CONSENTS.............7
2.12 PROXIES.................................................................7
2.13 INSPECTORS OF ELECTION..................................................8
ARTICLE III DIRECTORS............................................................8
3.1 POWERS..................................................................8
3.2 NUMBER OF DIRECTORS.....................................................8
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS................................9
3.4 REMOVAL.................................................................9
3.5 RESIGNATION AND VACANCIES...............................................9
3.6 PLACE OF MEETINGS, MEETINGS BY TELEPHONE...............................10
3.7 REGULAR MEETINGS.......................................................10
3.8 SPECIAL MEETINGS: NOTICE...............................................10
3.9 QUORUM.................................................................11
3.10 WAIVER OF NOTICE.......................................................11
3.11 ADJOURNMENT............................................................11
3.12 NOTICE OF ADJOURNMENT..................................................11
3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING......................11
3.14 FEES AND COMPENSATION OF DIRECTORS.....................................11
3.15 APPROVAL OF LOANS TO OFFICERS..........................................12
ARTICLE IV COMMITTEES..........................................................12
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
4.1 COMMITTEES OF DIRECTORS................................................12
4.2 MEETINGS AND ACTION OF COMMITTEES......................................13
ARTICLE V OFFICERS............................................................13
5.1 OFFICERS...............................................................13
5.2 APPOINTMENT OF OFFICERS................................................13
5.3 SUBORDINATE OFFICERS...................................................14
5.4 REMOVAL AND RESIGNATION OF OFFICERS....................................14
5.5 VACANCIES IN OFFICES...................................................14
5.6 CHAIRMAN OF THE BOARD..................................................14
5.7 PRESIDENT..............................................................14
5.8 VICE PRESIDENTS........................................................15
5.9 SECRETARY..............................................................15
5.10 CHIEF FINANCIAL OFFICER................................................15
ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER
AGENTS..............................................................16
6.1 INDEMNIFICATION OF DIRECTORS...........................................16
6.2 INDEMNIFICATION OF OTHERS..............................................16
6.3 PAYMENT OF EXPENSES IN ADVANCE.........................................16
6.4 INDEMNITY NOT EXCLUSIVE................................................17
6.5 INSURANCE INDEMNIFICATION..............................................17
6.6 CONFLICTS..............................................................17
6.7 RIGHT TO BRING SUIT....................................................17
6.8 INDEMNITY AGREEMENTS...................................................18
6.9 AMENDMENT REPEAL OR MODIFICATION.......................................18
ARTICLE VII RECORDS AND REPORTS.................................................18
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER...........................18
7.2 MAINTENANCE AND INSPECTION OF BYLAWS...................................19
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS..................19
7.4 INSPECTION BY DIRECTORS................................................19
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER..................................20
7.6 FINANCIAL STATEMENTS...................................................20
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.........................21
ARTICLE VIII GENERAL MATTERS.....................................................21
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING..................21
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS..............................21
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C>
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED......................21
8.4 CERTIFICATES FOR SHARES................................................22
8.5 LOST CERTIFICATES......................................................22
8.6 CONSTRUCTION; DEFINITIONS..............................................22
ARTICLE IX AMENDMENTS..........................................................23
9.1 AMENDMENT BY SHAREHOLDERS..............................................23
9.2 AMENDMENT BY DIRECTORS.................................................23
9.3 RECORD OF AMENDMENTS...................................................23
ARTICLE X INTERPRETATION......................................................23
</TABLE>
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<PAGE> 5
BYLAWS
OF
CAPSTONE TURBINE CORPORATION
ARTICLE I
CORPORATE OFFICES
1.1 PRINCIPAL OFFICE
The Board of Directors shall fix the location of the principal executive
office of the corporation at any place within or outside the State of
California. If the principal executive office is located outside California and
the corporation has one or more business offices in California, then the Board
of Directors shall fix and designate a principal business office in California.
1.2 OTHER OFFICES
The Board of Directors may at any time establish branch or subordinate
offices at any place or places.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1 PLACE OF MEETINGS
Meetings of shareholders shall be held at any place within or outside
the State of California designated by the Board of Directors. In the absence of
any such designation, shareholders' meetings shall be held at the principal
executive office of the corporation or at any place consented to in writing by
all persons entitled to vote at such meeting, given before or after the meeting
and filed with the Secretary of the corporation.
2.2 ANNUAL MEETING
An annual meeting of shareholders shall be held each year on a date and
at a time designated by the Board of Directors. At that meeting, directors shall
be elected. Any other proper business may be transacted at the annual meeting of
shareholders.
2.3 SPECIAL MEETINGS
Special meetings of the shareholders may be called at any time, subject
to the provisions of Sections 2.4 and 2.5 of these Bylaws, by the Board of
Directors, the Chairman of the Board, the President or the holders of shares
entitled to cast not less than ten percent (10%) of the votes at that meeting.
<PAGE> 6
If a special meeting is called by anyone other than the Board of
Directors or the President or the Chairman of the Board, then the request shall
be in writing, specifying the time of such meeting and the general nature of the
business proposed to be transacted, and shall be delivered personally or sent by
registered mail or by other written communication to the Chairman of the Board,
the President, any Vice President or the Secretary of the corporation. The
officer receiving the request forthwith shall cause notice to be given to the
shareholders entitled to vote, in accordance with the provisions of Sections 2.4
and 2.5 of these Bylaws, that a meeting will be held at the time requested by
the person or persons calling the meeting, so long as that time is not less than
thirty-five (35) nor more than sixty (60) days after the receipt of the request.
If the notice is not given within twenty (20) days after receipt of the request,
then the person or persons requesting the meeting may give the notice. Nothing
contained in this paragraph of this Section 2.3 shall be construed as limiting,
fixing or affecting the time when a meeting of shareholders called by action of
the Board of Directors may be held.
2.4 NOTICE OF SHAREHOLDERS' MEETINGS
All notices of meetings of shareholders shall be sent or otherwise given
in accordance with Section 2.5 of these Bylaws not less than ten (10) (or, if
sent by third-class mail pursuant to Section 2.5 of these Bylaws, not less than
thirty (30)) nor more than sixty (60) days before the date of the meeting to
each shareholder entitled to vote thereat. Such notice shall state the place,
date, and hour of the meeting and (i) in the case of a special meeting, the
general nature of the business to be transacted, and no business other than that
specified in the notice may be transacted, or (ii) in the case of the annual
meeting, those matters which the Board of Directors, at the time of the mailing
of the notice, intends to present for action by the shareholders, but, subject
to the provisions of the next Paragraph of this Section 2.4, any proper matter
may be presented at the meeting for such action. The notice of any meeting at
which Directors are to be elected shall include the names of nominees intended
at the time of the notice to be presented by the Board for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the California Corporations Code (the
"Code"), (ii) an amendment of the Articles of Incorporation, pursuant to Section
902 of the Code, (iii) a reorganization of the corporation, pursuant to Section
1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to
Section 1900 of the Code, or (v) a distribution in dissolution other than in
accordance with the rights of any outstanding preferred shares, pursuant to
Section 2007 of the Code, then the notice shall also state the general nature of
that proposal.
2.5 MANNER OF GIVING NOTICE. AFFIDAVIT OF NOTICE
Notice of a shareholders' meeting shall be given either personally or by
first-class mail, or, if the corporation has outstanding shares held of record
by five hundred (500) or more persons (determined as provided in Section 605 of
the Code) on the record date for the shareholders' meeting, notice may be sent
by third-class mail, or other means of written communication, addressed to the
shareholder at the address of the shareholder appearing on the books of the
corporation or given by the shareholder to the corporation for the purpose of
notice; or if no such address appears or is given, at the place where the
principal
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<PAGE> 7
executive office of the corporation is located or by publication at least once
in a newspaper of general circulation in the county in which the principal
executive office is located. The notice shall be deemed to have been given at
the time when delivered personally or deposited in the mail or sent by other
means of written communication.
If any notice (or any report referenced in Article VII of these Bylaws)
addressed to a shareholder at the address of such shareholder appearing on the
books of the corporation is returned to the corporation by the United States
Postal Service marked to indicate that the United States Postal Service is
unable to deliver the notice to the shareholder at that address, all future
notices or reports shall be deemed to have been duly given without further
mailing if the same shall be available to the shareholder upon written demand of
the shareholder at the principal executive office of the corporation for a
period of one (1) year from the date of the giving of the notice.
An affidavit of mailing of any notice or report in accordance with the
provisions of this Section 2.5, executed by the Secretary, Assistant Secretary
or any transfer agent, shall be prima facie evidence of the giving of the notice
or report.
2.6 QUORUM
Unless otherwise provided in the Articles of Incorporation of the
corporation, a majority of the shares entitled to vote, represented in person or
by proxy, shall constitute a quorum at a meeting of the shareholders. The
shareholders present at a duly called or held meeting at which a quorum is
present may continue to transact business until adjournment notwithstanding the
withdrawal of enough shareholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by at least a majority of the shares
required to constitute a quorum.
In the absence of a quorum, any meeting of shareholders may be adjourned
from time to time by the vote of a majority of the shares represented either in
person or by proxy, but no other business may be transacted, except as provided
in the last sentence of the preceding paragraph.
2.7 ADJOURNED MEETING: NOTICE
Any shareholders' meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by the vote of the majority of the
shares represented at that meeting, either in person or by proxy.
When any meeting of shareholders, either annual or special, is adjourned
to another time or place, notice need not be given of the adjourned meeting if
its time and place are announced at the meeting at which the adjournment is
taken. However, if the adjournment is for more than forty-five (45) days from
the date set for the original meeting or if a new record date for the adjourned
meeting is fixed, a notice of the adjourned meeting shall be given to each
shareholder of record entitled to vote at the adjourned meeting in accordance
with the provisions of Sections 2.4 and 2.5 of these Bylaws. At any adjourned
meeting the corporation may transact any business which might have been
transacted at the original meeting.
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<PAGE> 8
2.8 VOTING
The shareholders entitled to vote at any meeting of shareholders shall
be determined in accordance with the provisions of Section 2.11 of these Bylaws,
subject to the provisions of Sections 702 through 704 of the Code (relating to
voting shares held by a fiduciary, in the name of a corporation, or in joint
ownership).
Elections for directors and voting on any other matter at a
shareholders' meeting need not be by ballot unless a shareholder demands
election by ballot at the meeting and before the voting begins.
Except as provided in the last paragraph of this Section 2.8, or as may
be otherwise provided in the Articles of Incorporation, each outstanding share,
regardless of class, shall be entitled to one vote on each matter submitted to a
vote of the shareholders. Any holder of shares entitled to vote on any matter
may vote part of the shares in favor of be proposal and refrain from voting the
remaining shares or may vote them against the proposal other than elections to
office, but, if the shareholder fails to specify the number of shares such
shareholder is voting affirmatively, it will be conclusively presumed that the
shareholder's approving vote is with respect to all shares which the shareholder
is entitled to vote.
The affirmative vote of the majority of the shares represented and
voting at a duly held meeting at which a quorum is present (which shares voting
affirmatively also constitute at least a majority of the required quorum) shall
be the act of the shareholders, unless the vote of a greater number or voting by
classes is required by the Code or by the Articles of Incorporation.
At a shareholders' meeting at which directors are to be elected, a
shareholder shall be entitled to cumulate votes either (i) by giving one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which that shareholder's shares are
normally entitled or (ii) by distributing the shareholder's votes on the same
principle among as many candidates as the shareholder thinks fit, if the
candidate or candidates' names have been placed in nomination prior to the
voting and the shareholder has given notice prior to the voting of the
shareholder's intention to cumulate the shareholder's votes. If any one
shareholder has given such a notice, then every shareholder entitled to vote may
cumulate votes for candidates in nomination. The candidates receiving the
highest number of affirmative votes, up to the number of directors to be
elected, shall be elected; votes against any candidate and votes withheld shall
have no legal effect.
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT
The transactions of any meeting of shareholders, either annual or
special, however called and noticed, and wherever held, are as valid as though
they had been taken at a meeting duly held after regular call and notice, if a
quorum be present either in person or by proxy, and if, either before or after
the meeting, each of the persons entitled to vote, not present in person or by
proxy, signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. Neither the business to be
transacted at nor the purpose of any annual or special meeting of shareholders
need be specified in any written waiver of notice or consent to the holding of
the meeting or approval of the minutes
-5-
<PAGE> 9
thereof, except that if action is taken or proposed to be taken for approval of
any of those matters specified in the second paragraph of Section 2.4 of these
Bylaws, the waiver of notice or consent or approval shall state the general
nature of the proposal. All such waivers, consents, and approvals shall be filed
with the corporate records or made a part of the minutes of the meeting.
Attendance of a person at a meeting shall constitute a waiver of notice
of and presence at that meeting, except when the person objects, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened and except that attendance at a meeting is
not a waiver of any right to object to the consideration of matters required by
the Code to be included in the notice of such meeting but not so included, if
such objection is expressly made at the meeting.
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action which may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding shares having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting al which
all shares entitled to vote thereon were present and voted.
Directors may not be elected by written consent except by unanimous
written consent of all shares entitled to vote for the election of directors.
However, a director may be elected at any time to fill any vacancy on the Board
of Directors, provided that it was not created by removal of a director and that
it has not been filled by the directors, by the written consent of the holders
of a majority of the outstanding shares entitled to vote for the election of
directors.
All such consents shall be maintained in the corporate records. Any
shareholder giving a written consent, or the shareholder's proxy holders, or a
transferee of the shares, or a personal representative of the shareholder, or
their respective proxy holders, may revoke the consent by a writing received by
the Secretary of the corporation before written consents of the number of shares
required to authorize the proposed action have been filed with the Secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing, the Secretary shall give prompt notice of any corporate
action approved by the shareholders without a meeting by less than unanimous
written consent to those shareholders entitled to vote who have not consented in
writing. Such notice shall be given in the manner specified in Section 2.5 of
these Bylaws. In the case of approval of (i) a contract or transaction in which
a director has a direct or indirect financial interest, pursuant to Section 310
of the Code, (ii) indemnification of a corporate "agent," pursuant to Section
317 of the Code, (iii) a reorganization of the corporation, pursuant to Section
1201 of the Code, and (iv) a distribution in dissolution other than in
accordance with the rights of outstanding preferred shares, pursuant to Section
2007 of the Code, the notice shall be given at least ten (10) days before the
consummation of any action authorized by that approval, unless the consents of
all shareholders entitled to vote have been solicited in writing.
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<PAGE> 10
2.11 RECORD DATE FOR SHAREHOLDER NOTICE: VOTING: GIVING CONSENTS
In order that the corporation may determine the shareholders entitled to
notice of any meeting or to vote, the Board of Directors may fix, in advance, a
record date, which shall not be more than sixty (60) days nor less than ten (10)
days prior to the date of such meeting nor more than sixty (60) days before any
other action. Shareholders on the close of business on the record date are
entitled to notice and to vote, as the case may be, notwithstanding any transfer
of any shares on the books of the corporation after the record date, except as
otherwise provided in the Articles of Incorporation or the Code.
A determination of shareholders of record entitled to notice of or to
vote at a meeting of shareholders shall apply to any adjournment of the meeting
unless the Board of Directors fixes a new record date for the adjourned meeting,
but the Board of Directors shall fix a new record date if the meeting is
adjourned for mom than forty-five (45) days from the date set for the original
meeting.
If the Board of Directors does not so fix a record date:
(a) The record date for determining shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at the close of
business on the business day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the business day next preceding
the day on which the meeting is held.
(b) The record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the Board has been taken, shall be the day on which the first written
consent is given, or (ii) when prior action by the Board has been taken, shall
be at the close of business on the day on which the Board adopts the resolution
relating thereto, or the sixtieth (60th) day prior to the date of such other
action, whichever is later.
The record date for any other purpose shall be as provided in Section
8.1 of these Bylaws.
2.12 PROXIES
Every person entitled to vote for directors, or on any other matter,
shall have the right to do so either in person or by one or more agents
authorized by a written proxy signed by the person and filed with the Secretary
of the corporation. A proxy shall be deemed signed if the shareholder's name or
other authorization is placed on the proxy (whether by manual signature,
typewriting, telegraphic or electronic transmission or otherwise) by the
shareholder or the shareholder's attorney-in-fact. A validly executed proxy
which does not state that it is irrevocable shall continue in full force and
effect unless (i) the person who executed the proxy revokes it prior to the time
of voting by delivering a writing to the corporation stating that the proxy is
revoked or by executing a subsequent proxy and presenting it to the meeting or
by attendance at such meeting and voting in person, or (ii) written notice of
the death or incapacity of the maker of that proxy is received by the
corporation before the vote pursuant to that proxy is counted; provided,
however, that no
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proxy shall be valid after the expiration of eleven (11) months from the date
thereof, unless otherwise provided in the proxy. The dates contained on the
forms of proxy presumptively determine the order of execution, regardless of the
postmark dates on the envelopes in which they are mailed. The revocability of a
proxy that states on its face that it is irrevocable shall be governed by the
provisions of Sections 705(e) and 705(f) of the Code.
2.13 INSPECTORS OF ELECTION
In advance of any meeting of shareholders, the Board of Directors may
appoint inspectors of election to act at the meeting and any adjournment
thereof. If inspectors of election are not so appointed or designated or if any
persons so appointed fail to appear or refuse to act, then the Chairman of the
meeting may, and on the request of any shareholder or a shareholder's proxy
shall, appoint inspectors of election (or persons to replace those who so fail
to appear) at the meeting. The number of inspectors shall be either one (1) or
three (3). If appointed at a meeting on the request of the (1) or more
shareholders or proxies, the majority of shares represented in person or by
proxy shall determine whether one (1) or three (3) inspectors are to be
appointed.
The inspectors of election shall determine the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum, and the authenticity, validity, and effect of
proxies, receive votes, ballots or consents, bear and determine all challenges
and questions in any way arising in connection with the right to vote, count and
tabulate all votes or consents, determine when the polls shall close, determine
the result and do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the Code and any limitations in the
Articles of Incorporation and these Bylaws relating to action required to be
approved by the shareholders or by the outstanding shares, the business mid
affairs of be corporation shall be managed and all corporate powers shall be
exercised by or under the direction of the Board of Directors. The Board may
delegate the management of the day-to-day operation of the business of the
corporation to a management company or other person provided that the business
and affairs of the corporation shall be managed and all corporate powers shall
be exercised under the ultimate direction of the Board.
3.2 NUMBER OF DIRECTORS
The authorized number of directors of the corporation shall be twelve
(12). The number of authorized directors may be amended by the vote or written
consent of holders of a majority of the outstanding of each class of stock of
the Company entitled to vote, subject to any limitations or restrictions imposed
by the Code.
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No reduction of the authorized number of directors shall have the effect
of removing any director before that director's term of office expires.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
At each annual meeting of shareholders, directors shall be elected to
bold office until the next annual meeting. Each director, including a director
elected to fill a vacancy, shall hold office until the expiration of be term for
which elected and until a successor has been elected and qualified, except in
the case of the death, resignation, or removal of such a director.
3.4 REMOVAL
The entire Board of Directors or any individual director may be removed
from office without cause by the affirmative vote of a majority of the
outstanding shares entitled to vote on such removal; provided, however, that
unless the entire Board is removed, no individual director may be removed when
the votes cast against such director's removal or not consenting in writing to
such removal, would be sufficient to elect that director if voted cumulatively
at an election at which the same total number of votes cast went cast (or, if
such action is taken by written consent, all shares entitled to vote were voted)
and the entire number of directors authorized at the time of such director's
most recent election were then being elected.
3.5 RESIGNATION AND VACANCIES
Any director may resign MUM upon giving oral or written notice to the
Chairman of the Board, the President, the Secretary or the Board of Directors,
unless the notice specifies a later time for the effectiveness of such
resignation. If the resignation of a director is effective at a future time, the
Board of Directors may elect it successor to take office when the resignation
becomes effective.
Vacancies on the Board of Directors may be filled by a majority of the
remaining directors, or if the number of directors then in office is less than a
quorum by (i) unanimous written consent of the directors then in office, (ii)
the affirmative vote of a majority of the directors then in office at a meeting
held pursuant to notice or waivers of notice, or (iii) a sole remaining
director; however, a vacancy created by the removal of a director by the vote or
written consent of the shareholders or by court order may be filled only by the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present (which shares voting affirmatively
also constitute at least a majority of the required quorum), or by the unanimous
written consent of all shares entitled to vote thereon. Each director so elected
shall hold office until the next annual meeting of the shareholders and until a
successor has been elected and qualified, or until his or her death, resignation
or removal.
A vacancy or vacancies in the Board of Directors shall be deemed to
exist (i) in the event of the death, resignation or removal of any director,
(ii) if the Board of Directors by resolution declares vacant the office of a
director who has been declared of unsound mind by an order of court or convicted
of a felony, (iii) if the authorized number of directors is
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increased, or (iv) if the shareholders fail, at any meeting of shareholders at
which any director or directors are elected, to elect the full authorized number
of directors to be elected at that meeting.
The shareholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the directors, but any such election by
written consent, other than to fill a vacancy created by removal, shall require
the consent of the holders of a majority of the outstanding shares entitled to
vote thereon. A director may not be elected by written consent to fill a vacancy
created by removal except by unanimous consent of all shares entitled to vote
for the election of directors.
3.6 PLACE OF MEETINGS, MEETINGS BY TELEPHONE
Regular meetings of the Board of Directors may be held at any place
within or outside the State of California that has been designated from time to
time by resolution of the Board. In the absence of such a designation, regular
meetings shall be held at the principal executive office of the corporation.
Special meetings of the Board may be held at any place within or outside the
State of California that has been designated in the notice of the meeting or, if
not stated in the notice or if there is no notice, at the principal executive
office of the corporation.
Members of the Board may participate in a meeting through the use of
conference telephone or similar communications equipment, so long as all
directors participating in such meeting can hear one another. Participation in a
meeting pursuant to this paragraph constitutes presence in person at such
meeting.
3.7 REGULAR MEETINGS
Regular meetings of to Board of Directors may be held without notice if
the time and place of such meetings are fixed by the Board of Directors.
3.8 SPECIAL MEETINGS: NOTICE
Subject to the provisions of the following paragraph, special meetings
of the Board of Directors for any purpose or purposes may be called at any time
by the Chairman of the Board, the President, any Vice President, the Secretary
or any two (2) directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail,
telegram, charges prepaid, or by telecopier, addressed to each director at that
director's address as it is shown on the records of the corporation. If the
notice is mailed, it shall be deposited in the United States mail at least four
(4) days before the time of the holding of the meeting. If the notice is
delivered personally or by telephone or by telecopier or telegram, it shall be
delivered personally or by telephone or by telecopier or to the telegraph
company at least forty-eight (48) hours before the time of the holding of the
meeting. Any oral notice given personally or by telephone may be communicated
either to the director or to a person at the office of the director who the
person giving the notice has reason to believe will promptly communicate it to
the director. The notice need not specify the purpose of the meeting.
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3.9 QUORUM
A majority of the authorized number of directors shall constitute a
quorum for the transaction of business, except to adjourn as provided in Section
3. 11 of these Bylaws. Every act or decision done or made by a majority of the
directors present at a meeting duly held at which a quorum is present is the act
of the Board of Directors, subject to the provisions of Section 310 of the Code
(as to approval of contracts or transactions in which a director has a direct or
indirect material financial interest), Section 311 of the Code (as to
appointment of committees), Section 317(e) of the Code (as to indemnification of
directors), the Articles of Incorporation, and other applicable law.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for such
meeting.
3.10 WAIVER OF NOTICE
Notice of a meeting need not be given to any director who signs a waiver
of notice or a consent to holding the meeting or an approval of the minutes
thereof, whether before or after the meeting, or who attends the meeting without
protesting, prior thereto or at its commencement, the lack of notice to such
director. All such waivers, consents, and approvals shall be filed with the
corporate records or made a part of the minutes of the meeting. A waiver of
notice need not specify the purpose of any regular or special meeting of the
Board of Directors.
3.11 ADJOURNMENT
A majority of the directors present, whether or not a quorum is present,
may adjourn any meeting to another time and place.
3.12 NOTICE OF ADJOURNMENT
If the meeting is adjourned for more than twenty-four (24) hours, notice
of any adjournment to another time and place shall be given prior to the time of
the adjournment meeting to the directors who were not present at the time of the
adjournment.
3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the Board of Directors
may be taken without a meeting, if all members of the Board individually or
collectively consent in writing to such action. Such written consent or consents
shall be filed with the minutes of the proceedings of the Board. Such action by
written consent shall have the same force and effect as a unanimous vote of the
Board of Directors.
3.14 FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees who are officers or employees of the
corporation may receive such compensation, if any, for their services and such
reimbursement of expenses as may be fixed or determined by resolution of the
Board of
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Directors. Board members who are not officers or employee of the corporation
shall not be entitled to receive form the corporation any compensation for their
services or reimbursement of their expenses. This Section 3.14 shall not be
construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
3.15 APPROVAL OF LOANS TO OFFICERS
If these Bylaws have been approved by the corporation's shareholders in
accordance with the Code, the corporation may, upon the approval of the Board of
Directors alone, make loans of money or property to, or guarantee the
obligations of, any officer of the corporation or of its parent, if any, whether
or not a director, or adopt an employee benefit plan or plans authorizing such
loans or guaranties provided that (i) the Board of Directors determines that
such a loan or guaranty or plan may reasonably be expected to benefit the
corporation, (ii) the corporation has outstanding shares held of record by 100
or more persons (determined as provided in Section 605 of the Code) on the date
of approval by the Board of Directors, and (iii) the approval of the Board of
Directors is by a vote sufficient without counting the vote of any interested
director of directors. Notwithstanding the foregoing, the corporation shall have
the power to make loans permitted by the Code.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The Board of Directors may, by resolution adopted by a majority of the
authorized number of directors, designate one or more committees, each
consisting of two (2) or more directors, to serve at the pleasure of the Board.
The Board may designate one or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the committee.
The appointment of members or alternate members of a committee requires the vote
of a majority of the authorized number of directors. Any such committee shall
have authority to act in the manner and to the extent provided in the resolution
of the Bard and may have all the authority of the Board, except with respect to:
(a) The approval of any action which, under the Code, also
requires shareholders' approval or approval of the outstanding shares.
(b) The filling of vacancies on the Board of Directors or in any
committee.
(c) The fixing of compensation of the directors for serving on
the Board or on any committee.
(d) The amendment or repeal of these Bylaws or the adoption of
new Bylaws.
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(e) The amendment or repeal of any resolution of the Board of
Directors which by its express terms is not so amendable or repealable.
(f) A distribution to the shareholders of the corporation, except
at a rate, in a periodic amount or within a price range set forth in the
Articles of Incorporation or determined by the Board of Directors.
(g) The appointment of any other committees of the Board of
Directors or the members
4.2 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these Bylaws, Section
3.5 (place of meetings), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice),
Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section
3.12 (action without meeting), with such changes in the context of those Bylaws
as are necessary to substitute the committee and its members for the Board of
Directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the Board of Directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the Board of Directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The Board of Directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these Bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a President, a Secretary, and a
Chief Financial Officer. The corporation may also have, at the discretion of the
Board of Directors, a Chairman of the Board, one or more Vice Presidents, one or
more Assistant Secretaries, one or more Assistant Treasurers, and such other
officers as may be appointed in accordance with the provisions of Section 5.3 of
these Bylaws. Any number of offices may be held by the same person.
5.2 APPOINTMENT OF OFFICERS
The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Section 5.3 or Section 5.5 of
these Bylaws, shall be chosen by the Board and serve at the pleasure of the
Board, subject to the rights, if any, of an officer under any contract of
employment.
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5.3 SUBORDINATE OFFICERS
The Board of Directors may appoint, or may empower the Chairman of the
Board or the President to appoint, such other officers as the business of the
corporation may require, each of whom shall bold office for such period, have
such authority, and perform such duties as are provided in these Bylaws or as
the Board of Directors may from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, all officers serve at the pleasure of the Board of Directors and any
officer may be removed, either with or without cause, by the Board of Directors
at any regular or special meeting of the Board or, except in case of an officer
chosen by the Board of Directors, by any officer upon whom such power of removal
may be conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of tat
notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these Bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
The Chairman of the Board, if such an officer be elected, shall, if
present, preside at meetings of the Board of Directors and exercise and perform
such other powers and duties as may from time to time be assigned by the Board
of Directors or as may be prescribed by these Bylaws. If there is no President,
then the Chairman of the Board shall also be the chief executive officer of the
corporation and shall have the powers and duties prescribed in Section 5.7 of
these Bylaws.
5.7 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the Board
of Directors to the Chairman of the Board, if there be such an officer, the
President shall be the chief executive officer of the corporation and shall,
subject to the control of the Board of Directors, have general supervision,
direction, and control of the business and the officers of the corporation. The
President shall preside at all meetings of the shareholders and, in the absence
or nonexistence of a Chairman of the Board, at all meetings of the Board of
Directors. The President shall have the general powers and duties of management
usually vested in the office of President of a corporation, and shall have such
other powers and duties as may be prescribed by the Board of Directors or these
Bylaws.
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5.8 VICE PRESIDENTS
In the absence or disability of the President, the Vice Presidents, if
any, in order of their rank as fixed by the Board of Directors or, if not
ranked, a Vice President designated by the Board of Directors, shall perform all
the duties of the President and when so acting shall have all the powers of, and
be subject to all the restrictions upon, the President. The Vice Presidents
shall have such other powers and perform such other duties as from time to time
may be prescribed for them respectively by the Board of Directors, these Bylaws,
the President or the Chairman of the Board.
5.9 SECRETARY
The Secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the Board of Directors may
direct, a book of minutes of all meetings and actions of Directors, committees
of directors and shareholders. The minutes shall show the time and place of each
meeting, whether regular or special (and, if special, how authorized and the
notice given), the names of those present at directors' meetings or committee
meetings, the number of shares present or represented at shareholders' meetings,
and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the Board of
Directors, a share register, or a duplicate share register; showing the names of
all shareholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the number
and date of cancellation of every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all meetings
of the shareholders and of the Board of Directors required to be given by law or
by these Bylaws. The Secretary shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the Board of Directors or by these Bylaws.
5.10 CHIEF FINANCIAL OFFICER
The Chief Financial Officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The Chief Financial Officer shall deposit all money and other valuables
in the name and to the credit of the corporation with such depositaries as may
be designated by the Board of Directors. The Chief Financial Officer shall
disburse the funds of the corporation as may be ordered by the Board of
Directors, shall render to the President and directors, whenever they request
it, an account of all of his or her transactions as Chief Financial Officer and
of the financial condition of the corporation, and shall have such other powers
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and perform such other dudes as may be prescribed by the Board of Directors or
dose Bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS
The corporation shall, to the maximum extent and in the manner permitted
by the Code, indemnify each of its directors against expenses (as defined in
Section 317(a) of the Code), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding (as defined
in Section 3170) of the Code), arising by reason of the fact that such person is
or was a director of the corporation. For purposes of this Article VI, a
"director" of the corporation includes any person (i) who is or was a director
of the corporation, (ii) who is or was serving at the request of the corporation
as a director of another foreign or domestic corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a director of a corporation
which was a predecessor corporation of the corporation or of another enterprise
at the request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the extent and in the manner
permitted by the Code, to, indemnify each of its employees, officers, and agents
(other than directors) against expenses (as defined in Section 317(a) of the
Code), judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding (as defined in Section 317(a) of the
Code), arising by reason of the fact that such person is or was an employee,
officer, or agent of the corporation. For purposes of this Article VI, an
"employee" or "officer" or "agent" of the corporation (other than a director)
includes any person (i) who is or was an employee, officer, or agent of the
corporation, (ii) who is or was serving at the request of the corporation as an
employee, officer, or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee, officer, or agent of a corporation which was a predecessor corporation
of the corporation or of another enterprise at the request of such predecessor
corporation.
6.3 PAYMENT OF EXPENSES IN ADVANCE
Expenses and attorneys' fees incurred in defending any civil or criminal
action or proceeding for which indemnification is required pursuant to Section
6.1, or if otherwise authorized by the Board of Directors, shall be paid by the
corporation in advance of the final disposition of such action or proceeding
upon receipt of an undertaking by or on behalf of the indemnified party to repay
such amount if it shall ultimately be determined that the indemnified party is
not entitled to be indemnified as authorized in this Article VI.
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6.4 INDEMNITY NOT EXCLUSIVE
The indemnification provided by this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any Bylaw, agreement, van of or directors or otherwise, both as
to action in an official capacity and as to action in another capacity while
holding such office. The rights to indemnity hereunder shall continue as to a
person who has ceased to be a director, officer, employee, or agent and shall
inure to the benefit of the heirs, executors, and administrators of the person.
6.5 INSURANCE INDEMNIFICATION
The corporation shall have the power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the corporation against any liability asserted against or incurred by such
person in such capacity or arising out of that person's status as such, whether
or not the corporation would have the power to indemnify that person against
such liability under the provisions of this Article VI.
6.6 CONFLICTS
No indemnification or advance shall be made under this Article VI,
except where such indemnification or advance is mandated by law or the order,
judgment or decree of any court of competent jurisdiction, in any circumstance
where it appears:
(1) That it would be inconsistent with a provision of the
Articles of Incorporation, these Bylaws, a resolution of be shareholders or an
agreement in effect at the time of the accrual of the alleged cause of the
action asserted in the proceeding in which the expenses were incurred or other
amounts were paid, which prohibits or otherwise limits indemnification; or
(2) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
6.7 RIGHT TO BRING SUIT
If a claim under this Article is not paid in full by the corporation
within 90 days after a written claim has been received by the corporation
(either became the claim is denied or because no determination is made), the
claimant may at any time thereafter bring suit against the corporation to
recover the unpaid amount of the claim and, if successful in whole or in part,
the claimant shall also be entitled to be paid the expenses of prosecuting such
claim. The corporation shall be entitled to raise as a defense to any such
action that the claimant has not met the standards of conduct that make it
permissible under the Code for the corporation to indemnify the claimant for the
claim. Neither the failure of the corporation (including its Board of Directors,
independent legal counsel, or its shareholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
permissible in the circumstances because he or she has met the applicable
standard of conduct, if any, nor an actual determination by the corporation
(including its Board of Directors, independent legal counsel, or its
shareholders) that the claimant has not met the applicable standard of conduct,
shall be a defense to such action or create a
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presumption for the purposes of such action that the claimant has not met the
applicable standard of conduct.
6.8 INDEMNITY AGREEMENTS
The Board of Directors is authorized to enter into a contract with any
director, officer, employee or agent of the corporation, or any person who is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, including employee benefit plans, or any person who was a director,
officer, employee or agent of a corporation which was a predecessor corporation
of the corporation or of another enterprise at the request of such predecessor
corporation, providing for indemnification rights equivalent to or, if the Board
of Directors so determines and to the extent permitted by applicable law,
greater than, those provided for in this Article VI.
6.9 AMENDMENT REPEAL OR MODIFICATION
Any amendment, repeal or modification of any provision of this Article
VI shall not adversely affect any right or protection of a director or agent of
the corporation existing at the time of such amendment, repeal or modification.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER
The corporation shall keep either at its principal executive office or
at the office of its transfer agent or registrar (if either be appointed), as
determined by resolution of the Board of Directors, a record of its shareholders
listing the names and addresses of all shareholders and the number and class of
shares held by each shareholder.
A shareholder or shareholders of It corporation holding at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation or who bold at least one percent (1%) of such voting shares and
have filed a Schedule 14B with the United States Securities and Exchange
Commission relating to the election of directors, shall have an absolute right
to do either or both of the following (i) inspect and copy the record of
shareholders' names, addresses, and shareholdings during usual business hours
upon five (5) days' prior written demand upon the corporation, or (ii) obtain
from the transfer agent for the corporation, upon written demand and upon the
tender of such transfer agent's usual charges for such list (the amount of which
charges shall be stated to the shareholder by the transfer agent upon request),
a list of the shareholders' names and addresses who are entitled to vote for the
election of directors, and their shareholding, as of the most recent record date
for which it has been compiled or as of a date specified by the shareholder
subsequent to the date of demand. The list shall be made available on or before
the later of five (5) business days after the demand is received or the date
specified therein as the date as of which the list is to be compiled.
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The record of shareholders shall also be open to inspection and copying
by any shareholder or holder of a voting trust certificate at any time during
usual business hours upon written demand on the corporation, for a purpose
reasonably related to the holder's interests as a shareholder or holder of a
voting trust certificate.
Any inspection and copying under his Section 7.1 may be made in person
or by an agent or attorney of the shareholder or holder of a voting trust
certificate making the demand.
7.2 MAINTENANCE AND INSPECTION OF BYLAWS
The corporation shall keep at its principal executive office or, if its
principal executive office is not in the State of California, at its principal
business office in California, the original or a copy of these Bylaws as amended
to date, which shall be open to inspection by the shareholders at all reasonable
times during office hours. If the principal executive office of the corporation
is outside the State of California and the corporation has no principal business
office in such state, then it shall, upon the written request of any
shareholder, furnish to such shareholder a copy of these Bylaws as amended to
date.
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS
The accounting books and records and the minutes of proceedings of the
shareholders and the Board of Directors, and committees of the Board of
Directors shall be kept at such place or places as are designated by the Board
of Directors or, in absence of such designation, at the principal executive
office of the corporation. The minutes shall be kept in written form, and the
accounting books and records shall be kept either in written form or in any
other form capable of being converted into written form.
The minutes and accounting books and records shall be open to inspection
upon the written demand on the corporation of any shareholder or holder of a
voting trust certificate at any reasonable time during usual business hours, for
a purpose reasonably related to such holder's interests as a shareholder or as
the holder of a voting trust certificate. Such inspection by a shareholder or
holder of a voting trust certificate may be made in person or by an agent or
attorney and the right of inspection includes the right to copy and make
extracts. Such rights of inspection shall extend to the records of each
subsidiary corporation of the corporation.
7.4 INSPECTION BY DIRECTORS
Every director shall have the absolute right at any reasonable time to
inspect and copy all books, records, and documents of every kind and to inspect
the physical properties of the corporation and each of its subsidiary
corporations, domestic or foreign. Such inspection by a director may be made in
person or by an agent or attorney and the right of inspection includes the right
to copy and make extracts.
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7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER
The Board of Directors shall cause an annual report to be sent to the
shareholders not later than one hundred twenty (120) days after the close of the
fiscal year adopted by the corporation. Such report shall be sent to the
shareholders at least fifteen (15) (or, if sent by third-class mail, thirty-five
(35)) days prior to the annual meeting of shareholders to be held during the
next fiscal year and in the manner specified in Section 21 of these Bylaws for
giving notice to shareholders of the corporation.
The annual report shall contain a balance sheet as of the end of the
fiscal year and an income statement and statement of changes in financial
position for the fiscal year, accompanied by any report thereon of independent
accountants or, if there is no such report, the certificate of an authorized
officer of the corporation that the statements were prepared without audit from
the books and records of the corporation.
The foregoing requirement of an annual report shall be waived so long as
the shares of the corporation are held by fewer than one hundred (100) holders
of record.
7.6 FINANCIAL STATEMENTS
If no annual report for the fiscal year has been sent to shareholders,
then the corporation shall, upon the written request of any shareholder made
more than one hundred twenty (120) days after the close of such fiscal year,
deliver or mail to the person making the request, within thirty (30) days
thereafter, a copy of a balance sheet as of the end of such fiscal year and an
income statement and statement of changes in financial position for such fiscal
year.
A shareholder or shareholders holding at least five percent (5 %) of the
outstanding shares of any class of the corporation may make a written request to
the corporation for an income statement of the corporation for the three-month,
six-month or nine-month period of the current fiscal year ended more than thirty
(30) days prior to the date of the request and a balance sheet of the
corporation as of the end of that period. The statements shall be delivered or
mailed to the person making the request within thirty (30) days thereafter. A
copy of the statements shall be kept on file in the principal office of the
corporation for twelve (12) months and it shall be exhibited at all reasonable
times to any shareholder demanding an examination of the statements or a copy
shall be mailed to the shareholder. If the corporation has not sent to the
shareholders its annual report for the last fiscal year, the statements referred
to in the first paragraph of this Section 7.6 shall likewise be delivered or
mailed to the shareholder or shareholders within thirty (30) days after the
request.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report thereon, if any, of any independent
accountants engaged by the corporation or the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
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7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The Chairman of the Board, the President, any Vice President, the Chief
Financial Officer, the Secretary or Assistant Secretary of this corporation, or
any other person authorized by the Board of Directors or the President or a Vice
President, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority herein
granted may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
For purposes of determining the shareholders entitled to receive payment
of any dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any other lawful action (other than with
respect to notice or voting at a shareholders meeting or action by shareholders
by written consent without a meeting), the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty (60) days prior to
any such action. Only shareholders of record at the close of business on the
record date are entitled to receive the dividend, distribution or allotment of
rights, or to exercise the rights, as the case may be, notwithstanding any
transfer of any shares on the books of the corporation after the record date,
except as otherwise provided in the Articles of Incorporation or the Code.
If the Board of Directors does not so fix a record date, then the record
date for determining shareholders for any such purpose shall be at the close of
business on the day on which the Board adopts the resolution relating thereto or
the sixtieth (60th) day prior to the date of that action, whichever is later.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
From time to time, the Board of Directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
The Board of Directors, except as otherwise provided in these Bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or
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<PAGE> 25
within the agency power of an officer, no officer, agent or employee shall have
any power or authority to bind the corporation by any contract or engagement or
to pledge its credit or to render it liable for any purpose or for any amount.
8.4 CERTIFICATES FOR SHARES
A certificate or certificates for shares of the corporation shall be
issued to each shareholder when any of such shares are fully paid. The Board of
Directors may authorize the issuance of certificates for shares partly paid
provided that these certificates shall state the total amount of the
consideration to be paid for them and the amount actually paid. All certificates
shall be signed in the name of the corporation by the Chairman of the Board or
the Vice Chairman of the Board or the President or a Vice President and by the
Chief Financial Officer or an Assistant Treasurer or the Secretary or an
Assistant Secretary, certifying the number of shares and the class or series of
shares owned by the shareholder. Any or all of the signatures on the certificate
may be by facsimile.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on a certificate has ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if that person were an
officer, transfer agent or registrar at the date of issue.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares shall be
issued to replace a previously issued certificate unless the latter is
surrendered to the corporation or its transfer agent or registrar and cancelled
at the same time. The Board of Directors may, in case any share certificate or
certificate for any other security is lost, stolen or destroyed (as evidenced by
a written affidavit or affirmation of such fact), authorize the issuance of
replacement certificates on such terms and conditions as the Board may require;
the Board may require indemnification of the corporation secured by a bond or
other adequate security sufficient to protect the corporation against any claim
that may be made against it, including any expense or liability, on account of
the alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Code shall govern the construction of these
Bylaws. Without limiting the generality of this provision, the singular number
includes the plural, the plural number includes the singular, and the term
"person" includes both a corporation and a natural person.
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ARTICLE IX
AMENDMENTS
9.1 AMENDMENT BY SHAREHOLDERS
New Bylaws may be adopted or these Bylaws may be amended or repealed by
the vote or written consent of holders of a majority of the outstanding shares
entitled to vote; provided, however, that if the Articles of Incorporation of
the corporation set forth the number of authorized Directors of the corporation,
then the authorized number of Directors may be changed only by an amendment of
the Articles of Incorporation.
9.2 AMENDMENT BY DIRECTORS
Subject to the rights of the shareholders as provided in Section 9.1 of
these Bylaws, Bylaws, other than a Bylaw or an amendment of a Bylaw changing the
authorized number of directors (except to fix the authorized number of directors
pursuant to a Bylaw providing for a variable number of directors), may be
adopted, amended or repealed by the Board of Directors.
9.3 RECORD OF AMENDMENTS
Whenever an amendment or new Bylaw is adopted, it shall be copied in the
book of minutes with the original Bylaws. If any Bylaw is repealed, the fact of
repeal, with the dot: of the meeting al which the repeal was enacted or written
consent was filed, shall be stated in said book.
ARTICLE X
INTERPRETATION
Reference in these Bylaws to any provision of the California
Corporations Code shall be deemed to include all amendments thereof.
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<PAGE> 1
EXHIBIT 9.1
AMENDMENT NO. 1
TO
INVESTORS RIGHTS AGREEMENT
This Amendment No. 1 to Investors Rights Agreement (this "Amendment") is
made by and among Capstone Turbine Corporation, a California corporation, with a
principal place of business at 6430 Independence Avenue, Woodland Hills, CA
91367 (the "Company") and each of the parties to the Investors Rights Agreement
dated August 22, 1997.
BACKGROUND
WHEREAS, the Company and certain of its shareholders are party that
certain Investors Rights Agreement, dated August 22, 1997 (the "Agreement");
WHEREAS, since the date of the Agreement the Company has issued certain
warrants and additional shares of Preferred Stock, including shares of a newly
designated Convertible Preferred Stock, Series F ("Series Preferred Stock"), to
existing Shareholders (as defined in the Agreement) and to new Shareholders;
WHEREAS, the Company proposes to issue up to 37,500,000 shares of a
newly designated series of Convertible Preferred Stock, Series G ("Series G
Preferred Stock") to existing Shareholders and to new Shareholders at a price of
$4.00 per share, which may be effected through multiple closings (the "Series G
Financing"), and may in the future issue additional shares of Series G Preferred
Stock;
WHEREAS, pursuant to the terms of the Agreement, the Company has made or
will make new investors acquiring Series E Preferred Stock, Series F Preferred
Stock and Series G Preferred Stock after the November 1997 second closing of the
Series E placement (collectively, the "New Shareholders") parties to the
Agreement, provided each such New Investor has executed or will execute a
counterpart signature page to the Agreement;
WHEREAS, in light of the foregoing, the Company and the Shareholders
executing this Amendment wish to amend and clarify the Agreement as set forth
herein; and
WHEREAS, capitalized terms not defined herein shall have the meanings
set forth in the Investors Rights Agreement;
NOW, THEREFORE, in consideration of the representations, warranties, and
agreements contained herein, and other good and valuable consideration the
receipt and sufficiency of which is hereby acknowledged, the parties agree as
follows:
1. Negative Covenants.
<PAGE> 2
Section 2.2(a)(ii) of the Agreement is hereby amended and restated in
its entirety to read:
(ii) Repurchase any shares of Preferred Stock, Common
Stock or warrants (other than Employee Stock or redemptions
effected upon the terms contained in the Amended and Restated
Articles of Incorporation of the Company); provided, that any
repurchase of Preferred Stock will, subject to the terms of the
Restated Articles, be undertaken pro rata among shares of Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, Series
F Preferred Stock and Series G Preferred Stock, and Warrants, if
any, for Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock and Series G Preferred
Stock;
2. Piggy-Back Registration Rights; Cutbacks. Section 3.1 of the Agreement is
hereby amended to add the following sentence immediate following the penultimate
sentence thereof:
"Any reduction in the number of Registrable Shares to be included
in such registration statement pursuant to the foregoing sentence
shall be allocated among holders of Registrable Shares requesting
their inclusion under this Section 3.1 on a pro rata basis in
proportion to the number of shares requested to be included by
each such holder."
3. Demand Registration; Number of Demands. In order to reflect the addition of
the New Shareholders as Shareholders under the Agreement and the Company's
obligations under Section 3.12, upon the first closing of the Series G
Financing, the third sentence of Section 3.2 of the Agreement shall be
automatically amended hereby by replacing the word "two" with the word "four",
such that the Company may be required to effect a total of "four" Demand
Registrations under this Section 3.2 (subject to further future adjustments
under Section 3.12 of the Agreement).
4. Registrations on Form S-3; Number of Registrations. In order to reflect the
addition of the New Shareholders as Shareholders under the Agreement and the
Company's obligations under Section 3.12, upon the first closing of the Series G
Financing, Section 3.3(a) of the Agreement shall be automatically amended hereby
by replacing the word "four" with the word "six", such that the Company may be
required to effect a total of "six" registrations on Form S-3 (subject to
further future adjustments under Section 3.12 of the Agreement):
2
<PAGE> 3
5. Notwithstanding Section 3.11 of the Agreement, no Shareholder shall be
prohibited from at any time selling or otherwise disposing of securities of the
Company purchased by such Shareholder in the public market (including shares
previously sold to the public in a registered public offering and shares
previously sold into the public markets pursuant to Rule 144 promulgated under
the Securities Act of 1933, as amended).
6. Other Registration Rights. Section 3.12 of the Agreement is hereby amended
and restated in its entirety to read as follows:
3.12 Other Registration Rights. The Company shall not
grant any registration rights to any other Person which
registration rights are senior to the registration rights of the
Holders, unless the Company shall first obtain the written
consent of holders of a majority of the Registrable Shares. The
Company may grant registration rights in the future to any future
purchaser of the Securities of the Company which are on parity
with the Holders (including without limitation by making any such
purchaser a Shareholder under this Agreement), without the
consent of the Holders, provided that such purchasers agree in
writing to be bound by the provisions of this Agreement and
provided further that, if such rights are granted on parity with
the Holders and if the aggregate number of Registrable Shares is
increased thereby by at least 10%, the number of permitted Demand
Registrations and the number of permitted registrations under
Section 3.3(a) shall each be increased by at least one. The
Company has the right to add employees of the Company who have
options or Securities of the Company, and to add any future
purchasers of Series G Preferred Stock up to thirty-seven million
five hundred thousand (37,500,000) shares in the aggregate
(including those being sold in the Series G Financing), as
parties to this Agreement, without regard to the foregoing
sentence.
7. Shareholders. Prior to the Closing of the sale of Series G Preferred Stock,
the Shareholders are as listed in Schedule A hereto. Upon the Closing of any
sale of the Series G Preferred Stock, or upon the addition of any other
Shareholders to the Agreement, the Company shall amend Schedule A to reflect the
inclusion of New Shareholders acquiring Series G Preferred Stock.
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<PAGE> 4
8. Acknowledgment. Each of the undersigned Shareholders acknowledges compliance
by the Company with the terms of all preemptive rights, rights of first offer or
other similar participation rights held thereby (including without limitation
under Article IV of the Agreement and that certain Rights Agreement dated March
30, 1999) (collectively, "Preemptive Rights") through the date hereof in
connection with any and all issuances of the Company's equity securities or
convertible debt securities, including without limitation in connection with the
Series G Financing. Each such Shareholder acknowledges and agrees that it has,
to the extent it is not already participating in the Series G Financing, waived
its Preemptive Rights in connection therewith; provided, however, that such
waiver shall not preclude the exercise of such Preemptive Rights in future
financings to the extent otherwise applicable by their terms.
9. Counterparts. This Amendment may be executed in any number of counterparts,
all of which taken together shall constitute one and the same instrument, and
any of the parties hereto may execute this Agreement by signing any such
counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of February __, 2000.
CAPSTONE TURBINE CORPORATION
By: /s/ JEFFREY R. WATTS
-----------------------------------------
Jeffrey R. Watts, Chief Financial Officer
4
<PAGE> 5
INVESTORS RIGHTS AGREEMENT
This Agreement is made by and among Capstone Turbine Corporation, a
California corporation, with a principal place of business at 6025 Yolanda
Avenue, Tarzana, California 91356 (the "Company") and each of the shareholders,
optionholders, and warrantholders set forth in the signature lines below.
BACKGROUND
WHEREAS, the Company sold 3,100,0000 shares of Convertible Preferred
Stock, Series A ("Series A Preferred Stock") to various purchasers (the "1993
Series A Purchasers") pursuant to a Preferred Stock Purchase Agreement dated as
of March 31, 1993 as amended on July 29, 1994 (the "1993 Stock Purchase
Agreement");
WHEREAS, the Company sold an additional 3,300,000 shares of Series A
Preferred Stock to various purchasers pursuant to a Preferred Stock Purchase
Agreement dated as of July 29, 1994 (the "1994 Stock Purchase Agreement");
WHEREAS, the Company sold 3,333,334 shares of Series B Preferred Stock
to Fletcher Challenge Distributed Generation, Inc., a Delaware corporation,
pursuant to a Preferred Stock Purchase Agreement dated as of May 16, 1995 (the
"1995 Stock Purchase Agreement").
WHEREAS, the Company sold 5,101,611 shares of Series C Preferred Stock
("Series C Preferred Stock") to various purchasers and issued warrants to such
purchasers pursuant to a Preferred Stock Purchase Agreement dated as of February
8, 1996 (the "1996 Stock Purchase Agreement");
WHEREAS, the Company sold an additional 2,500,000 shares of Series C
Preferred Stock to Vulcan Ventures, Inc., a Washington corporation, pursuant to
a Preferred Stock Agreement dated as of May 20, 1996(the "Vulcan Stock Purchase
Agreement");
WHEREAS, the Company sold 3,125,000 shares of Series D Preferred Stock
("Series D Preferred Stock") to various purchasers pursuant to a Preferred Stock
Purchase Agreement dated as of January 17, 1997 (the "1997 Stock Purchase
Agreement"); and
WHEREAS, the Company as of the date hereof is selling up to 8,333,333
shares of Series E Convertible Preferred Stock ("Series E Preferred Stock"),
subject to increase, pursuant to a Preferred Stock Purchase Agreement dated the
date hereof (the "1997 Series E Stock Purchase Agreement"), which may be
effectuated through multiple closings.
NOW, THEREFORE, in consideration of the representations, warranties, and
agreements contained herein, the parties agree as follows:
<PAGE> 6
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
1.1. Certain Defined Terms. As used in this Agreement, the following
terms shall have the following meanings (such meanings to be equally applicable
to both the singular and plural forms of the terms defined):
"Agreement" means this Investor Rights Agreement as from time to time
amended and in effect between the parties, including all Exhibits hereto.
"Board" or "Board of Directors" means the board of directors of the
Company as constituted from time to time.
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency then administering the Securities Act or Exchange Act.
"Common Stock" means the Company's Common Stock.
"Common Shares" means shares of the Company's Common Stock.
"Company" means Capstone Turbine Corporation, a California corporation,
and its successors and assigns.
"Consolidated" and"consolidating" when used with reference to any term
defined herein mean that term as applied to the accounts of the Company and its
Subsidiaries consolidated in accordance with generally accepted accounting
principles consistently applied throughout reporting periods.
"Controlled Entity" means any corporation, firm or entity under the
control of the Company.
"Continuing Founder" means a Founder who continues to hold at least
750,000 shares of Common Stock, as adjusted for any Recapitalization Events.
"Conversion Shares" means shares of Common Stock issuable upon
conversion of the Preferred Shares.
"Directors" means the members from time to time of the Board of
Directors.
"Employee Stock" means any Common Stock of the Company, whether now or
hereafter authorized, that the Company has issued or sold or received for
issuance to an employee pursuant to an employee stock purchase, option or
benefit plan, agreement or other arrangement.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any similar federal statute, and the rules and regulations of the Commission (or
of any other federal agency then administering the Exchange Act) thereunder, all
as the same shall be in effect at the time.
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<PAGE> 7
"Founders" mean Robin Mackay and James C. Noe.
"Holder" means any person owning or having the right to acquire
Registrable Shares or any assignee thereof in accordance with Section 3.14
hereof.
"Immediate Family" means any spouse, child, grandchild, brother, parent
or sister of a Holder.
"Initial Public Offering" means the first underwritten public offering
of Common Stock of the Company for the account of the Company and offered on a
"firm commitment" basis pursuant to an offering registered under the Securities
Act with the Commission on Form S-1, Form SB-1, Form SB-2 or their then
equivalents.
"Intellectual Property Rights" means any and all, whether domestic or
foreign, patents, patent applications, patent rights, trade secrets,
confidential business information, formulae, processes, laboratory notebooks,
algorithms, copyrights, mask works, claims of infringement against third
parties, licenses, permits, license rights, contract rights with employees,
consultants and third parties, trademarks, trade names, service marks,
inventions and discoveries, and other such rights generally classified as
intangible property assets in accordance with generally accepted accounting
principles.
"Notice of Acceptance" shall have the meaning assigned to that term in
Section 4.2.
"Offer" shall have the meaning assigned to that term in Section 4. 1.
"Offered Securities" shall have the meaning assigned to that term in
Section 4. 1.
"Person" means an individual, corporation, partnership, joint venture,
trust, university, or unincorporated organization, or a government, or any
agency or political subdivision thereof.
"Preemptive Shareholder" shall have the meaning assigned to that term in
Section 4.1.
"Preferred Shares" means the shares of preferred stock of the Company
now held or hereafter acquired by any Shareholder.
"Qualified Public Offering" means an underwritten public offering on a
firm commitment basis pursuant to an effective registration statement filed
pursuant to the Securities Act covering the offer and sale of Common Stock of
the Company in which the net proceeds of the offering equal or exceed
$30,000,000 (net of underwriting discounts and commissions) and in which the
price per share of the Common Stock equals or exceeds $8 (subject to appropriate
adjustment for Recapitalization Events).
"Recapitalization Events" means stock splits, stock dividends,
recapitalizations, reclassifications and similar events.
"Refused Securities" shall have the meaning assigned to that term in
Section 4.3.
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<PAGE> 8
"Registrable Shares" shall mean and include (i) the Conversion Shares,
(ii) all shares of Common Stock issued or issuable upon the exercise or
conversion of any warrant, right or convertible security issued as a dividend or
distribution with respect to, or in exchange or replacement for, Preferred
Shares or Conversion Shares; (iii) shares of Common Stock otherwise held by a
Shareholder; and (iv) any shares of Common Stock issued to (or issuable upon
exercise of warrants issued to) any bank or other lender, or equipment lessor in
connection with the Company obtaining a loan or equipment financing, if the
Company expressly accords to such shares the registration rights contained in
this Agreement; provided, however, that shares of Common Stock which are
Registrable Shares shall cease to be Registrable Shares upon the consummation of
any sale of such shares pursuant to a registration statement or Rule 144 under
the Securities Act. Wherever reference is made in this Agreement to holders of
Registrable Shares or to a request or consent of holders of a certain percentage
of Registrable Shares, each holder of Preferred Shares shall be deemed to hold
the Conversion Shares issuable upon conversion of the Preferred Shares, even if
such conversion has not yet been effected.
"Securities" means any shares of capital stock of the Company or any
securities convertible into or exchangeable for any class of capital stock of
the Company and all securities into which such Securities may be converted or
reclassified as a result of any merger, consolidation, stock split, stock
dividend or other recapitalization of the Company whether now owned or hereafter
acquired.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar federal statute, and the rules and regulations of the Commission (or of
any other federal agency then administering the Securities Act) thereunder, all
as the same shall be in effect at the time.
"Shareholders" means (i) Persons listed in Exhibit A attached to this
Agreement, (ii) any Person who purchases from the Company after the date hereof
newly issued shares of preferred or common stock of the Company and who, as
permitted by this Agreement, becomes a party to this Agreement and executes a
counterpart of this Agreement, (iii) any permitted assignee or transferee from
any of the foregoing of Registrable Shares who is not a competitor of the
Company pursuant to the terms of this Agreement, and (iv) any Warrantholder who
exercises a warrant for the Company's Securities.
"Shares" means, collectively, the Preferred Shares and the Conversion
Shares.
"Stockholders Agreement" shall have the meaning set forth in Section
6.1.
"Subsidiary" or "Subsidiaries" means any Person of which the Company
and/or any of its other Subsidiaries (as herein defined) directly or indirectly
owns at the time at least fifty percent (50%) of the outstanding voting
securities.
"Transfer" shall have meaning set forth in Section 5. 1.
"Warrantholder" means a holder of Warrants to acquire stock of the
Company, as listed in Exhibit B as may be amended from time to time.
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<PAGE> 9
"Warrants" means warrant certificates representing the right to purchase
stock of the Company.
1.2. Accounting Terms. All accounting terms not specifically defined
herein shall be construed in accordance with generally accepted accounting
principles consistently applied, and all financial data submitted pursuant to
this Agreement shall be prepared in accordance with such principles.
ARTICLE II
COVENANTS OF THE COMPANY
2.1. Certain Affirmative Covenants of the Company. The Company covenants
and agrees that until the consummation of a Qualified Public Offering, it will
use its diligent efforts perform and observe the following covenants and
provisions, and will cause each Subsidiary, if and when such Subsidiary exists,
to perform and observe such of the following covenants and provisions as are
applicable to such Subsidiary:
(a) Agreements of Officers and Employees. Cause each employee of
the Company now or hereafter employed, and all consultants of the Company, who
are involved in the design, review, evaluation or development of products or
Intellectual Property Rights to execute and deliver a Confidentiality and
Invention Assignment Agreement in form and substance reasonably satisfactory to
the Board of Directors of the Company.
(b) Indemnification. Maintain provisions in its By-laws or
Articles of Incorporation exculpating and indemnifying all Directors from and
against liability to the maximum extent permitted under the laws of the state of
its incorporation.
(c) Keeping of Records and Books of Account. Keep adequate
records and books of account, in which complete entries will be made in
accordance with generally accepted accounting principles consistently applied,
reflecting all financial transactions of the Company, and in which, for each
fiscal you, all proper reserves for depreciation, depletion, obsolescence,
amortization, taxes, bad debts and other purposes in connection with its
business shall be made.
(d) Controls. Maintain a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
2.2. Negative Covenants.
(a) Covenants. The Company shall not, without the prior written
consent or affirmative vote of the holders of record of at least 51% of the
total outstanding shares of all series of Preferred Stock of the Company voting
on aggregate basis:
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(i) Declare or pay any dividends or make any other
distributions on shares of Common Stock;
(ii) Repurchase any shares of Preferred Stock, Common Stock
or warrants (other than Employee Stock or redemptions effected upon the terms
contained in the Amended and Restated Articles of Incorporation of the Company);
provided, that any repurchase of Preferred Stock will be undertaken pro rata
among shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Warrants for Series C Preferred Stock, Series D Preferred
Stock, and Series E Preferred Stock;
(iii) Make, or permit any Controlled Entity to make, any
guaranty, other than in the ordinary course of business or on behalf of the
Company or a wholly-owned subsidiary of the Company;
(iv) Merge with or consolidate into any corporation, firm or
entity, or sell, lease or otherwise dispose of all or substantially all of its
assets unless the Company is the surviving or acquiring entity and except in
connection with reincorporation mergers;
(v) Mortgage or pledge, or create a security interest in, or
permit any Controlled Entity to mortgage, pledge or create a security interest
in, all or substantially all of the property of the Company unless unanimously
authorized by the entire Board of Directors of the Company;
(b) Termination. The provisions of this Section 2.2 shall
terminate upon the earlier to occur of (i) an Automatic Conversion Event (as
defined in the Company's Amended and Restated Articles of Incorporation), (ii)
the date upon which less than 1,000,000 shares of the Preferred Stock (as
adjusted for Recapitalization Events) are outstanding, or (iii) a Qualified
Public Offering.
2.3. Reporting Requirements. Until the consummation of a Qualified
Public Offering, the Company will furnish the following to each Shareholder, so
long as such Shareholder continues to own at least 10% of the then outstanding
capital stock of the Company, and subject to the confidentiality provisions of
Section 7.7, unless such Shareholder waives in writing its rights to receive
such reports:
(a) Monthly and Quarterly Reports. As soon as available and in
any event within 45 days after the end of each calendar month, consolidated and
consolidating balance sheets of the Company and its Subsidiaries as of the end
of such month and consolidated and consolidating statements of income and a
summary statement of monthly cash flow of the Company and its Subsidiaries for
such month and for the period commencing at the end of the previous fiscal year
and ending with the end of such month, prepared in accordance with generally
accepted accounting principles consistently applied (except for the exclusion of
footnotes); and, as soon as available and in any event within 45 days after the
end of the first three fiscal quarters of each fiscal year, financial statements
containing the same information as required in the monthly financial statements
set forth on a quarterly basis, prepared in accordance with generally accepted
accounting principles consistently applied (except for the exclusion of
footnotes). All such monthly and quarterly financial statements may be
unaudited.
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(b) Annual Reports. As soon as available and in any event within
120 days after the end of each fiscal year of the Company, a copy of the annual
audit report for such year for the Company and its Subsidiaries, including
therein consolidated and consolidating balance sheets of the Company and its
Subsidiaries as of the end of such fiscal year and consolidated and
consolidating statements of income and of cash flow of the Company and its
Subsidiaries for such fiscal year, setting forth in each case in comparative
form the corresponding figures for the preceding fiscal year, all such
consolidated statements to be duly certified by the chief financial officer of
the Company and a firm of independent public accountants approved by the Board
of Directors accompanied by a management control letter prepared by such
independent public accounting firm.
(c) Budgets and Business Plan. As soon as available and in any
event at least 30 days before the beginning of each fiscal year of the Company,
a business plan and prepared on a monthly basis, operating budget for the
forthcoming fiscal year, and as soon as available any revisions thereto.
(d) Reports and Other Information. Provide to each such
Shareholder with reasonable promptness, such other information and data with
respect to the Company or any of its Subsidiaries as from time to time may be
requested.
2.4. Inspection Rights. until the consummation of a Qualified Public
Offering, the Company will permit each Shareholder, so long as such Shareholder
continues to own at least 10% of the outstanding capital stock of the Company,
and such Shareholder's employees, agents or representatives, to examine and make
copies of and extracts from the records and books of account of, and visit and
inspect the properties, assets, operations and business of the Company and any
Subsidiary, and to discuss the affairs, finances and accounts of the Company and
any Subsidiary with any of its officers, consultants, directors, employees,
attorneys or independent accountants; provided, however, that any Shareholder,
employee, agent or representative, as the case may be, agrees to hold all
information confidential on the terms set forth in Section 7.7 hereof and
pursuant to such other non-disclosure agreement as the Company determines
appropriate; and further provided that the Company is not obligated to provide
access to any information which it believes would adversely affect the
attorney-client privilege.
ARTICLE III
REGISTRATION RIGHTS
3.1. Piggy-Back Registration. If at any time the Company shall determine
to register for its own account or the account of others under the Securities
Act (including without limitation pursuant to the Qualified Public Offering, the
Initial Public Offering or a demand for registration of any Shareholder of the
Company) any of its equity securities, other than on Form S-8 or Form S-4 or
their then equivalents (a "Piggy-Back Registration"), it shall send to each
Holder, written notice of such determination and, if within fifteen (15) days
after receipt of such notice, such Holder shall so request in writing, the
Company shall use its diligent efforts to include in such registration statement
all or any part of the Registrable Shares such Holder requests to be registered,
except that if, in connection with any offering involving an underwriting of
Common Stock to be issued by the Company, the managing underwriter shall impose
a limitation on the number of shares of Common Stock
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which may be included in the registration statement because, in its judgment,
such limitation is necessary to effect an orderly public distribution, then the
Company shall be obligated to include in such registration statement only such
limited portion (or none, if so required by the managing underwriter) of the
Registrable Shares with respect to which such Holder has requested inclusion
hereunder. No right under this Section 3.1 shall be construed to limit any
registration required under Section 3.2.
3.2. Demand Registration. If on any occasion Holders holding a majority
of the then outstanding Registrable Shares shall notify the Company in writing
that it or they intend to offer or cause to be offered for public sale at least
35% of the then outstanding Registrable Shares, the Company will so notify all
Holders. Upon written request of any Holder given within fifteen (15) days after
the receipt by such Holder from the Company of such notification, the Company
will use its diligent efforts to cause such of the Registrable Shares as may be
requested by any Holder (including the Holder giving the initial notice of
intent to offer) to be registered under the Securities Act as expeditiously as
possible (a "Demand Registration"). The Company shall not be required to effect
more than two Demand Registrations. If in the good faith judgment of the Board
of Directors of the Company, a Demand Registration would be detrimental to the
Company and the Board of Directors of the Company concludes, as a result, that
it is important to defer the filing of such registration statement at such time,
then the Company shall have the right to defer such filing, provided that the
Company may not defer the filing for a period of more than 180 days after
receipt of the request for a Demand Registration, or more than once in any
12-month period. The Holders may not exercise their rights under this Section
3.2 until the earlier to occur of (i) thirty-six (36) months following the date
of this Agreement or (ii) six months after the effectiveness of any registration
statement covering the Initial Public Offering. The Holders may not exercise
their right under this Section 3.2 within one hundred eighty (180) days of the
effective date of any registration statement (other than on Form S-8) covering
capital stock of the Company.
3.3. Registrations on Form S-3. In addition to the rights provided the
Holders in Sections 3.1 and 3.2 above, if the registration of Registrable Shares
under the Securities Act can be effected on Form S-3 (or any equivalent
successor form promulgated by the Commission), then the Company shall provide
the Holders with the following rights:
(a) For the Holders. Upon the written request of one or more
Holders, the Company will so notify each Holder, and then will, as expeditiously
as possible, use its diligent efforts to effect qualification and registration
under the Securities Act on Form S-3 of all or such portion of the Registrable
Shares as the Holders shall specify; provided, however, the Company shall not be
required to effect a registration pursuant to this Section 3.3(a) unless the
market value of the Registrable Shares to be sold by the Holders in any such
registration shall be at least $2,000,000 at the time of filing such
registration statement, and further provided that the Company shall not be
required to effect more than one registration during any 12 month period
pursuant to this Section 3.3(a) or more than four registrations in the aggregate
pursuant to this Section 3.3(a).
(b) Conflicts. In the event that, in a registration under this
Section 3.3 which is effected through an underwriter, the underwriter imposes a
limitation on the number of Registrable Shares which may be included in the
registration statement in order
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to effect an orderly public distribution, then the Company shall exclude from
such registration statement, first, all shares which are not Registrable Shares,
and second, Registrable Shares which are requested to be included pursuant to
Section 3.1.
3.4. Effectiveness. The Company will use its diligent efforts to
maintain the effectiveness for up to one hundred twenty (120) days (or such
shorter period of time as the underwriters need to complete the distribution of
the registered offering, or ninety (90) days in the case of a "shelf"
registration statement on Form S-3) of any registration statement pursuant to
which any of the Registrable Shares are being offered, and from time to time
will amend or supplement such registration statement and the prospectus
contained therein to the extent necessary to comply with the Securities Act and
any applicable state securities statute or regulation. The Company will also
provide each Holder with as many copies of the prospectus contained in any such
registration statement as it may reasonably request.
3.5. Indemnification of Holders.
(a) In the event that the Company registers any of the
Registrable Shares under the Securities Act, the Company will indemnify and hold
harmless each Holder and each underwriter of the Registrable Shares (including
their officers, directors, affiliates and partners) so registered (including any
broker or dealer through whom such shares may be sold) and each Person, if any,
who controls such Holder or any such underwriter within the meaning of Section
15 of the Securities Act from and against any and all losses, claims, damages,
expenses or liabilities, joint or several, to which they or any of them become
subject under the Securities Act, applicable state securities laws or under any
other statute or at common law or otherwise, as incurred, and, except as
hereinafter provided, will reimburse each such Holder, each such underwriter and
each such controlling Person if any, for any legal or other expenses reasonably
incurred by them or any of them in connection with investigating or defending
any actions whether or not resulting in any liability, as incurred, insofar as
such losses, claims, damages, expenses, liabilities or actions arise out of or
are based upon any untrue statement or alleged untrue statement of a material
fact contained in the registration statement, in any preliminary or amended
preliminary prospectus or in the final prospectus (or the registration statement
or prospectus as from time to time amended or supplemented by the Company) or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary in order to make the
statements therein not misleading, or any violation by the Company of any rule
or regulation promulgated under the Securities Act or any state securities laws
applicable to the Company and relating to action or inaction required of the
Company in connection with such registration, unless (i) such untrue statement
or alleged untrue statement or omission or alleged omission was made in such
registration statement, preliminary or amended preliminary prospectus or final
prospectus in reliance upon and in conformity with information furnished in
writing to the Company in connection therewith by any such holder of Registrable
Shares or its controlling person (in the case of indemnification of such holder
or its controlling person), or any such underwriter or its controlling person
(in the case of indemnification of such underwriter or its controlling person)
expressly for use therein, or unless (ii) in the case of a sale directly by such
Holder of (including a sale of such Registrable Shares through any underwriter
retained by such holder of Registrable Shares to engage in a distribution on
behalf of such Holder), such untrue statement or alleged untrue
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statement or omission or alleged omission was contained in a preliminary
prospectus and corrected in a final or amended prospectus copies of which were
delivered to such Holder or such underwriter on a timely basis, and such Holder
failed to deliver a copy of the final or amended prospectus at or prior to the
confirmation for the sale of the Registrable Shares to the person asserting any
such loss, claim, damage or liability in any case where such delivery is
required by the Securities Act.
(b) Promptly after receipt by any Holder, any underwriter or any
controlling Person of notice of the commencement of any action in respect of
which indemnity may be sought against the Company, such Holder, or such
underwriter or such controlling person, as the case may be, will notify the
Company in writing of the commencement thereof (provided, that failure to so
notify the Company shall not relieve the Company from any liability it may have
hereunder) and, subject to the provisions hereinafter stated, the Company shall
be entitled to assume the defense of such action (including the employment of
counsel, who shall be counsel reasonably satisfactory to such Holder, of such
underwriter or such controlling Person, as the case may be), and the payment of
expenses insofar as such action shall relate to any alleged liability in respect
of which indemnity may be sought against the Company.
(c) Such Holder, any such underwriter or any such controlling
Person shall have the right to employ separate counsel in any such action and to
participate in the defense thereof but the fees and expenses of such counsel
subsequent to any assumption of the defense by the Company shall not be at the
expense of the Company unless the employment of such counsel has been
specifically authorized in writing by the Company. The Company shall not be
liable to indemnify any Person for any settlement of any such action effected
without the Company's written consent. The Company shall not, except with the
approval of each party being indemnified under this Section 3.5, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to the
parties being so indemnified of a release from all liability in respect to such
claim or litigation.
(d) In order to provide for just and equitable contribution to
joint liability under the Securities Act in any case in which any Holder
exercising rights under this Article III, or any controlling Person of any such
Holder, makes a claim for indemnification pursuant to this Section 3.5 but it is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 3.5 provides for indemnification in
such case, then, the Company and such Holder will contribute to the aggregate
losses, claims, damages or liabilities to which they may be subject (after
contribution from others) in such proportion as is appropriate to reflect the
relative fault of the Company on the one hand and of the Holder on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative fault of the Company on the one hand and of the
Holder on the other shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by the
Company on the one hand or by the Holder on the other, and
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<PAGE> 15
each party's relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission; provided, however, that, in
any such case, (A) no such Holder will be required to contribute any amount in
excess of the public offering price of all such Registrable Shares offered by
such Holder pursuant to such registration statement; and (B) no person or entity
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) will be entitled to contribution from any person or entity
who was not guilty of such fraudulent misrepresentation.
3.6. Indemnification of Company.
(a) In the event that the Company registers any of the
Registrable Shares under the Securities Act, each Holder so registered will
indemnify and hold harmless the Company, each of its directors, each of its
officers who have signed or otherwise participated in the preparation of the
registration statement, each underwriter of the Registrable Shares so registered
(including any broker or dealer through whom such of the shares may be sold) and
each Person, if any, who controls the Company within the meaning of Section 15
of the Securities Act from and against any and all losses, claims, damages,
expenses or liabilities, joint or several, to which they or any of them may
become subject under the Securities Act, applicable state securities laws or
under any other statute or at common law or otherwise, and, except as
hereinafter provided, will reimburse the Company and each such director,
officer, underwriter or controlling Person for any legal or other expenses
reasonably incurred by them or any of them in connection with investigating or
defending any actions whether or not resulting in any liability, insofar as such
losses, claims, damages, expenses, liabilities or actions arise out of or are
based upon any untrue statement or alleged untrue statement of a material fact
contained in the registration statement, in any preliminary or amended
preliminary prospectus or in the final prospectus (or in the registration
statement or prospectus as from time to time amended or supplemented) or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, but only insofar as any such statement or
omission was made in reliance upon and in conformity with information furnished
in writing to the Company in connection therewith by such Holder expressly for
use therein; provided, however, that such Holder's obligations hereunder shall
be limited to an amount equal to the proceeds received by such Holder sold in
such registration.
(b) Promptly after receipt of notice of the commencement of any
action in respect of which indemnity may be sought against such Holder, the
Company will notify such Holder in writing of the commencement thereof
(provided, that failure to so notify such Holder shall not relieve such holder
from any liability it may have hereunder), and such Holder shall, subject to the
provisions hereinafter stated, be entitled to assume the defense of such action
(including the employment of counsel, who shall be counsel reasonably
satisfactory to the Company) and the payment of expenses insofar as such action
shall relate to the alleged liability in respect of which indemnity may be
sought against such holder of Registrable Shares. The Company and each such
director, officer, underwriter or controlling Person shall have the right to
employ separate counsel in any such action and to participate in the defense
thereof, but the fees and expenses of such counsel subsequent to any assumption
of the defense by such Holder shall not be at the expense of such Holder unless
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employment of such counsel has been specifically authorized in writing by such
Holder. Such Holder shall not be liable to indemnify any Person for any
settlement of any such action effected without such Holder's written consent.
(c) In order to provide for just and equitable contribution to
joint liability under the Securities Act in any case in which the Company
exercising its rights under this Article III makes a claim for indemnification
pursuant to this Section 3.6, but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding that this
Section 3.6 provides for indemnification, in such case, then, the Company and
such Holder will contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (after contribution from others) in
such proportion as is appropriate to reflect the relative fault of the Company
on the one hand and of the Holder on the other in connection with the statements
or omissions which resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations. The relative fault of the
Company on the one hand and of the Holder on the other shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or by the Holder
on the other, and each party's relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission; provided,
however, that, in any such case, (A) no such Holder will be required to
contribute any amount in excess of the public offering price of all such
Registrable Shares offered by it pursuant to such registration statement; and
(B) no person or entity guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) will be entitled to contribution
from any person or entity who was not guilty of such fraudulent
misrepresentation.
3.7. Exchange Act Registration. If the Company at any time shall list
any class of equity securities of the type which may be issued upon the
conversion of the Preferred Stock on any national securities exchange and shall
register such class of equity securities under the Exchange Act, the Company
will, at its expense, simultaneously list on such exchange and maintain such
listing of, the Common Stock. If the Company becomes subject to the reporting
requirements of either Section 13 or Section 15(d) of the Exchange Act, the
Company will use its diligent efforts to timely file with the Commission such
information as the Commission may require under either of said Sections; and in
such event, the Company shall use its diligent efforts to take all action as may
be required as a condition to the availability of Rule 144 or Rule 144A under
the Securities Act (or any successor exemptive rule hereinafter in effect) with
respect to such Common Stock. The Company shall furnish to any Holder forthwith
upon request (i) a written statement by the Company as to its compliance with
the reporting requirements of Rule l44, (ii) a copy of the most recent annual or
quarterly report of the Company as filed with the Commission, and (iii) such
other reports and documents as a Holder may reasonably request in availing
itself of any rule or regulation of the Commission allowing a Holder to sell any
such Registrable Securities without registration. After the occurrence of the
Initial Public Offering, the Company agrees to use its diligent efforts to
facilitate and expedite transfers of Common Stock pursuant to
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Rule 144 under the Securities Act, which efforts shall include timely notice to
its transfer agent to expedite such transfers of Common Stock.
3.8. Further Obligations of the Company. Whenever under the preceding
Sections of this Article III, the Company is required hereunder to register
Registrable Shares, it agrees that it shall also do the following:
(a) Furnish to each selling Holder such copies of each
preliminary and final prospectus and such other documents as said holder may
reasonably request to facilitate the public offering of its Registrable Shares;
(b) Use its diligent efforts to register or qualify the
Registrable Shares covered by said registration statement under the applicable
securities or "blue sky" laws of such jurisdictions as any selling Holder may
reasonably request; provided, however, that the Company shall not be obligated
to qualify to do business in any jurisdictions where it is not then so qualified
or to take any action which would subject it to the service of process in suits
other than those arising out of the offer or sale of the securities covered by
the registration statement in any jurisdiction where it is not then so subject;
(c) Furnish to each selling Holder a signed counterpart,
addressed to the selling holders, of
(i) an opinion of counsel for the Company, dated the
effective date of the registration statement, and
(ii) "comfort" letters signed by the Company's independent
public accountants who have examined and reported on the Company's financial
statements included in the registration statement, to the extent permitted by
the standards of the American Institute of Certified Public Accountants,
covering substantially the same matters with respect to the registration
statement (and the prospectus included therein) and (in the case of the
accountants' "comfort" letters) with respect to events subsequent to the date of
the financial statements, as are customarily covered in opinions of issuer's
counsel and in accountants' "comfort" letters delivered to the underwriters in
underwritten public offerings of securities;
(d) Make available for inspection to each selling Holder a copy
of all documents filed with and all correspondence from or to the Commission in
connection with any such offering of securities; and
(e) Cooperate to the extent reasonably requested to obtain all
necessary approvals from the National Association of Securities Dealers, Inc.
3.9. Shareholder Acts. Whenever under the preceding Sections of this
Article III the Holders are registering such shares pursuant to any registration
statement, each such Holder agrees to (i) timely provide to the Company, at its
request, such information and materials as it may reasonably request in order to
effect the registration of such Registrable Shares and (ii) convert all shares
of Preferred Stock included in any registration statement to
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shares of Common Stock, such conversion to be effective at the closing of such
offering pursuant to such registration statement.
3.10. Expenses. In the case of all Piggy-Back Registrations effected
under Section 3.1, two Demand Registrations effected under Section 3.2, and one
registration per 12-month period effected under Section 3.3 up to the maximum
number specified therein, the Company shall bear all reasonable costs and
expenses of each such registration, including, but not limited to, the Company's
printing, legal and accounting fees and expenses, Commission and NASD filing
fees and "Blue Sky" fees and expenses; provided, however, that the Company shall
have no obligation to pay or otherwise bear any portion of the underwriters'
commissions or discounts attributable to the Registrable Shares being offered
and sold by be Holders, or the fees and expenses of counsel for the selling
Holders in connection with the registration of the Registrable Shares. The
Company shall pay all expenses in connection with any registration initiated
pursuant to this Article III which is withdrawn, delayed or abandoned at the
request of the Company, except if such withdrawal, delay or abandonment is
caused by the fraud, material misstatement or omission of a material fact by a
Holder to be included in such registration.
3.11. "Market Stand-Off" Agreement. Each Holder hereby agrees that,
during the period of duration (up to, but not exceeding, 180 days) specified by
the Company and an underwriter of Common Stock or other securities of the
Company, following the effective date of a registration statement of the Company
filed under the Securities Act, it shall not, to the extent requested by the
Company and such underwriter, directly or indirectly sell, offer to sell,
contract to sell (including, without limitation, any short sale), grant any
option to purchase or otherwise transfer or dispose of (other than to donees who
agree to be similarly bound) any securities of the Company held by it at any
time during such period except Common Stock included in such registration;
provided, however, that:
(i) such agreement shall be applicable only during the
three-year period following the date of the final prospectus distributed
pursuant to the first such registration statement of the Company which covers
Common Stock (or other securities) to be sold on its behalf to the public in an
underwritten offering; and
(ii) all officers and directors of the Company, all
one-percent (1%) security holders, and all other persons with registration
rights (whether or not pursuant to this Agreement) enter into similar
agreements.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period, and each Holder agrees
that, if so requested, such Holder will execute an agreement in the form
provided by the underwriter containing terms which are essentially consistent
with the provisions of this Section 3.11.
Notwithstanding the foregoing, the obligations described in this Section
3.11 shall not apply to a registration relating solely to employee benefit plans
on Form S-1 or Form S-8 or similar forms which may be promulgated in the future.
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3.12. Other Registration Rights. The Company shall not grant any
registration rights to any other Person which registration rights are senior to
the registration rights of the Holders, unless the Company shall first obtain
the written consent of a majority-in-interest of the Holders. The Company may
grant registration rights in the future to any future purchaser of the
Securities of the Company which are on parity with the Holders, without the
consent of the Holders, provided that such purchasers agree in writing to be
bound by the provisions of this Agreement and provided further that, if such
rights are granted on parity with the Holders, the number of permitted Demand
Registrations and the number of permitted registrations under Section 3.3(a)
shall each be increased by at least one. The Company has the right to add
employees of the Company who have options or Securities of the Company as
parties to this Agreement.
3.13. S-8 Registration. Reasonably promptly after completion of the
Initial Public Offering, the Company shall use its diligent efforts to file with
the Commission a registration statement on Form S-8 (or its equivalent successor
form) to register all shares of Common Stock issuable pursuant to options
granted under the Company's stock option plans adopted by the Company's Board of
Directors and approved by the Company's shareholders.
3.14. Assignment of Registration Rights. The rights to cause the Company
to register Registrable Securities pursuant to this Article III may be assigned
(but only with all related obligations) by a Holder to a transferee or assignee
of at least 500,000 shares of such securities, provided (i) the Company is,
within a reasonable time before such transfer, furnished with written notice of
the name and address of such transferee or assignee and the securities with
respect to which such registration rights are being assigned; (ii) that such
assignment shall be effective only if immediately following such transfer the
further disposition of such securities by the transferee or assignee is
restricted under the Securities Act and (iii) the assignee, in the Company's
judgment, is not a competitor of the Company.
3.15. Termination of Registration Rights. No Holder shall be entitled to
exercise any right provided for in this Article III after the earlier of (i)
five (5) years following the consummation of the sale of securities in an
Initial Public Offering, (ii) such time as Rule 144 or another similar exemption
under the Act is available for the sale of all of such Holder's shares during a
three (3)-month period without registration.
3.16. Delay of Registration. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any registration as the
result of any controversy that might arise with respect to the interpretation or
implementation of this Article III.
ARTICLE IV
RIGHT OF FIRST OFFER
4.1. Right of First Offer. Subject to this Article IV, if the Company
shall decide to issue or sell, any (i) shares of Common Stock, (ii) any other
equity security of the Company, including without limitation, shares of
Preferred Stock, (iii) any debt security of the Company which by its terms is
convertible into or exchangeable for any equity security of the Company, (iv)
any security of the Company that is a combination of debt and equity, or (v) any
option, warrant or other right to subscribe for, purchase or otherwise acquire
any such equity security or any such debt security of the Company, the Company
shall, in each
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case, first offer to sell such securities (the "Offered Securities") to such
Shareholders ("Preemptive Shareholders") who hold at least 5% of the then
outstanding capital stock of the Company and to each Continuing Founder as
follows: The Company shall offer to sell to each Preemptive Shareholder that
portion of the Offered Securities as the number of Common Shares which such
Preemptive Shareholders then holds or has the right to acquire bears to the sum
of the total number of issued and outstanding Common Shares plus the number of
Common Shares reserved for issuance upon conversion of outstanding shares of
convertible securities of the Company (including the Preferred Stock) and upon
exercise of warrants, options and rights outstanding, at a pace and on such
other terms as shall have been specified by the Company in writing; delivered to
the Preemptive Shareholders (the "Offer"), which Offer by its terms shall remain
open for a period of 14 days from the giving of the Offer.
4.2. Notice of Acceptance. Notice of each Preemptive Shareholder's
intention to accept, in whole or in part, any Offer made pursuant to Section 4.1
shall be evidenced by a writing signed by such Preemptive Shareholder and
delivered to the Company prior to the end of the 14-day period of such Offer,
setting forth the number of shares or securities such Preemptive Shareholder
elects to purchase (the "Notice of Acceptance"). Failure of any Preemptive
Shareholder to deliver a Notice of Acceptance within said 14 days will be deemed
to be a rejection of the Offer.
4.3. Conditions to Acceptances and Purchase. The Company shall have one
hundred twenty (120) days from the end of said 14-day period to sell any such
Offered Securities as to which a Notice of Acceptance has not been given (the
"Refused Securities") to any Person or Persons, substantially on the same terms
and conditions as set forth in the Offer.
4.4. Termination and Waiver of Right of First Offer. The rights of the
Preemptive Shareholders under this Article IV may be waived with respect to each
series of Preferred Stock of the Company upon the prior written consent of the
holders of a majority of the outstanding shares of such series, and shall
terminate immediately prior to the effectiveness of the registration statement
with respect to the Initial Public Offering, but expressly conditioned on the
consummation of the Initial Public Offering. The rights of any Preemptive
Shareholder under this Article IV shall also terminate for all future issuances
of Offered Securities if the Preemptive Shareholder does not purchase all of the
Offered Securities which it was entitled to purchase in this Article IV.
4.5. Exception. The rights of the Preemptive Shareholders under this
Article IV shall not apply to:
(a) Common Stock issued as a stock dividend to holders of Common
Stock or upon any subdivision or combination of shares of Common Stock;
(b) Preferred Stock issued as a dividend to holders of Preferred
Stock or upon any subdivision or combination of shares of Preferred Stock;
(c) The issuance of any Conversion Shares;
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(d) Common Stock issued upon exercise of options, warrants and
rights outstanding as of the date of this Agreement;
(e) Common Stock and options of the Company issued after the date
hereof to directors, officers, employees or consultants of the Company and any
Subsidiary pursuant to any qualified or non-qualified stock option plan,
employee stock ownership plan, employee benefit plan, stock plan, or such other
options, arrangements, agreements or plans intended principally as a means of
providing compensation or incentive compensation for employment or services,
approved by the Board of Directors of the Company;
(f) Options, warrants or shares issued to banks or other lenders
or equipment lessors in connection with the Company obtaining loans or equipment
financing or to customers, prospective customers, vendors or strategic partners;
or
(g) Securities of capital stock issued in a merger or
consolidation or as consideration for the acquisition by the Company of any
other corporation or other business entity or of the assets and business
thereof.
4.6. Convenience. For convenience in administration, the Company may
offer and sell Securities covered by the right in Section 4.1 without first
offering such Securities to the Preemptive Shareholders, so long as the
Preemptive Shareholders are given the opportunity to purchase their pro rata
amount within 45 days after the close of the sale of Securities.
4.7. Assignability. The rights of the Preemptive Shareholders set forth
herein are nonassignable except (a) to any or all of the beneficial owners of a
Preemptive Shareholder; (b) an Affiliate of a Preemptive Shareholder; (c) to the
immediate Family of a Continuing Founder or trusts of which a Continuing Founder
or such member of the Immediate Family is the beneficiary; and (d) to a
purchaser who is not a competitor of the Company and who purchases all of the
Preemptive Shareholder's Securities of the Company. Any assignee permitted under
the preceding sentence shall assume the assignor's obligations under this
Agreement and become a party to this Agreement in a manner satisfactory to the
Company.
ARTICLE V
CERTAIN TRANSFER RESTRICTIONS
5.1. Restriction on Transfer. No Shareholder may sell or engage in any
transaction which has resulted or which will result in a change in the
beneficial or record ownership of any Securities held by the Shareholder,
including without limitation a voluntary or involuntary sale, assignment,
transfer, pledge, hypothecation, encumbrance, disposal, loan, gift, attachment
or levy (a "Transfer"), except as provided in this Article V, and any such
Transfer of Securities or attempted Transfer of Securities in contravention of
this Article V shall be void and ineffective for any purpose and shall not
confer on any transferee or purported transferee any rights whatsoever.
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5.2. Rights of First Refusal.
(a) Each time a Shareholder proposes (or is required by operation
of law or other involuntary transfer) to Transfer any or all of the Securities
standing in such Shareholder's name or owned by him, such Shareholder shall
first offer such Securities to the Company in accordance with the following
provisions:
(i) Such Shareholder shall deliver a written notice (a
"Notice") to the Company stating (A) such Shareholder's bona fide intention to
Transfer such Securities, (B) the name and address of the proposed transferee,
(C) the number of Securities to be transferred, and (D) the purchase price per
Security and terms of payment for which the Holder proposes to Transfer such
Securities.
(ii) Within 30 days after receipt of the Notice, the Company
shall have the first right to purchase or obtain such Securities, upon the price
and terms of payment designated in the Notice. If the Notice provides for the
payment of non-cash consideration, the Company at its option may pay the
consideration in cash equal to the Board of Directors' good faith estimate of
the present fair market value of the non-cash consideration offered. If the
proposed Transfer is an encumbrance or is involuntary or by operation of law,
the price of each Security purchased shall be its fair market value on the date
the Company receives the Notice as determined in good faith by the Board of
Directors and such price shall be payable in cash on the date of purchase. Fair
market value as so determined by the Board of Directors shall be conclusive and
binding on all interested parties.
(iii) If the Company elects not to purchase or obtain all of
the Securities designated in the Transferring Shareholder's Notice, then the
Shareholder may Transfer the Securities referred to in the Notice to the
proposed transferee, provided that such Transfer (A) is completed within 60 days
after the expiration of the Company's right to purchase or obtain such
Securities, (B) is made at the price and terms designated in the Notice, and (C)
the proposed Transferee agrees to be bound by the terms and provisions of this
Article V immediately upon receipt of such Securities. If such Securities are
not so transferred, the Transferring Shareholder must give notice in accordance
with this Article V prior to any other or subsequent Transfer of such
Securities.
(iv) The Company may assign its rights hereunder as
determined by the Board of Directors.
(b) Notwithstanding Section 5.2(a), a Shareholder may Transfer
Securities: (i) to a member of the Shareholder's Immediate Family (including a
revocable trust for the benefit of such a member), (ii) to a wholly owned
subsidiary or constituent partner of the Shareholder, or (iii) to the estate of
any of the foregoing by gift, will or intestate succession; provided that the
Shareholder or his representative notifies the Company of any such Transfer and
the proposed transferee agrees to be bound by the terms and conditions of this
Article V and to become a party to this Article V immediately upon the receipt
of such Securities.
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5.3. Legal Compliance. Notwithstanding any provision to the contrary
herein, the Company's obligation to pay or complete payment for any Securities
to be purchased by it under this Article V is subject to its being legally
permitted to do so under the tests in Sections 500 and 501 of the California
Corporation Code and compliance with all applicable federal and state securities
and other laws to which the Company is subject.
5.4. Legend on Stock Certificates. Each certificate representing shares
owned of record or beneficially by a party to this Agreement shall be endorsed
with the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO VARIOUS
RESTRICTIONS ON TRANSFER, INCLUDING CERTAIN RIGHTS OF FIRST REFUSAL TO PURCHASE
SUCH SECURITIES, SET FORTH IN AN INVESTORS RIGHTS AGREEMENT, A COPY OF WHICH IS
AVAILABLE AT THE ISSUER'S HEADQUARTERS.
Under no circumstances shall any Transfer of Securities subject hereto
be valid until the proposed transferee thereof shall have provided to the
Company a written acknowledgment of the provisions of this Article V; and
notwithstanding any other provision of this Article V, no such Transfer of any
kind shall in any event result in the non-applicability of the provisions hereof
at any time to any of the Securities subject hereto.
5.5. Term of this Article. The restrictions on Transfer of Securities
set forth in this Article V shall terminate upon any of the following:
(a) The determination of the Board of Directors that this Article
V shall be terminated.
(b) The liquidation or bankruptcy of the Company.
(c) The consummation of an Initial Public Offering.
ARTICLE VI
VOTING FOR DIRECTORS
6.1. Directors. Each Shareholder agrees to vote their Securities in the
Company as voted by the parties to that certain Stockholders Agreement dated
April 9, 1997 as amended and as may be further amended from time to time (the
"Stockholders Agreement").
6.2. Termination. The obligation in Section 6.1 shall terminate at the
time of the termination of the Stockholders Agreement.
ARTICLE VII
MISCELLANEOUS
7.1. No Waiver; Cumulative Remedies. No failure or delay on the part of
any party to this Agreement in exercising any right, power or remedy hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such right, power or remedy preclude any other or further exercise thereof
or the exercise of any other right, power or
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<PAGE> 24
remedy hereunder. The remedies herein provided are cumulative and not exclusive
of any remedies provided by law.
7.2. Amendments, Waivers and Consents. Any provision in the Agreement to
the contrary notwithstanding, and except as hereinafter provided, changes in,
termination or amendments of or additions to this Agreement may be made, and
compliance with any covenant or provision set forth herein may be omitted or
waived, if the Company (i) shall obtain consent thereto in writing from the
holder or holders of at least a majority of the Registrable Shares, provided
that the consent of at least eighty percent (80%) of the Registrable Shares is
necessary to amend or terminate Article IV, (ii) shall deliver copies of such
consent in writing to any Shareholders who did not execute such consent and
(iii) the consent of an affected Continuing Founder is obtained if the
Continuing Founder's rights in Section 4.1 is amended or terminated; provided
that no consents shall be effective to reduce the percentage of the Registrable
Shares the consent of the holders of which is required under this Section 7.2.
Any waiver or consent may be given subject to satisfaction of conditions stated
therein and any waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
7.3. Addresses for Notices. All notices, requests, demands and other
communications provided for hereunder shall be in writing (including telegraphic
communication) and mailed, telegraphed or delivered to each applicable party at
the address set forth in the records of the Company or at such other address as
to which such party may inform the other parties in writing in compliance with
the terms of this Section.
If to any Shareholder: at such Shareholder's address for notice as set
forth in the register maintained by the Company, or at such other address as
shall be designated by such Person in a written notice to the other parties
complying as to delivery with the terms of this Section.
If to the Company: at the address set forth on page 1 hereof, or at such
other address as shall be designated by the Company in a written notice to the
other parties complying as to delivery with the terms of this Section.
All such notices, requests, demands and other communications shall be
deemed delivered: three days after mailed (which mailing must be accomplished by
certified mail, return receipt requested and postage prepaid); when transmitted
by successful facsimile transmission; one business day after deposited with a
guaranteed overnight courier service (charged to sender); or when delivered in
hand or dispatched by telegraph.
7.4. Binding Effect; Assignment. This Agreement shall be binding upon
and inure to the benefit of the Company. This Agreement is not assignable by the
Shareholders without the consent of the Company, except as provided for in
Sections 3.14 and 4.7.
7.5. Entire Agreement. This Agreement and the Stockholders Agreement
constitute the entire agreement among the parties and supersedes any prior or
contemporaneous understandings, representations or agreements concerning the
subject matter hereof. In particular Articles 7, 8 and 9 of the 1993 Stock
Purchase Agreement, as amended, Articles 7, 8 and 9 of the 1994 Stock Purchase
Agreement, as amended,
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Articles 6, 7 and 8 of the 1995 Stock Purchase Agreement, as amended, Articles
6, 7 and 8 of the 1996 Stock Purchase Agreement, as amended, Articles 6, 7 and 8
of the Vulcan Stock Purchase Agreement, as amended, and Articles 6, 7 and 8 of
the 1997 Stock Purchase Agreement, are hereby deemed terminated and of no
further force or effect. This Agreement supersedes the prior rights of any
Warrantholder with respect to any registration rights.
7.6. Severability. The provisions of this Agreement are severable and,
in the event that any court of competent jurisdiction one or more of the
provisions or part of a provision contained in this Agreement shall, for any
reason, be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision
or part of a provision of this Agreement, but this Agreement shall be reformed
and construed as if such invalid or illegal or unenforceable provision, or part
of a provision, had never been contained herein, and such provisions or part
reformed so that it would be valid, legal and enforceable to the maximum extent
possible.
7.7. Confidentiality. Each Shareholder agrees that it will keep
confidential and will not disclose, or divulge any confidential, proprietary,
secret or non-public information which such Shareholder may obtain from the
Company (except as otherwise required by law or as otherwise contemplated by the
Marketing and Licensing Agreement dated March 16, 1995 between the Company and
Fletcher Challenge Power Marketing Ltd.) and not use such information other than
for the benefit of the Company or in furtherance of the Shareholder's rights as
a shareholder of the Company, provided that no such information shall be deemed
to be non-public if it (i) is or becomes generally available to the public other
than as a result of a disclosure by the Shareholder or its respective agents,
representatives or employees; (ii) is or becomes available to the Shareholder on
a non-confidential basis from a source (other than the Company or one of its
officers, directors, agents, representatives or employees) that is not
prohibited from disclosing such information by a legal, contractual or fiduciary
obligation; or (iii) was known to the Shareholder on a non-confidential basis
prior to its disclosure to it by the Company and provided further that, any
other term of this Agreement to the contrary notwithstanding, the Company shall
not be obligated to disclose any information, the disclosure of which it
believes in good faith would be detrimental to the Company or its shareholders.
7.8. Governing Law and Construction. This Agreement will be governed by
and construed in accordance with the laws of California, without regard to the
principles of conflicts of law. The language of this Agreement shall be deemed
to be the result of negotiation among the parties and their respective counsel
and shall not be construed strictly for or against any party. Each party (i)
agrees that any action arising out of or in connection with this Agreement shall
be brought solely in federal or state courts in Los Angeles, California, (ii)
hereby consents to the sole jurisdiction of such courts, and (iii) agrees that,
whenever a party is requested to execute one or more documents evidencing such
consent, it shall do so immediately.
7.9. Headings. Article, section and subsection headings in this
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
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7.10. Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.
7.11. Further Assurances. From and after the date of this Agreement,
upon the request of any Shareholder or the Company, the Company and the
Shareholder shall execute and deliver such instruments, documents and other
writings as may be reasonably necessary or desirable to confirm and carry out
and to effectuate fully the intent and purposes of this Agreement.
7.12. Aggregation of Stock. All shares of Company stock held or acquired
by a Shareholder and its Affiliates and Immediate Family shall be aggregated
together for purposes of determining the availability of any rights under this
Agreement.
7.13. Attorney's Fees. In the event that any dispute among the parties
to this Agreement should result in a legal proceeding, the prevailing party
shall be entitled to recover from the other party(ies) to such dispute, all
fees, costs and expenses of enforcing any right under or with respect to this
Agreement, including without limitation, such fees and expenses of attorneys and
accountants, which shall include, without limitation, all fees, costs and
expenses of appeals.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of August 22, 1997.
CAPSTONE TURBINE CORPORATION
By: /s/ Jeffrey R. Watts
----------------------------------------
Its: Chief Financial Officer
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EXHIBIT 10.2
[LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE -- NET
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes
only December 1, 1999, is made by and between NORTHPARK INDUSTRIAL, a California
General Partnership, NORTHWEST INDUSTRIAL CENTER, a California Limited
Partnership and NORTHPARK INDUSTRIAL - LEAHY DIVISION LLC., a California limited
liability company ("LESSOR") and CAPSTONE TURBINE CORPORATION, a California
corporation ("LESSEE"), (collectively the "PARTIES," or individually a "PARTY").
(See Addendum Paragraph 50)
1.2 PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known as 21211 Nordhoff Street, Chatsworth 91311 located in the County of Los
Angeles, State of California and generally described as (describe briefly the
nature of the property and, if applicable, the "PROJECT", if the property is
located within a Project) a concrete tilt-up building consisting of
approximately 98,370 square feet of area, aka Lot #3, Tract #33398, City of Los
Angeles, in an MR-2 zone in Northpark Industrial Center ("PREMISES"). (See also
Paragraph 2 and Addendum Paragraph 51)
1.3 TERM: Ten (10) years and 0 months ("ORIGINAL TERM") commencing
See Addendum Paragraph 52 ("COMMENCEMENT DATE") and ending See Addendum
Paragraph 52 ("EXPIRATION DATE"). (See also Paragraph 3)
1.4 EARLY POSSESSION: See Addendum Paragraph 53 ("EARLY POSSESSION
DATE"). (See also Paragraphs 3.2 and 3.3)
1.5 BASE RENT: $60,000.00 per month ("BASE RENT"), payable on the
First (1st) day of each month commencing See Addendum Paragraph 54. (See also
Paragraph 4)
[X] If this box is checked, there are provisions in this Lease for the Base Rent
to be adjusted.
1.6 BASE RENT PAID UPON EXECUTION: $420,000.00 as Base Rent for the
period See Addendum Paragraph 54.
1.7 SECURITY DEPOSIT: $60,000.00 ("SECURITY DEPOSIT").
(See also Paragraph 5)
1.8 AGREED USE: See Addendum Paragraph 55. (See also Paragraph 6)
1.9 INSURING PARTY: Lessee is the "INSURING PARTY" unless otherwise
stated herein. (See also Paragraph 8 and Addendum Paragraph 67)
1.10 REAL ESTATE BROKERS: (See also Paragraph 15)
(a) REPRESENTATION: The following real estate brokers
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction (check applicable boxes):
[ ] _________________________ represents Lessor exclusively ("LESSOR'S BROKER");
[ ] ______________________ represents Lessee exclusively ("LESSEE'S BROKER"); or
[X] The Seeley Company represents both Lessor and Lessee ("DUAL AGENCY").
(b) PAYMENT TO BROKERS: Lessor shall pay to the Broker the fee
agreed to in their separate written agreement.
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to
be guaranteed by _______________________________________________________________
_________________________________________ ("GUARANTOR"). (See also Paragraph 37)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 50 through 89 and Exhibits A - Lessor's Building
Improvement Plans, B - Lessee's Building Improvement Plans, C - Parking Garage
Rules, D - Form of First Amendment to Lease, E - Form of Memorandum of Lease,
all of which constitute a part of this Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby
leases from Lessor, the Premises, for the term, at the rental, and upon all of
the terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of size set forth in this Lease, or that may have
been used in calculating rental, is an approximation which the Parties agree is
reasonable and the rental based thereon is not subject to revision whether or
not the actual size is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee broom
clean and free of debris on the Commencement Date or the Early Possession Date,
whichever first occurs ("START DATE"), and, so long as the required service
contracts described in Paragraph 7.1(b) below are obtained by Lessee within
thirty (30) days following the Start Date, warrants that the existing
electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air
conditioning systems ("HVAC"), loading doors, if any, and all other such
elements in the Premises, other than those constructed by Lessee, shall be in
good operating condition on said date and that the structural elements of the
roof, bearing walls and foundation of any buildings on the Premises (the
"BUILDING") shall be free of material defects. If a non-compliance with said
warranty exists as of the Start Date, Lessor shall, as Lessor's sole obligation
with respect to such matter, except as otherwise provided in this Lease,
promptly after receipt of written notice from Lessee setting forth with
specificity the nature and extent of such non-compliance, rectify same at
Lessor's expense. If, after the Start Date, Lessee does not give Lessor written
notice of any non-compliance with this warranty within: (i) one year as to the
surface of the roof and the structural portions of the roof, foundations and
bearing walls, (ii) six (6) months as to the HVAC systems, (iii) thirty (30)
days as to the remaining systems and other elements of the Building, correction
of such non-compliance shall be the obligation of Lessee at Lessee's sole cost
and expense. (See Addendum Paragraph 56)
2.3 COMPLIANCE. Lessor warrants that the improvements on the
Premises and Garage comply with all applicable laws, covenants or restrictions
of record, building codes, regulations and ordinances ("APPLICABLE
REQUIREMENTS") in effect on the Start Date. Said warranty does not apply to the
use to which Lessee will put the Premises or to any Alterations or Utility
Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee.
NOTE: Lessee is responsible for determining whether or not the zoning is
appropriate for Lessee's intended use, and acknowledges that past uses of the
Premises may no longer be allowed. If the Premises do not comply with said
warranty, Lessor shall, except as otherwise provided, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify the same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within six (6)
months following the Start Date, correction of that non-compliance shall be the
obligation of Lessee at Lessee's sole cost and expense. (See Addendum Paragraph
57). If the Applicable Requirements are hereafter changed (as opposed to being
in existence at the Start Date, which is addressed in Paragraph 6.2(e) below) so
as to require during the term of this Lease the construction of an addition to
or an alteration of the Building, the remediation of any Hazardous Substance, or
the reinforcement or other physical modification of the Building ("CAPITAL
EXPENDITURE"), Lessor and Lessee shall allocate the cost of such work as
follows:
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<PAGE> 2
(a) Subject to Paragraph 2.3(c) below, if such Capital
Expenditures are required as a result of the specific and unique use of the
Premises by Lessee as compared with uses by tenants in general, Lessee shall be
fully responsible for the cost thereof, provided, however that if such Capital
Expenditure is required during the last two (2) years of this Lease and the cost
thereof exceeds six (6) months' Base Rent, Lessee may instead terminate this
Lease unless Lessor notifies Lessee, in writing, within ten (10) days after
receipt of Lessee's termination notice that Lessor has elected to pay the
difference between the actual cost thereof and the amount equal to six (6)
months' Base Rent. If Lessee elects termination, Lessee shall immediately cease
the use of the Premises which requires such Capital Expenditure and deliver to
Lessor written notice specifying a termination date at least ninety (90) days
thereafter. Such termination date shall, however, in no event be earlier than
the last day that Lessee could legally utilize the Premises without commencing
such Capital Expenditure. (See Addendum Paragraph 57)
(b) If such Capital Expenditure is not the result of the specific
and unique use of the Premises by Lessee (such as governmentally mandated
seismic modifications), then Lessor and Lessee shall allocate the obligation to
pay for such costs pursuant to the provisions of Paragraph 7.1(c); provided,
however, that if such Capital Expenditure is required during the last two years
of this Lease or if Lessor reasonably determines that it is not economically
feasible to pay its share thereof, Lessor shall have the option to terminate
this Lease upon ninety (90) days prior written notice to Lessee unless Lessee
notifies Lessor, in writing, within ten (10) days after receipt of Lessor's
termination notice that Lessee will pay for such Capital Expenditure. If Lessor
does not elect to terminate, and fails to tender its share of any such Capital
Expenditure, Lessee may advance such funds and deduct same, with Interest, from
Rent until Lessor's share of such costs have been fully paid. If Lessee is
unable to finance Lessor's share, or if the balance of the Rent due and payable
for the remainder of this Lease is not sufficient to fully reimburse Lessee on
an offset basis, Lessee shall have the right to terminate this Lease upon thirty
(30) days written notice to Lessor. (See Addendum Paragraph 57)
(c) Notwithstanding the above, the provisions concerning Capital
Expenditures are intended to apply only to non-voluntary, unexpected, and new
Applicable Requirements. If the Capital Expenditures are instead triggered by
Lessee as a result of an actual or proposed change in use, change in intensity
of use, or modification to the Premises then, and in that event, Lessee shall be
fully responsible for the cost thereof, and Lessee shall not have any right to
terminate this Lease. (See Addendum Paragraph 57)
2.4 ACKNOWLEDGEMENTS. Lessee acknowledges that: (a) it has been
advised by Lessor and/or Brokers to satisfy itself with respect to the condition
of the Premises (including but not limited to the electrical, HVAC and fire
sprinkler systems, security, environmental aspects, and compliance with
Applicable Requirements), and their suitability for Lessee's intended use; (b)
Lessee has made such investigation as it deems necessary with reference to such
matters and assumes all responsibility therefor as the same relate to its
occupancy of the Premises; and (c) neither Lessor, Lessor's agents, nor any
Broker has made any oral or written representations or warranties with respect
to said matters other than as set forth in this Lease. In addition, Lessor
acknowledges that: (a) Broker has made no representations, promises or
warranties concerning Lessee's ability to honor the Lease or suitability to
occupy the Premises; and (b) it is Lessor's sole responsibility to investigate
the financial capability and/or suitability of all proposed tenants. (See
Addendum Paragraph 58)
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
Paragraph 2 shall be of no force or effect if immediately prior to the Start
Date Lessee was the owner or occupant of the Premises. In such event, Lessee
shall be responsible for any necessary corrective work.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term
of this Lease are as specified in Paragraph 1.3. (See Addendum Paragraph 59)
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this Lease
(including but not limited to the obligations to pay Real Property Taxes and
insurance premiums and to maintain the Premises) shall, however, be in effect
during such period. Any such early possession shall not affect the Expiration
Date. (See Addendum Paragraph 60)
3.3 DELAY IN POSSESSION. Lessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises to Lessee by the
Commencement Date. If, despite said efforts, Lessor is unable to deliver
possession as agreed, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease. Lessee shall not, however,
be obligated to pay Rent or perform its other obligations until it receives
possession of the Premises. If possession is not delivered within sixty (60)
days after the Commencement Date, Lessee may, at its option, by notice in
writing within ten (10) days after the end of such sixty (60) day period, cancel
this Lease, in which event the Parties shall be discharged from all obligations
hereunder. If such written notice is not received by Lessor within said ten (10)
day period, Lessee's right to cancel shall terminate. Except as otherwise
provided, if possession is not tendered to Lessee by the Start Date and Lessee
does not terminate this Lease, as aforesaid, any period of rent abatement that
Lessee would otherwise have enjoyed shall run from the date of delivery of
possession and continue for a period equal to what Lessee would otherwise have
enjoyed under the terms hereof, but minus any days of delay caused by the acts
or omissions of Lessee. If possession of the Premises is not delivered within
four (4) months after the Commencement Date, this Lease shall terminate unless
other agreements are reached between Lessor and Lessee, in writing. (See
Addendum Paragraph 61)
3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender
possession of the Premises to Lessee until Lessee complies with its obligation
to provide evidence of insurance (Paragraph 8.5). Pending delivery of such
evidence, Lessee shall be required to perform all of its obligations under this
Lease from and after the Start Date, including the payment of Rent,
notwithstanding Lessor's election to withhold possession pending receipt of such
evidence of insurance. Further, if Lessee is required to perform any other
conditions prior to or concurrent with the Start Date, the Start Date shall
occur but Lessor may elect to withhold possession until such conditions are
satisfied.
4. RENT.
4.1. RENT DEFINED. All monetary obligations of Lessee to Lessor under
the terms of this Lease (except for the Security Deposit) are deemed to be rent
("RENT").
4.2 PAYMENT. Lessee shall cause payment of Rent to be received by
Lessor in lawful money of the United States, without offset or deduction (except
as specifically permitted in this Lease), on or before the day on which it is
due. Rent for any period during the term hereof which is for less than one (1)
full calendar month shall be prorated based upon the actual number of days of
said month. Payment of Rent shall be made to Lessor at its address stated herein
or to such other persons or place as Lessor may from time to time designate in
writing. Acceptance of a payment which is less than the amount then due shall
not be a waiver of Lessor's rights to the balance of such Rent, regardless of
Lessor's endorsement of any check so stating.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit as security for Lessee's faithful performance of its
obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults
under this Lease, Lessor may use, apply or retain all or any portion of said
Security Deposit for the payment of any amount due Lessor or to reimburse or
compensate Lessor for any liability, expense, loss or damage which Lessor may
suffer or incur by reason thereof. If Lessor uses or applies all or any portion
of said Security Deposit, Lessee shall within ten (10) days after written
request therefor deposit monies with Lessor sufficient to restore said Security
Deposit to the full amount required by this Lease. If the Base Rent increases
during the term of this Lease, Lessee shall, upon written request from Lessor,
deposit additional monies with Lessor so that the total amount of the Security
Deposit shall at all times bear the same proportion to the increased Base Rent
as the initial Security Deposit bore to the initial Base Rent. Should the Agreed
Use be amended to accommodate a material change in the business of Lessee or to
accommodate a sublessee or assignee, Lessor shall have the right to increase the
Security Deposit to the extent necessary, in Lessor's reasonable judgment, to
account for any increased wear and tear that the Premises may suffer as a result
thereof. If a change in control of Lessee occurs during this Lease and following
such change the financial condition of Lessee is, in Lessor's reasonable
judgment, significantly reduced, Lessee shall deposit such additional monies
with Lessor as shall be sufficient to cause the Security Deposit to be at a
commercially reasonable level based on said change in financial condition.
Lessor shall not be required to keep the Security Deposit separate from its
general accounts. Within fourteen (14) days after the expiration or termination
of this Lease, if Lessor elects to apply the Security Deposit only to unpaid
Rent, and otherwise within thirty (30) days after the Premises have been vacated
pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the
Security Deposit not used or applied by Lessor. No part of the Security Deposit
shall be considered to be held in trust, to bear interest or to be prepayment
for any monies to be paid by Lessee under this Lease. (See Addendum Paragraph
62)
PAGE 2 of 13
<PAGE> 3
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the
Agreed Use, or any other legal use which is reasonably comparable thereto, and
for no other purpose. Lessee shall not use or permit the use of the Premises in
a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs
owners and/or occupants of, or causes damage to neighboring properties. Lessor
shall not unreasonably withhold or delay its consent to any written request for
a modification of the Agreed Use, so long as the same will not impair the
structural integrity of the improvements on the Premises or the mechanical or
electrical systems therein, is not significantly more burdensome to the
Premises. If Lessor elects to withhold consent, Lessor shall within five (5)
business days after such request give written notification of same, which notice
shall include an explanation of Lessor's objections to the change in use.
(See Addendum Paragraph 63)
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCE" as used in this Lease shall mean any product, substance, or waste
whose presence, use, manufacture, disposal, transportation, or release, either
by itself or in combination with other materials expected to be on the Premises,
is either: (i) potentially injurious to the public health, safety or welfare,
the environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substances shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, and/or crude oil or any products, by-products or fractions
thereof. Lessee shall not engage in any activity in or on the Premises which
constitutes a Reportable Use of Hazardous Substances without the express prior
written consent of Lessor and timely compliance (at Lessee's expense) with all
Applicable Requirements. "REPORTABLE USE" shall mean (i) the installation or use
of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and/or
(iii) the presence at the Premises of a Hazardous Substance with respect to
which any Applicable Requirements requires that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may use any ordinary and customary materials reasonably
required to be used in the normal course of the Agreed Use, so long as such use
is in compliance with all Applicable Requirements, is not a Reportable Use, and
does not expose the Premises or neighboring property to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor. In addition,
Lessor may condition its consent to any Reportable Use upon receiving such
additional assurances as Lessor reasonably deems necessary to protect itself,
the public, the Premises and/or the environment against damage, contamination,
injury and/or liability, including, but not limited to, the installation (and
removal on or before Lease expiration or termination) of protective
modifications (such as concrete encasements) and/or increasing the Security
Deposit.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance has come to be located in, on,
under or about the Premises, other than as previously consented to by Lessor,
Lessee shall immediately give written notice of such fact to Lessor, and provide
Lessor with a copy of any report, notice, claim or other documentation which it
has concerning the presence of such Hazardous Substance. (See Addendum
Paragraph 64)
(c) LESSEE REMEDIATION. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under, or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of the Premises or neighboring properties, that was caused or
materially contributed to by Lessee, or pertaining to or involving any Hazardous
Substance brought onto the Premises during the term of this Lease, by or for
Lessee, or any third party. (See Addendum Paragraph 64)
(d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless
from and against any and all loss of rents and/or damages, liabilities,
judgments, claims, expenses, penalties, and attorneys' and consultants' fees
arising out of or involving any Hazardous Substance brought onto the Premises by
or for Lessee, or any third party (provided, however, that Lessee shall have no
liability under this Lease with respect to underground migration of any
Hazardous Substance under the Premises from adjacent properties). Lessee's
obligations shall include, but not be limited to, the effects of any
contamination or injury to person, property or the environment created or
suffered by Lessee, and the cost of investigation, removal, remediation,
restoration and/or abatement, and shall survive the expiration or termination of
this Lease. NO TERMINATION, CANCELLATION OR RELEASE AGREEMENT ENTERED INTO BY
LESSOR AND LESSEE SHALL RELEASE LESSEE FROM ITS OBLIGATIONS UNDER THIS LEASE
WITH RESPECT TO HAZARDOUS SUBSTANCES, UNLESS SPECIFICALLY SO AGREED BY LESSOR IN
WRITING AT THE TIME OF SUCH AGREEMENT. (See Addendum Paragraph 64)
(e) LESSOR INDEMNIFICATION. Lessor and its successors and assigns
shall indemnify, defend, reimburse and hold Lessee, its employees and lenders,
harmless from and against any and all environmental damages, including the cost
of remediation, which existed as a result of Hazardous Substances on the
Premises prior to the Start Date or which are caused by the gross negligence or
willful misconduct of Lessor, its agents or employees. Lessor's obligations, as
and when required by the Applicable Requirements, shall include, but not be
limited to, the cost of investigation, removal, remediation, restoration and/or
abatement, and shall survive the expiration or termination of this Lease.
(See Addendum Paragraph 64)
(f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the
responsibility and pay for any investigations or remediation measures required
by governmental entities having jurisdiction with respect to the existence of
Hazardous Substances on the Premises prior to the Start Date, unless such
remediation measure is required as a result of Lessee's use (including
"Alterations", as defined in Paragraph 7.3(a) below) of the Premises, in which
event Lessee shall be responsible for such payment. Lessee shall cooperate fully
in any such activities at the request of Lessor, including allowing Lessor and
Lessor's agents to have reasonable access to the Premises at reasonable times in
order to carry out Lessor's investigative and remedial responsibilities.
(See Addendum Paragraph 64)
(g) LESSOR TERMINATION OPTION. If a Hazardous Substance Condition
occurs during the term of this Lease, unless Lessee is legally responsible
therefor (in which case Lessee shall make the investigation and remediation
thereof required by the Applicable Requirements and this Lease shall continue in
full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and
Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and
remediate such Hazardous Substance Condition, if required, as soon as reasonably
possible at Lessor's expense, in which event this Lease shall continue in full
force and effect, or (ii) if the estimated cost to remediate such condition
exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is
greater, give written notice to Lessee, within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of
Lessor's desire to terminate this Lease as of the date sixty (60) days following
the date of such notice. In the event Lessor elects to give a termination
notice, Lessee may, within ten (10) days thereafter, give written notice to
Lessor of Lessee's commitment to pay the amount by which the cost of the
remediation of such Hazardous Substance Condition exceeds an amount equal to
twelve (12) times the then monthly Base Rent or $100,000, whichever is greater.
Lessee shall provide Lessor with said funds or satisfactory assurance thereof
within thirty (30) days following such commitment. In such event, this Lease
shall continue in full force and effect, and Lessor shall proceed to make such
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time provided, this Lease shall terminate as of the
date specified in Lessor's notice of termination. (See Addendum Paragraph 64)
6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as
otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully,
diligently and in a timely manner, materially comply with all Applicable
Requirements, the requirements of any applicable fire insurance underwriter or
rating bureau, and the recommendations of Lessor's engineers and/or consultants
which relate in any manner to the Premises, without regard to whether said
requirements are now in effect or become effective after the Start Date. Lessee
shall, within ten (10) days after receipt of Lessor's written request, provide
Lessor with copies of all permits and other documents, and other information
evidencing Lessee's compliance with any Applicable Requirements specified by
Lessor, and shall immediately upon receipt, notify Lessor in writing (with
copies of any documents involved) of any threatened or actual claim, notice,
citation, warning, complaint or report pertaining to or involving the failure of
Lessee or the Premises to comply with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's "Lender" (as defined
in Paragraph 30 below) and consultants shall have the right to enter into
Premises at any time, in the case of an emergency, and otherwise at reasonable
times, for the purpose of inspecting the condition of the Premises and for
verifying compliance by Lessee with this Lease. The cost of any such inspections
shall be paid by Lessor, unless a violation of Applicable Requirements, or a
contamination is found to exist or be imminent, or the inspection is requested
or ordered by a governmental authority. In such case, Lessee shall upon request
reimburse Lessor for the cost of such inspections, so long as such inspection is
reasonably related to the violation or contamination. (See Addendum Paragraph
65)
PAGE 3 of 13
<PAGE> 4
7. MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) IN GENERAL. Subject to the provisions of Paragraph 2.2
(Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable
Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14
(Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises,
Utility Installations, and Alterations in good order, condition and repair
(whether or not the portion of the Premises requiring repairs, or the means of
repairing the same, are reasonably or readily accessible to Lessee, and whether
or not the need for such repairs occurs as a result of Lessee's use, any prior
use, the elements or the age of such portion of the Premises), including, but
not limited to, all equipment or facilities, such as plumbing, heating,
ventilating, air-conditioning, electrical, lighting facilities, boilers,
pressure vessels, fire protection system, fixtures, walls (interior and
exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass,
skylights, landscaping, driveways, parking lots, fences, retaining walls, signs,
sidewalks and parkways located in, on, or adjacent to the Premises. Lessee, in
keeping the Premises in good order, condition and repair, shall exercise and
perform good maintenance practices, specifically including the procurement and
maintenance of the service contracts required by Paragraph 7.1(b) below.
Lessee's obligations shall include restorations, replacements or renewals when
necessary to keep the Premises and all improvements thereon or a part thereof in
good order, condition and state of repair. Lessee shall, during the term of this
Lease, keep the exterior appearance of the Building in a first-class condition
consistent with the exterior appearance of other similar facilities of
comparable age and size in the vicinity, including, when necessary, the exterior
repainting of the Building. (See Addendum Paragraph 66)
(b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense,
procure and maintain contracts, with copies to Lessor, in customary form and
substance for, and with contractors specializing and experienced in the
maintenance of the following equipment and improvements, if any, if and when
installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure
vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke
detection, (iv) landscaping and irrigation systems, (v) roof covering and
drains, (vi) driveways and parking lots, (vii) clarifiers (viii) basic utility
feed to the perimeter of the Building, and (ix) any other equipment, if
reasonably required by Lessor. (See Addendum Paragraph 66)
(c) REPLACEMENT. Subject to Lessee's indemnification of Lessor as
set forth in Paragraph 8.7 below, and without relieving Lessee of liability
resulting from Lessee's failure to exercise and perform good maintenance
practices, if the Basic Elements described in Paragraph 7.1(b) cannot be
repaired other than at a cost which is in excess of 50% of the cost of replacing
such Basic Elements, then such Basic Elements shall be replaced by Lessor, and
the cost thereof shall be prorated between the Parties and Lessee shall only be
obligated to pay, each month during the remainder of the term of this Lease, on
the date on which Base Rent is due, an amount equal to the product of
multiplying the cost of such replacement by a fraction, the numerator of which
is one, and the denominator of which is the number of months of the useful life
of such replacement as such useful life is specified pursuant to Federal income
tax regulations or guidelines for depreciation thereof (including interest on
the unamortized balance as is then commercially reasonable in the judgment of
Lessor's accountants), with Lessee reserving the right to prepay its obligation
at any time. (See Addendum Paragraph 66)
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs
2.2 (Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14
(Condemnation), it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the Premises, or
the equipment therein, all of which obligations are intended to be that of the
Lessee. It is the intention of the Parties that the terms of this Lease govern
the respective obligations of the Parties as to maintenance and repair of the
Premises, and they expressly waive the benefit of any statute now or hereafter
in effect to the extent it is inconsistent with the terms of this Lease.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(See Addendum Paragraph 66)
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" refers to all floor and window coverings, air lines, power
panels, electrical distribution, security and fire protection systems,
communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing
in or on the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery
and equipment that can be removed without doing material damage to the Premises.
The term "ALTERATIONS" shall mean any modification of the improvements, other
than Utility Installations or Trade Fixtures, whether by addition or deletion.
"LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make any Alterations or
Utility Installations to the Premises without Lessor's prior written consent.
Lessee may, however, make non-structural Utility Installations to the interior
of the Premises (excluding the roof) without such consent but upon notice to
Lessor, as long as they are not visible from the outside, do not involve
puncturing, relocating or removing the roof or any existing walls, and the
cumulative cost thereof during this Lease as extended does not exceed $50,000 in
the aggregate or $10,000 in any one year.
(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. Consent shall be deemed
conditioned upon Lessee's: (i) acquiring all applicable governmental permits,
(ii) furnishing Lessor with copies of both the permits and the plans and
specifications prior to commencement of the work, and (iii) compliance with all
conditions of said permits and other Applicable Requirements in a prompt and
expeditious manner. Any Alterations or Utility Installations shall be performed
in a workmanlike manner with good and sufficient materials. Lessee shall
promptly upon completion furnish Lessor with as-built plans and specifications.
For work which costs an amount equal to the greater of one month's Base Rent, or
$10,000, Lessor may condition its consent upon Lessee providing a lien and
completion bond in an amount equal to one and one-half times the estimated cost
of such Alteration or Utility Installation and/or upon Lessee's posting an
additional Security Deposit with Lessor.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanic's or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on or about the Premises, and Lessor shall have the
right to post notices of non-responsibility. If Lessee shall contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense defend and protect itself, Lessor and the Premises against the same and
shall pay and satisfy any such adverse judgment that may be rendered thereon
before the enforcement thereof. If Lessor shall require, Lessee shall furnish a
surety bond in an amount equal to one and one-half times the amount of such
contested lien, claim or demand, indemnifying Lessor against liability for the
same. If Lessor elects to participate in any such action, Lessee shall pay
Lessor's attorneys' fees and costs.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(See Addendum Paragraph 66)
(a) OWNERSHIP. Subject to Lessor's right to require removal or
elect ownership as hereinafter provided, all Alterations and Utility
Installations made by Lessee shall be the property of Lessee, but considered a
part of the Premises. Lessor may, at any time, elect in writing to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per Paragraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
termination of this Lease, become the property of Lessor and be surrendered by
Lessee with the Premises.
(b) REMOVAL. By delivery to Lessee of written notice from Lessor
not earlier than ninety (90) and not later than thirty (30) days prior to the
end of the term of this Lease, Lessor may require that any or all Lessee Owned
Alterations or Utility Installations be removed by the expiration or termination
of this Lease. Lessor may require the removal at any time of all or any part of
any Lessee Owned Alterations or Utility Installations made without the required
consent.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the Expiration Date or any earlier termination date, with all of the
improvements, parts and surfaces thereof broom clean and free of debris, and in
good operating order, condition and state of repair, ordinary wear and tear
excepted. "Ordinary wear and tear" shall not include any damage or deterioration
that would have been prevented by good maintenance practice. Lessee shall repair
any damage occasioned by the installation, maintenance or removal of Trade
Fixtures, Lessee Owned Alterations and/or Utility Installations, furnishings,
and equipment as well as the removal of any storage tank installed by or for
Lessee, and the removal, replacement, or remediation of any soil, material or
groundwater contaminated by Lessee. Trade Fixtures shall remain the property of
Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate
the Premises pursuant to this Paragraph 7.4(c) without the express written
consent of Lessor shall constitute a holdover under the provisions of Paragraph
26 below.
PAGE 4 of 13
<PAGE> 5
8. INSURANCE; INDEMNITY.
8.1 PAYMENT FOR INSURANCE. Lessee shall pay for all insurance
required under Paragraph 8 except to the extent of the cost attributable to
liability insurance carried by Lessor under Paragraph 8.2(b) in excess of
$2,000,000 per occurrence. Premiums for policy periods commencing prior to or
extending beyond the Lease term shall be prorated to correspond to the Lease
term. Payment shall be made by Lessee to Lessor within ten (10) days following
receipt of an invoice.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force a
Commercial General Liability Policy of Insurance protecting Lessee and Lessor
against claims for bodily injury, personal injury and property damage based upon
or arising out of the ownership, use, occupancy or maintenance of the Premises
and all areas appurtenant thereto. Such insurance shall be on an occurrence
basis providing single limit coverage in an amount not less than $2,000,000 per
occurrence with an "ADDITIONAL INSURED -- MANAGERS OR LESSORS OF PREMISES
ENDORSEMENT" and contain the "AMENDMENT OF THE POLLUTION EXCLUSION ENDORSEMENT"
for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall
not contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this Lease
as an "insured contract" for the performance of Lessee's indemnity obligations
under this Lease. The limits of said insurance shall not, however, limit the
liability of Lessee nor relieve Lessee of any obligation hereunder. All
insurance carried by Lessee shall be primary to and not contributory with any
similar insurance carried by Lessor, whose insurance shall be considered excess
insurance only.
(b) CARRIED BY LESSOR. Lessor shall maintain liability insurance
as described in Paragraph 8.2(a), in addition to, and not in lieu of, the
insurance required to be maintained by Lessee. Lessee shall not be named as an
additional insured therein.
8.3 PROPERTY INSURANCE -- BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain
and keep in force a policy or policies in the name of Lessor, with loss payable
to Lessor, any groundlessor, and to any Lender(s) insuring loss or damage to the
Premises. The amount of such insurance shall be equal to the full replacement
cost of the Premises, as the same shall exist from time to time, or the amount
required by any Lenders, but in no event more than the commercially reasonable
and available insurable value thereof. If Lessor is the Insuring Party, however,
Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's
personal property shall be insured by Lessee under Paragraph 8.4 rather than by
Lessor. If the coverage is available and commercially appropriate, such policy
or policies shall insure against all risks of direct physical loss or damage
(except the perils of flood and/or earthquake unless required by a Lender),
including coverage for debris removal and the enforcement of any Applicable
Requirements requiring the upgrading, demolition, reconstruction or replacement
of any portion of the Premises as the result of a covered loss. Said policy or
policies shall also contain an agreed valuation provision in lieu of any
coinsurance clause, waiver of subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage amount by a factor
of not less than the adjusted U.S. Department of Labor Consumer Price Index for
All Urban Consumers for the city nearest to where the Premises are located. If
such insurance coverage has a deductible clause, the deductible amount shall not
exceed $1,000 per occurrence, and Lessee shall be liable for such deductible
amount in the event of an Insured Loss. (See Addendum Paragraph 67)
(b) RENTAL VALUE. The Insuring Party shall obtain and keep in
force a policy or policies in the name of Lessor with loss payable to Lessor and
any Lender, insuring the loss of the full Rent for one (1) year. Said insurance
shall provide that in the event the Lease is terminated by reason of an insured
loss, the period of indemnity for such coverage shall be extended beyond the
date of the completion of repairs or replacement of the Premises, to provide for
one full year's loss of Rent from the date of any such loss. Said insurance
shall contain an agreed valuation provision in lieu of any coinsurance clause,
and the amount of coverage shall be adjusted annually to reflect the projected
Rent otherwise payable by Lessee, for the next twelve (12) month period. Lessee
shall be liable for any deductible amount in the event of such loss.
(See Addendum Paragraph 67)
(c) ADJACENT PREMISES. If the Premises are part of a larger
building, or of a group of buildings owned by Lessor which are adjacent to the
Premises, the Lessee shall pay for any increase in the premiums for the property
insurance of such building or buildings if said increase is caused by Lessee's
acts, omissions, use or occupancy of the Premises. (See Addendum Paragraph 67)
8.4 LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE.
(a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned
Alterations and Utility Installations. Such insurance shall be full replacement
cost coverage with a deductible of not to exceed $1,000 per occurrence. The
proceeds from any such insurance shall be used by Lessee for the replacement of
personal property, Trade Fixtures and Lessee Owned Alterations and Utility
Installations. Lessee shall provide Lessor with written evidence that such
insurance is in force.
(b) BUSINESS INTERRUPTION. Lessee shall obtain and maintain loss
of income and extra expense insurance in amounts as will reimburse Lessee for
direct or indirect loss of earnings attributable to all perils commonly insured
against by prudent lessees in the business of Lessee or attributable to
prevention of access to the Premises as a result of such perils.
(c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.
8.5 INSURANCE POLICIES. Insurance required herein shall be by
companies duly licensed or admitted to transact business in the state where the
Premises are located, and maintaining during the policy term a "General
Policyholders Rating" of at least B+, V, as set forth in the most current issue
of "Best's Insurance Guide", or such other rating as may be required by a
Lender. Lessee shall not do or permit to be done anything which invalidates the
required insurance policies. Lessee shall, prior to the Start Date, deliver to
Lessor certified copies of policies of such insurance or certificates evidencing
the existence and amounts of the required insurance. No such policy shall be
cancelable or subject to modification except after thirty (30) days prior
written notice to Lessor. Lessee shall, at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Lessor may order such
insurance and charge the cost thereof to Lessee, which amount shall be payable
by Lessee to Lessor upon demand. Such policies shall be for a term of at least
one year, or the length of the remaining term of this Lease, whichever is less.
If either Party shall fail to procure and maintain the insurance required to be
carried by it, the other Party may, but shall not be required to, procure and
maintain the same.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages against the other, for loss of or damage
to its property arising out of or incident to the perils required to be insured
against herein. The effect of such releases and waivers is not limited by the
amount of insurance carried or required, or by any deductibles applicable
hereto. The Parties agree to have their respective property damage insurance
carriers waive any right to subrogation that such companies may have against
Lessor or Lessee, as the case may be, so long as the insurance is not
invalidated thereby.
8.7 INDEMNITY. Except for Lessor's gross negligence or willful
misconduct, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or
liabilities arising out of, involving, or in connection with, the use and/or
occupancy of the Premises by Lessee. If any action or proceeding is brought
against Lessor by reason of any of the foregoing matters, Lessee shall upon
notice defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not
have first paid any such claim in order to be defended or indemnified.
(See Addendum Paragraph 67)
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable
for injury or damage to the person or goods, wares, merchandise or other
property of Lessee, Lessee's employees, contractors, invitees, customers, or any
other person in or about the Premises, whether such damage or injury is caused
by or results from fire, steam, electricity, gas, water or rain, or from the
breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause,
whether the said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, or from other sources or places. Lessor shall not be liable for any
damages arising from any act or neglect of any other tenant of Lessor.
Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under
no circumstances be liable for injury to Lessee's business or for any loss of
income or profit therefrom. (See Addendum Paragraph 67)
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction
to the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, which can reasonably be repaired in six (6) months or
less from the date of the damage or destruction.
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Lessor shall notify Lessee in writing within thirty (30) days from the date of
the damage or destruction as to whether or not the damage is Partial or Total.
(See Addendum Paragraph 68)
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or
destruction to the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which cannot reasonably be repaired in six (6)
months or less from the date of the damage or destruction. Lessor shall notify
Lessee in writing within thirty (30) days from the date of the damage or
destruction as to whether or not the damage is Partial or Total. (See Addendum
Paragraph 68)
(c) "INSURED LOSS" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which was caused by an event required to be
covered by the insurance described in Paragraph 8.3(a), irrespective of any
deductible amounts or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of Applicable Requirements, and
without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PARTIAL DAMAGE -- INSURED LOSS. If a Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair
such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and
Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect; provided, however, that Lessee shall, at
Lessor's election, make the repair of any damage or destruction the total cost
to repair of which is $10,000 or less, and, in such event, Lessor shall make any
applicable insurance proceeds available to Lessee on a reasonable basis for that
purpose. Notwithstanding the foregoing, if the required insurance was not in
force or the insurance proceeds are not sufficient to effect such repair, the
Insuring Party shall promptly contribute the shortage in proceeds (except as to
the deductible which is Lessee's responsibility) as and when required to
complete said repairs. In the event, however, such shortage was due to the fact
that, by reason of the unique nature of the improvements, full replacement cost
insurance coverage was not commercially reasonable and available, Lessor shall
have no obligation to pay for the shortage in insurance proceeds or to fully
restore the unique aspects of the Premises unless Lessee provides Lessor with
the funds to cover same, or adequate assurance thereof, within ten (10) days
following receipt of written notice of such shortage and request therefor. If
Lessor receives said funds or adequate assurance thereof within said ten (10)
day period, the party responsible for making the repairs shall complete them as
soon as reasonably possible and this Lease shall remain in full force and
effect. If such funds or assurance are not received, Lessor may nevertheless
elect by written notice to Lessee within ten (10) days thereafter to: (i) make
such restoration and repair as is commercially reasonable with Lessor paying any
shortage in proceeds, in which case this Lease shall remain in full force and
effect, or have this Lease terminate thirty (30) days thereafter. Lessee shall
not be entitled to reimbursement of any funds contributed by Lessee to repair
any such damage or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be
some insurance coverage, but the net proceeds of any such insurance shall be
made available for the repairs if made by either Party. (See Addendum
Paragraph 68)
9.3 PARTIAL DAMAGE -- UNINSURED LOSS. If a Premises Partial Damage
that is not an Insured Loss occurs, unless caused by a negligent or willful act
of Lessee (in which event Lessee shall make the repairs at Lessee's expense),
Lessor may either: (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) terminate this Lease by giving written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
damage. Such termination shall be effective sixty (60) days following the date
of such notice. In the event Lessor elects to terminate this Lease, Lessee shall
have the right within ten (10) days after receipt of the termination notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage without reimbursement from Lessor. Lessee shall provide Lessor with
said funds or satisfactory assurance thereof within thirty (30) days after
making such commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not make the
required commitment, this Lease shall terminate as of the date specified in the
termination notice. (See Addendum Paragraph 68)
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof,
if a Premises Total Destruction occurs, this Lease shall terminate sixty (60)
days following such Destruction. If the damage or destruction was caused by the
gross negligence or willful misconduct of Lessee, Lessor shall have the right to
recover Lessor's damages from Lessee, except as provided in Paragraph 8.6.
(See Addendum Paragraph 68)
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of this Lease there is damage for which the cost to repair exceeds one
(1) month's Base Rent, whether or not an Insured Loss, Lessor may terminate this
Lease effective sixty (60) days following the date of occurrence of such damage
by giving a written termination notice to Lessee within thirty (30) days after
the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee
at that time has an exercisable option to extend this Lease or to purchase the
Premises, then Lessee may preserve this Lease by, (a) exercising such option and
(b) providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs on or before the earlier of (i)
the date which is ten days after Lessee's receipt of Lessor's written notice
purporting to terminate this Lease, or (ii) the day prior to the date upon which
such option expires. If Lessee duly exercises such option during such period and
provides Lessor with funds (or adequate assurance thereof) to cover any shortage
in insurance proceeds, Lessor shall, at Lessor's commercially reasonable
expense, repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option and
provide such funds or assurance during such period, then this Lease shall
terminate on the date specified in the termination notice and Lessee's option
shall be extinguished. (See Addendum Paragraph 68)
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (See Addendum
Paragraph 68)
(a) ABATEMENT. In the event of Premises Partial Damage or
Premises Total Destruction or a Hazardous Substance Condition for which Lessee
is not responsible under this Lease, the Rent payable by Lessee for the period
required for the repair, remediation or restoration of such damage shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired, but not to exceed the proceeds received from the Rental Value
insurance. All other obligations of Lessee hereunder shall be performed by
Lessee, and Lessor shall have no liability for any such damage, destruction,
remediation, repair or restoration except as provided herein. (See Addendum
Paragraph 68)
(b) REMEDIES. If Lessor shall be obligated to repair or restore
the Premises and does not commence, in a substantial and meaningful way, such
repair or restoration within ninety (90) days after such obligation shall
accrue, Lessee may, at any time prior to the commencement of such repair or
restoration, give written notice to Lessor and to any Lenders of which Lessee
has actual notice, of Lessee's election to terminate this Lease on a date not
less than sixty (60) days following the giving of such notice. If Lessee gives
such notice and such repair or restoration is not commenced within thirty (30)
days thereafter, this Lease shall terminate as of the date specified in said
notice. If the repair or restoration is commenced within said thirty (30) days,
this Lease shall continue in full force and effect. "COMMENCE" shall mean either
the unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first occurs. (See
Addendum Paragraph 68)
9.7 TERMINATION -- ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be
made concerning advance Base Rent and any other advance payments made by Lessee
to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's
Security Deposit as has not been, or is not then required to be, used by Lessor.
9.8 WAIVE STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this Lease and hereby waive the provisions of
any present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term
"REAL PROPERTY TAXES" shall include any form of assessment; real estate,
general, special, ordinary or extraordinary, or rental levy or tax (other than
inheritance, personal income or estate taxes); improvement bond; and/or license
fee imposed upon or levied against any legal or equitable interest of Lessor in
the Premises, Lessor's right to other income therefrom, and/or Lessor's business
of leasing, by any authority having the direct or indirect power to tax and
where the
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funds are generated with reference to the Building address and where the
proceeds so generated are to be applied by the city, county or other local
taxing authority of a jurisdiction within which the Premises are located. The
term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or
charge, or any increase therein, imposed by reason of events occurring during
the term of this Lease, including but not limited to, a change in the ownership
of the Premises. (See Addendum Paragraph 69)
10.2
(a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes
applicable to the Premises during the term of this Lease. Subject to Paragraph
10.2(b), all such payments shall be made at least ten (10) days prior to any
delinquency date. Lessee shall promptly furnish Lessor with satisfactory
evidence that such taxes have been paid. If any such taxes shall cover any
period of time prior to or after the expiration or termination of this Lease,
Lessee's share of such taxes shall be prorated to cover only that portion of the
tax bill applicable to the period that this Lease is in effect, and Lessor shall
reimburse Lessee for any overpayment. If Lessee shall fail to pay any required
Real Property Taxes, Lessor shall have the right to pay the same, and Lessee
shall reimburse Lessor therefor upon demand.
(b) ADVANCE PAYMENT. In the event Lessee incurs a late charge on
any Rent payment, Lessor may, at Lessor's option, estimate the current Real
Property Taxes, and require that such taxes be paid in advance to Lessor by
Lessee, either: (i) in a lump sum amount equal to the installment due, at least
twenty (20) days prior to the applicable delinquency date, or (ii) monthly in
advance with the payment of the Base Rent. If Lessor elects to require payment
monthly in advance, the monthly payment shall be an amount equal to the amount
of the estimated installment of taxes divided by the number of months remaining
before the month in which said installment becomes delinquent. When the actual
amount of the applicable tax bill is known, the amount of such equal monthly
advance payments shall be adjusted as required to provide the funds needed to
pay the applicable taxes. If the amount collected by Lessor is insufficient to
pay such Real Property Taxes when due, Lessee shall pay Lessor, upon demand,
such additional sums as are necessary to pay such obligations. All monies paid
to Lessor under this Paragraph may be intermingled with other monies of Lessor
and shall not bear interest. In the event of a Breach by Lessee in the
performance of its obligations under this Lease, then any balance of funds paid
to Lessor under the provisions of this Paragraph may, at the option of Lessor,
be treated as an additional Security Deposit.
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be conclusively determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available. (See Addendum Paragraph 69)
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay, prior to delinquency,
all taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee. When possible, Lessee shall cause such property to be assessed and
billed separately from the real property of Lessor. If any of Lessee's said
personal property shall be assessed with Lessor's real property, Lessee shall
pay Lessor the taxes attributable to Lessee's property within ten (10) days
after receipt of a written statement.
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered. (See Addendum
Paragraph 70)
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or encumber (collectively, "ASSIGN OR ASSIGNMENT") or sublet
all or any part of Lessee's interest in this Lease or in the Premises without
Lessor's prior written consent.
(b) A change in the control of Lessee shall constitute an
assignment requiring consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose. (See Addendum Paragraph 71)
(c) The involvement of Lessee or its assets in any transaction,
or series of transactions (by way of merger, sale, acquisition, financing,
transfer, leveraged buy-out or otherwise), whether or not a formal assignment or
hypothecation of this Lease or Lessee's assets occurs, which results or will
result in a reduction of the Net Worth of Lessee by an amount greater than
twenty-five percent (25%) of such Net Worth as it was represented at the time of
the execution of this Lease or at the time of the most recent assignment to
which Lessor has consented, or as it exists immediately prior to said
transaction or transactions constituting such reduction, whichever was or is
greater, shall be considered an assignment of this Lease to which Lessor may
withhold its consent. "NET WORTH OF LESSEE" shall mean the net worth of Lessee
(excluding any guarantors) established under generally accepted accounting
principles. (See Addendum Paragraph 71)
(d) An assignment or subletting without consent shall, at
Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a
noncurable Breach without the necessity of any notice and grace period. If
Lessor elects to treat such unapproved assignment or subletting as a noncurable
Breach, Lessor may either: (i) terminate this Lease, or (ii) upon thirty (30)
days written notice, increase the monthly Base Rent to one hundred ten percent
(110%) of the Base Rent then in effect. Further, in the event of such Breach and
rental adjustment, (i) the purchase price of any option to purchase the Premises
held by Lessee shall be subject to similar adjustment to one hundred ten percent
(110%) of the price previously in effect, and (ii) all fixed and non-fixed
rental adjustments scheduled during the remainder of the Lease term shall be
increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent.
(See Addendum Paragraph 71)
(e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
(See Addendum Paragraph 71)
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease; (ii)
release Lessee of any obligations hereunder; or (iii) alter the primary
liability of Lessee for the payment of Rent or for the performance of any other
obligations to be performed by Lessee.
(b) Lessor may accept Rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of Rent or performance shall constitute a waiver or estoppel
of Lessor's right to exercise its remedies for Lessee's Default or Breach.
(c) Lessor's consent to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting.
(d) In the event of any Default or Breach by Lessee, Lessor may
proceed directly against Lessee, any Guarantors or anyone else responsible for
the performance of Lessee's obligations under this Lease, including any assignee
or sublessee, without first exhausting Lessor's remedies against any other
person or entity responsible therefore to Lessor, or any security held by
Lessor.
(e) Each request for consent to an assignment or subletting
shall be in writing, accompanied by information relevant to Lessor's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or sublessee, including but not limited
to the intended use and/or required modification of the Premises, if any,
together with a fee of $1,000 or ten percent (10%) of the current monthly Base
Rent applicable to the portion of the Premises which is the subject of the
proposed assignment or sublease, whichever is greater, as consideration for
Lessor's considering and processing said request. Lessee agrees to provide
Lessor with such other or additional information and/or documentation as may be
reasonably requested. (See Addendum Paragraph 71)
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed to
have assumed and agreed to conform and comply with each and every term,
covenant, condition and obligation herein to be observed or performed by Lessee
during the term of said assignment or sublease, other than such obligations as
are contrary to or inconsistent with provisions of an assignment or sublease to
which Lessor has specifically consented to in writing.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. (See
Addendum Paragraph 71) The following terms and conditions shall apply to any
subletting by Lessee of all or any part of the Premises and shall be deemed
included in all subleases under this Lease whether or not expressly incorporated
therein:
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all Rent payable on any sublease, and Lessor may collect
such Rent and apply same toward Lessee's obligations under this Lease; provided,
however, that until a Breach shall occur in the performance of Lessee's
obligations, Lessee may collect said Rent. Lessor shall not, by reason of the
foregoing or any assignment of such sublease, nor by reason of the collection of
Rent, be deemed liable to the sublessee for any failure of Lessee to perform and
comply with any of Lessee's obligations to such sublessee. Lessee hereby
irrevocably authorizes and directs any such sublessee, upon receipt of a written
PAGE 7 of 13
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notice from Lessor stating that a Breach exists in the performance of Lessee's
obligations under this Lease, to pay to Lessor all Rent due and to become due
under the sublease. Sublessee shall rely upon any such notice from Lessor and
shall pay all Rents to Lessor without any obligation or right to inquire as to
whether such Breach exists, notwithstanding any claim from Lessee to the
contrary.
(b) In the event of a Breach by Lessee, Lessor may, at its
option, require sublessee to attorn to Lessor, in which event Lessor shall
undertake the obligations of the sublessor under such sublease from the time of
the exercise of said option to the expiration of such sublease; provided,
however, Lessor shall not be liable for any prepaid rents or security deposit
paid by such sublessee to such sublessor or for any prior Defaults or Breaches
of such sublessor.
(c) Any matter requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor.
(d) No sublessee shall further assign or sublet all or any part
of the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure the Default
of Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against Lessee
for any such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the
Lessee to comply with or perform any of the terms, covenants, conditions or
rules under this Lease. A "BREACH" is defined as the occurrence of one or more
of the following Defaults, and the failure of Lessee to cure such Default within
any applicable grace period:
(a) The abandonment of the Premises; or the vacating of the
Premises without providing a commercially reasonable level of security, or where
the coverage of the property insurance described in Paragraph 8.3 is jeopardized
as a result thereof, or without providing reasonable assurances to minimize
potential vandalism. (See Addendum Paragraph 72)
(b) The failure of Lessee to make any payment of Rent or any
Security Deposit required to be made by Lessee hereunder, whether to Lessor or
to a third party, when due, to provide reasonable evidence of insurance or
surety bond, or to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of three
(3) business days following written notice to Lessee. (See Addendum Paragraph
72)
(c) The failure by Lessee to provide (i) reasonable written
evidence of compliance with Applicable Requirements, (ii) the service contracts,
(iii) the rescission of an unauthorized assignment or subletting, (iv) a Tenancy
Statement, (v) a requested subordination, (vi) evidence concerning any guaranty
and/or Guarantor, (vii) any document requested under Paragraph 42 (easements),
or (viii) any other documentation or information which Lessor may reasonably
require of Lessee under the terms of this Lease, where any such failure
continues for a period of ten (10) days following written notice to Lessee.
(See Addendum Paragraph 72)
(d) A Default by Lessee as to the terms, covenants, conditions
or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
other than those described in subparagraphs 13.1(a), (b) or (c), above, where
such Default continues for a period of thirty (30) days after written notice;
provided, however, that if the nature of Lessee's Default is such that more than
thirty (30) days are reasonably required for its cure, then it shall not be
deemed to be a Breach if Lessee commences such cure within said thirty (30) day
period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the
making of any general arrangement or assignment for the benefit of creditors;
(ii) becoming a "DEBTOR" as defined in 11 U.S.C. Section 101 or any successor
statute thereto (unless, in the case of a petition filed against Lessee, the
same is dismissed within sixty (60) days); (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within thirty (30) days; or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days; provided, however, in the event that any
provision of this subparagraph 13.1 (e) is contrary to any applicable law, such
provision shall be of no force or effect, and not affect the validity of the
remaining provisions. (See Addendum Paragraph 72)
(f) The discovery that any financial statement of Lessee or of
any Guarantor given to Lessor was materially false.
(g) If the performance of Lessee's obligations under this Lease
is guaranteed: (i) the death of a Guarantor; (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance with
the terms of such guaranty; (iii) a Guarantor's becoming insolvent or the
subject of a bankruptcy filing; (iv) a Guarantor's refusal to honor the
guaranty; or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory basis, and Lessee's failure, within sixty (60) days following
written notice of any such event, to provide written alternative assurance or
security, which, when coupled with the then existing resources of Lessee, equals
or exceeds the combined financial resources of Lessee and the Guarantors that
existed at the time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any of its affirmative
duties or obligations, within ten (10) days after written notice (or in case of
an emergency, without notice), Lessor may, at its option, perform such duty or
obligation on Lessee's behalf, including but not limited to the obtaining of
reasonably required bonds, insurance policies, or governmental licenses, permits
or approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee upon receipt of invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be made by Lessee to
be by cashier's check. In the event of a Breach, Lessor may, with or without
further notice or demand, and without limiting Lessor in the exercise of any
right or remedy which Lessor may have by reason of such Breach:
(a) Terminate Lessee's right to possession of the Premises by
any lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
the time of termination; (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of the District within which the Premises are located
at the time of award plus one percent (1%). Efforts by Lessor to mitigate
damages caused by Lessee's Breach of this Lease shall not waive Lessor's right
to recover damages under Paragraph 12. If termination of this Lease is obtained
through the provisional remedy of unlawful detainer, Lessor shall have the right
to recover in such proceeding any unpaid Rent and damages as are recoverable
therein, or Lessor may reserve the right to recover all or any part thereof in a
separate suit. If a notice and grace period required under Paragraph 13.1 was
not previously given, a notice to pay rent or quit, or to perform or quit given
to Lessee under the unlawful detainer statute shall also constitute the notice
required by Paragraph 13.1. In such case, the applicable grace period required
by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and
the failure of Lessee to cure the Default within the greater of the two such
grace periods shall constitute both an unlawful detainer and a Breach of this
Lease entitling Lessor to the remedies provided for in this Lease and/or by said
statute.
(b) Continue the Lease and Lessee's right to possession and
recover the Rent as it becomes due, in which event Lessee may sublet or assign,
subject only to reasonable limitations. Acts of maintenance, efforts to relet,
and/or the appointment of a receiver to protect the Lessor's interests, shall
not constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available under the
laws or judicial decisions of the state wherein the Premises are located. The
expiration or termination of this Lease and/or the termination of Lessee's right
to possession shall not relieve Lessee from liability under any indemnity
provisions of this Lease as to matters occurring or accruing during the term
hereof or by reason of Lessee's occupancy of the Premises.
PAGE 8 of 13
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13.3 INDUCEMENT RECAPTURE. Any agreement for free or abated rent or
other charges, or for the giving or paying by Lessor to or for Lessee of any
cash or other bonus, inducement or consideration for Lessee's entering into this
Lease, all of which concessions are hereinafter referred to as "INDUCEMENT
PROVISIONS," shall be deemed conditioned upon Lessee's full and faithful
performance of all of the terms, covenants and conditions of this Lease. Upon
Breach of this Lease by Lessee, any such Inducement Provision shall
automatically be deemed deleted from this Lease and of no further force or
effect, and any rent, other charge, bonus, inducement or consideration
theretofore abated, given or paid by Lessor under such an Inducement Provision
shall be immediately due and payable by Lessee to Lessor, notwithstanding any
subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or
the cure of the Breach which initiated the operation of this paragraph shall not
be deemed a waiver by Lessor of the provisions of this paragraph unless
specifically so stated in writing by Lessor at the time of such acceptance.
(See Addendum Paragraph 72)
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease,
the exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent
shall not be received by Lessor within five (5) days after such amount shall be
due, then, without any requirement for notice to Lessee, Lessee shall pay to
Lessor a one-time late charge equal to ten percent (10%) of each such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of such late
payment. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent the exercise of any of the other rights and remedies granted hereunder.
In the event that a late charge is payable hereunder, whether or not collected,
for three (3) consecutive installments of Base Rent, then notwithstanding any
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance. (See Addendum Paragraph 72)
13.5 INTEREST. Any monetary payment due Lessor hereunder, other than
late charges, not received by Lessor, when due as to scheduled payments (such as
Base Rent) or within thirty (30) days following the date on which it was due for
non-scheduled payment, shall bear interest from the date when due, as to
scheduled payments, or the thirty-first (31st) day after it was due as to
non-scheduled payments. The interest ("INTEREST") charged shall be equal to the
prime rate reported in the Wall Street Journal as published closest prior to the
date when due plus four percent (4%), but shall not exceed the maximum rate
allowed by law. Interest is payable in addition to the potential late charge
provided for in Paragraph 13.4. (See Addendum Paragraph 72)
13.6 BREACH BY LESSOR.
(a) NOTICE OF BREACH. Lessor shall not be deemed in breach of
this Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and any Lender whose name and address shall have been furnished Lessee in
writing for such purpose, of written notice specifying wherein such obligation
of Lessor has not been performed; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days are reasonably
required for its performance, then Lessor shall not be in breach if performance
is commenced within such thirty (30) day period and thereafter diligently
pursued to completion. (See Addendum Paragraph 72)
(b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event that
neither Lessor nor Lender cures said breach within thirty (30) days after
receipt of said notice, or if having commenced said cure they do not diligently
pursue it to completion, then Lessee may elect to cure said breach at Lessee's
expense and offset from Rent an amount equal to the greater of one month's Base
Rent or the Security Deposit, and to pay an excess of such expense under
protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall
document the cost of said cure and supply said documentation to Lessor.
(See Addendum Paragraph 72)
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(collectively "CONDEMNATION"), this Lease shall terminate as to the part taken
as of the date the condemning authority takes title or possession, whichever
first occurs. If more than ten percent (10%) of any building portion of the
premises, or more than twenty-five percent (25%) of the land area portion of the
premises not occupied by any building, is taken by Condemnation, Lessee may, at
Lessee's option, to be exercised in writing within ten (10) days after Lessor
shall have given Lessee written notice of such taking (or in the absence of such
notice, within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in proportion
to the reduction in utility of the Premises caused by such Condemnation.
Condemnation awards and/or payments shall be the property of Lessor, whether
such award shall be made as compensation for diminution in value of the
leasehold, the value of the part taken, or for severance damages; provided,
however, that Lessee shall be entitled to any compensation for Lessee's
relocation expenses, loss of business goodwill and/or Trade Fixtures, without
regard to whether or not this Lease is terminated pursuant to the provisions of
this Paragraph. All Alterations and Utility Installations made to the Premises
by Lessee, for purposes of Condemnation only, shall be considered the property
of the Lessee and Lessee shall be entitled to any and all compensation which is
payable therefor. In the event that this Lease is not terminated by reason of
the Condemnation, Lessor shall repair any damage to the Premises caused by such
condemnation. (See Addendum Paragraph 73)
15. BROKERS' FEE.
15.1 ADDITIONAL COMMISSION. In addition to the payments owed pursuant
to Paragraph 1.10 above, and unless Lessor and the Brokers otherwise agree in
writing, Lessor agrees that: (a) if Lessee exercises any Option, (b) if Lessee
acquires any rights to the Premises or other premises owned by Lessor and
located within the same Project, if any, within which the Premises is located,
(c) if Lessee remains in possession of the Premises, with the consent of Lessor,
after the expiration of this Lease, or (d) if Base Rent is increased, whether by
agreement or operation of an escalation clause herein, then, Lessor shall pay
Brokers a fee in accordance with the schedule of said Brokers in effect at the
time of the execution of this Lease.
15.2 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's
interest in this Lease shall be deemed to have assumed Lessor's obligation
hereunder. Each Broker shall be a third party beneficiary of the provisions of
Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to a Broker any amounts
due as and for commissions pertaining to this Lease when due, then such amounts
shall accrue Interest. In addition, if Lessor fails to pay any amounts to
Lessee's Broker when due, Lessee's Broker may send written notice to Lessor and
Lessee of such failure and if Lessor fails to pay such amounts within ten (10)
days after said notice, Lessee shall pay said monies to its Broker and offset
such amounts against Rent. In addition, Lessee's Broker shall be deemed to be a
third party beneficiary of any commission agreement entered into by and/or
between Lessor and Lessor's Broker.
15.3 REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS. Lessee
and Lessor each represent and warrant to the other that it has had no dealings
with any person, firm, broker or finder (other than the Brokers, if any) in
connection with this Lease, and that no one other than said named Brokers is
entitled to any commission or finder's fee in connection herewith. Lessee and
Lessor do each hereby agree to indemnify, protect, defend and hold the other
harmless from and against liability for compensation or charges which may be
claimed by any such unnamed broker, finder or other similar party by reason of
any dealings or actions of the indemnifying Party, including any costs,
expenses, attorneys' fees reasonably incurred with respect thereto.
16. ESTOPPEL CERTIFICATES.
(a) Each Party (as "RESPONDING PARTY") shall within ten (10)
days after written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "ESTOPPEL CERTIFICATE" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party. (See Addendum Paragraph 74)
(b) If the Responding Party shall fail to execute or deliver the
Estoppel Certificate within such ten day period, the Requesting Party may
execute an Estoppel Certificate stating that: (i) the Lease is in full force and
effect without modification except as may be represented by the Requesting
Party, (ii) there are no uncured defaults in the Requesting Party's performance,
and (iii) if Lessor is the Requesting Party, not more than one month's rent has
been paid in advance. Prospective purchasers and encumbrancers may rely upon the
Requesting Party's Estoppel Certificate, and the Responding Party shall be
estopped from denying the truth of the facts contained in said Certificate.
(See Addendum Paragraph 74)
PAGE 9 of 13
<PAGE> 10
(c) If Lessor desires to finance, refinance, or sell the Premises, or any part
thereof, Lessee and all Guarantors shall deliver to any potential lender or
purchaser designated by Lessor such financial statements as may be reasonably
required by such lender or purchaser, including, but not limited to Lessee's
financial statements for the past three (3) years. All such financial statements
shall be received by Lessor and such lender or purchaser in confidence and shall
be used only for the purposes herein set forth. (See Addendum Paragraph 74)
17. DEFINITION OF LESSOR. The term "LESSOR" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or, if
this is a sublease, of the Lessee's interest in the prior lease. In the event of
a transfer of Lessor's title or interest in the Premises or this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid, the
prior Lessor shall be relieved of all liability with respect to the obligations
and/or covenants under this Lease thereafter to be performed by the Lessor.
Subject to the foregoing, the obligations and/or covenants in this Lease to be
performed by the Lessor shall be binding only upon the Lessor as hereinabove
defined. Notwithstanding the above, and subject to the provisions of Paragraph
20 below, the original Lessor under this Lease, and all subsequent holders of
the Lessor's interest in this Lease shall remain liable and responsible with
regard to the potential duties and liabilities of Lessor pertaining to Hazardous
Substances as outlined in Paragraph 6 above.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. DAYS. Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and refer to calendar days.
20. LIMITATION ON LIABILITY. Subject to the provisions of Paragraph 17
above, the obligations of Lessor under this Lease shall not constitute personal
obligations of Lessor, the individual partners of Lessor or its or their
individual partners, directors, officers or shareholders, and Lessee shall look
to the Premises, and to no other assets of Lessor, for the satisfaction of any
liability of Lessor with respect to this Lease, and shall not seek recourse
against the individual partners of Lessor, or its or their individual partners,
directors, officers or shareholders, or any of their personal assets for such
satisfaction.
21. TIME OF ESSENCE. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this Lease.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. The liability (including court costs and Attorneys'
fees), of any Broker with respect to negotiation, execution, delivery or
performance by either Lessor or Lessee under this Lease or any amendment or
modification hereto shall be limited to an amount up to the fee received by such
Broker pursuant to this Lease; provided, however, that the foregoing limitation
on each Broker's liability shall not be applicable to any gross negligence or
willful misconduct of such Broker.
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted
by this Lease shall be in writing and may be delivered in person (by hand or by
courier) or may be sent by regular, certified or registered mail or U.S. Postal
Service Express Mail, with postage prepaid, or by facsimile transmission, and
shall be deemed sufficiently given if served in a manner specified in this
Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease
shall be that Party's address for delivery or mailing of notices. Either Party
may by written notice to the other specify a different address for notice,
except that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for notice. A copy of all notices to Lessor shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate in writing. (See Addendum
Paragraph 89)
23.2 DATE OF NOTICE. Any notice sent by registered or
certified mail, return receipt requested, shall be deemed given on the date of
delivery shown on the receipt card, or if no delivery date is shown, the
postmark thereon. If sent by regular mail the notice shall be deemed given
forty-eight (48) hours after the same is addressed as required herein and mailed
with postage prepaid. Notices delivered by United States Express Mail or
overnight courier that guarantee next day delivery shall be deemed given
twenty-four (24) hours after delivery of the same to the Postal Service or
courier. Notices transmitted by facsimile transmission or similar means shall be
deemed delivered upon telephone confirmation of receipt, provided a copy is also
delivered via delivery or mail. If notice is received on a Saturday, Sunday or
legal holiday, it shall be deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or similar
act by Lessee, or be construed as the basis of an estoppel to enforce the
provision or provisions of this Lease requiring such consent. The acceptance of
Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any
payment by Lessee may be accepted by Lessor on account of moneys or damages due
Lessor, notwithstanding any qualifying statements or conditions made by Lessee
in connection therewith, which such statements and/or conditions shall be of no
force or effect whatsoever unless specifically agreed to in writing by Lessor at
or before the time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
one hundred fifty percent (150%) of the Base Rent applicable during the month
immediately preceding the expiration or termination. Nothing contained herein
shall be construed as consent by Lessor to any holding over by Lessee.
(See Addendum Paragraph 75)
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of
this Lease to be observed or performed by Lessee are both covenants and
conditions. In construing this Lease, all headings and titles are for the
convenience of the parties only and shall not be considered a part of this
Lease. Whenever required by the context, the singular shall include the plural
and vice versa. This Lease shall not be construed as if prepared by one of the
parties, but rather according to its fair meaning as a whole, as if both parties
had prepared it.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed upon the Premises, to any and all advances made on the security
thereof, and to all renewals, modifications, and extensions thereof. Lessee
agrees that the holders of any such Security Devices (in this Lease together
referred to as "Lessor's Lender") shall have no liability or obligation to
perform any of the obligations of Lessor under this Lease. Any Lender may elect
to have this Lease and/or any Option granted hereby superior to the lien of its
Security Device by giving written notice thereof to Lessee, whereupon this Lease
and such Options shall be deemed prior to such Security Device, notwithstanding
the relative dates of the documentation or recordation thereof.
(See Addendum Paragraph 76)
30.2 ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure,
PAGE 10 of 13
<PAGE> 11
such new owner shall not: (i) be liable for any act or omission of any prior
lessor or with respect to events occurring prior to acquisition of ownership;
(ii) be subject to any offsets or defenses which Lessee might have against any
prior lessor; or (iii) be bound by prepayment of more than one (1) month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into
by Lessor after the execution of this Lease, Lessee's subordination of this
Lease shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "NON-DISTURBANCE AGREEMENT") from the Lender which Non-Disturbance
Agreement provides that Lessee's possession of the Premises, and this Lease,
including any options to extend the term hereof, will not be disturbed so long
as Lessee is not in Breach hereof and attorns to the record owner of the
Premises. Further, within sixty (60) days after the execution of this Lease,
Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance
Agreement from the holder of any pre-existing Security Device which is secured
by the Premises. In the event that Lessor is unable to provide the
Non-Disturbance Agreement within said sixty (60) days, then Lessee may, at
Lessee's option, directly contact Lessor's lender and attempt to negotiate for
the execution and delivery of a Non-Disturbance Agreement.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that, upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of the Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document any
subordination, attornment and/or Non-Disturbance Agreement provided for herein.
31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding
involving the Premises to enforce the terms hereof or to declare rights
hereunder, the Prevailing Party (as hereafter defined) in any such proceeding,
action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such
fees may be awarded in the same suit or recovered in a separate suit, whether or
not such action or proceeding is pursued to decision or judgment. The term,
"PREVAILING PARTY" shall include, without limitation, a Party or Broker who
substantially obtains or defeats the relief sought, as the case may be, whether
by compromise, settlement, judgment, or the abandonment by the other Party or
Broker of its claim or defense. The attorneys' fees award shall not be computed
in accordance with any court fee schedule, but shall be such as to fully
reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall be
entitled to attorneys' fees, costs and expenses incurred in the preparation and
service of notices of Default and consultations in connection therewith, whether
or not a legal action is subsequently commenced in connection with such Default
or resulting Breach. (See Addendum Paragraph 77)
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises as Lessor may deem necessary.
All such activities shall be without abatement of rent or liability to Lessee.
Lessor may at any time place on the Premises any ordinary "FOR SALE" signs and
Lessor may during the last six (6) months of the term hereof place on the
Premises any ordinary "FOR LEASE" signs. Lessee may at any time place on or
about the Premises any ordinary "FOR SUBLEASE" sign. (See Addendum Paragraph 78)
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any
auction upon the Premises without Lessor's prior written consent. Lessor shall
not be obligated to exercise any standard of reasonableness in determining
whether to permit an auction.
34. SIGNS. Except for ordinary "For Sublease" signs, Lessee shall not place
any sign upon the Premises without Lessor's prior written consent. All signs
must comply with all Applicable Requirements. (See Addendum Paragraph 79)
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, that Lessor may elect to continue any one or all
existing subtenancies. Lessor's failure within ten (10) days following any such
event to elect to the contrary by written notice to the holder of any such
lesser interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.
36. CONSENTS. Except as otherwise provided herein, wherever in this Lease
the consent of a Party is required to an act by or for the other Party, such
consent shall not be unreasonably withheld or delayed. Lessor's actual
reasonable costs and expenses (including, but not limited to, architects',
attorneys', engineers' and other consultants' fees) incurred in the
consideration of, or response to, a request by Lessee for any Lessor consent,
including, but not limited to, consents to an assignment, a subletting or the
presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt
of an invoice and supporting documentation therefor. Lessor's consent to any
act, assignment or subletting shall not constitute an acknowledgment that no
Default or Breach by Lessee of this Lease exists, nor shall such consent be
deemed a waiver of any then existing Default or Breach, except as may be
otherwise specifically stated in writing by Lessor at the time of such consent.
The failure to specify herein any particular condition to Lessor's consent shall
not preclude the imposition by Lessor at the time of consent of such further or
other conditions as are then reasonable with reference to the particular matter
for which consent is being given. In the event that either Party disagrees with
any determination made by the other hereunder and reasonably requests the
reasons for such determination, the determining party shall furnish its reasons
in writing and in reasonable detail within ten (10) business days following such
request.
37. GUARANTOR. (See Addendum Paragraph 80)
38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and
performance of all of the covenants, conditions and provisions on Lessee's part
to be observed and performed under this Lease, Lessee shall have quiet
possession and quiet enjoyment of the Premises during the term hereof.
39. OPTIONS.
39.1 DEFINITION. "OPTION" shall mean: (a) the right to extend the
term of or renew this Lease or to extend or renew any lease that Lessee has on
other property of Lessor; (b) the right of first refusal or first offer to lease
either the Premises or other property of Lessor; (c) the right to purchase or
the right of first refusal to purchase the Premises or other property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to
Lessee in this Lease is personal to the original Lessee, and cannot be assigned
or exercised by anyone other than said original Lessee and only while the
original Lessee is in full possession of the Premises and, if requested by
Lessor, with Lessee certifying that Lessee has no intention of thereafter
assigning or subletting. (See Addendum Paragraph 81)
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple
Options to extend or renew this Lease, a later Option cannot be exercised unless
the prior Options have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option: (i) during
the period commencing with the giving of any notice of Default and continuing
until said Default is cured, (ii) during the period of time any Rent is unpaid
(without regard to whether notice thereof is given Lessee), (iii) during the
time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has
been given three (3) or more notices of separate Default, whether or not the
Defaults are cured, during the twelve (12) month period immediately preceding
the exercise of the Option. (See Addendum Paragraph 81)
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) An Option shall terminate and be of no further force or
effect, notwithstanding Lessee's due and timely exercise of the Option, if,
after such exercise and prior to the commencement of the extended term, (i)
Lessee fails to pay Rent for a period of thirty (30) days after such Rent
becomes due (without any necessity of Lessor to give notice thereof), (ii)
Lessor gives to Lessee three (3) or more notices of separate Default during any
twelve (12) month period, whether or not the Defaults are cured, or (iii) if
Lessee commits a Breach of this Lease.
40. MULTIPLE BUILDINGS. If the Premises are a part of a group of buildings
controlled by Lessor, Lessee agrees that it will observe all reasonable rules
and regulations which Lessor may make from time to time for the management,
safety, and care of said properties, including
PAGE 11 of 13
<PAGE> 12
the care and cleanliness of the grounds and including the parking, loading and
unloading of vehicles, and that Lessee will pay its fair share of common
expenses incurred in connection therewith. (See Addendum Paragraph 82)
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment and there shall survive the right
on the part of said Party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said Party
to pay such sum or any part thereof, said Party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay.
44. AUTHORITY. If either Party hereto is a corporation, trust, limited
liability company, partnership, or similar entity, each individual executing
this Lease on behalf of such entity represents and warrants that he or she is
duly authorized to execute and deliver this Lease on its behalf. Each Party
shall, within thirty (30) days after request, deliver to the other Party
satisfactory evidence of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions.
46. OFFER. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. This Lease is not intended to be binding until executed and
delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.
48. MULTIPLE PARTIES. If more than one person or entity is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.
49. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the
Mediation and/or the Arbitration of all disputes between the Parties and/or
Brokers arising out of this Lease [ ] is [X] is not attached to this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
________________________________________________________________________________
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF
THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE
SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE.
WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES IS LOCATED.
________________________________________________________________________________
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: Beverly Hills, California Executed at: Woodland Hills, California
------------------------- --------------------------
on: December , 1999 on: December , 1999
---------------------------------- -----------------------------------
By LESSOR: By LESSEE:
See Page 13 See Page 13
- -------------------------------------- ---------------------------------------
- -------------------------------------- ---------------------------------------
By: By:
----------------------------------- ------------------------------------
Name Printed: Name Printed:
------------------------ --------------------------
Title: Title:
------------------------------- ---------------------------------
By: By:
----------------------------------- ------------------------------------
Name Printed: Name Printed:
------------------------ --------------------------
Title: Title:
------------------------------- ---------------------------------
Address: 8929 Wilshire Blvd., #400 Address:
---------------------------- --------------------------------
Beverly Hills, CA 90211
---------------------------- --------------------------------
Telephone: (310) 652-8288 Telephone: ( )
--------------------- -----------------------
Facsimile: (310) 652 4972 Facsimile: ( )
--------------------- -----------------------
Federal ID No. 95-3146812 Federal ID No.
---------------------- ------------------------
NOTE: These forms are often modified to meet the changing requirements of law
and industry needs. Always write or call to make sure you are utilizing
the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700
So. Flower Street, Suite 600, Los Angeles, California 90017. (213)
687-8777. Fax No. (213) 687-8616
PAGE 12 of 13
<PAGE> 13
LESSOR: LESSEE:
NORTHPARK INDUSTRIAL, CAPSTONE TURBINE CORPORATION,
a California general partnership a California corporation
By: NORTHWEST INDUSTRIAL CENTER,
a California limited partnership, By: /s/ J. WATTS
General Partner --------------------------------
Name: J. Watts
By: /s/ MURRAY SIEGEL ------------------------------
---------------------------------- Title: CFO
Murray Siegel, General Partner -----------------------------
By: /s/ GARY SIEGEL By:
---------------------------------- --------------------------------
Gary Siegel, General Partner Name:
------------------------------
Title:
-----------------------------
By: NORTHPARK INDUSTRIAL-LEAHY DIVISION LLC,
a California limited liability company
General Partner
By: WEST AMERICA CONSTRUCTION CORPORATION,
a California corporation,
Manager
By: /s/ NICHOLAS M. BROWN
------------------------------
Nicholas M. Brown, President
By: /s/ THOMAS L. HARNER
------------------------------
Thomas L. Harner, Secretary
NORTHWEST INDUSTRIAL CENTER,
a California limited partnership,
By: /s/ MURRAY SIEGEL
----------------------------------
Murray Siegel, General Partner
By: /s/ GARY SIEGEL
----------------------------------
Gary Siegel, General Partner
NORTHPARK INDUSTRIAL-LEAHY DIVISION LLC,
a California limited liability company
By: WEST AMERICA CONSTRUCTION CORPORATION,
a California corporation,
Manager
By: /s/ NICHOLAS M. BROWN
----------------------------------
Nicholas M. Brown, President
By: /s/ THOMAS L. HARNER
----------------------------------
Thomas L. Harner, Secretary
PAGE 13 OF 13
<PAGE> 14
ADDENDUM TO LEASE - NET
Lease dated: December 1, 1999
----------------------------------------------
Lessor: NORTHPARK INDUSTRIAL
---------------------------------------------------
Lessee: CAPSTONE TURBINE CORPORATION
---------------------------------------------------
LESSOR AND LESSEE HEREBY AGREE THAT NOTWITHSTANDING ANYTHING CONTAINED IN
THE LEASE TO THE CONTRARY, THE PROVISIONS SET FORTH BELOW WILL BE DEEMED TO
BE A PART OF THE LEASE AND SHALL SUPERSEDE, TO THE EXTENT APPROPRIATE, ANY
CONTRARY PROVISION IN THE LEASE. ALL REFERENCES IN THE LEASE AND IN THIS
ADDENDUM SHALL BE CONSTRUCTED TO MEAN THE LEASE AND EXHIBITS, AS AMENDED
AND SUPPLEMENTED BY THIS ADDENDUM. ALL DEFINED TERMS USED IN THIS ADDENDUM,
UNLESS SPECIFICALLY DEFINED IN THIS ADDENDUM, SHALL HAVE THE SAME MEANING
AS SUCH TERMS HAVE IN THE LEASE.
50) PARTIES (PARAGRAPH 1.1, CONTINUED) Lessor, Northpark Industrial, is a
California general partnership which has two general partners. The
partners of Northpark Industrial are Northwest Industrial Center, a
California limited partnership, and Northpark Industrial-Leahy Division,
LLC, a California limited liability company, hereinafter said partners are
referred to as "Northwest" and "Leahy," respectively. Title to the real
property which is subject to this Lease, and title to the property where a
portion of Lessee's parking will be located pursuant to this Lease, is
held in the names of Northwest and Leahy. To evidence the authority of
Lessor to enter into this Lease with respect to such properties, and the
approval by Northwest and Leahy of this Lease, Northwest and Leahy are
executing this Lease, in their own separate capacities, in addition to
executing this Lease as the general partners of Lessor.
51) PREMISES (PARAGRAPH 1.2, CONTINUED) In addition to the Premises, Lessee
shall have the right, at no additional cost or rent, to use throughout the
term of this Lease, as the same may be extended, 200 parking spaces, (i)
forty (40) of which shall be parking spaces and located on the land on
which the Premises is located (i.e. 21211 Nordhoff), and shall be for
Lessee's exclusive use, and (ii) one-hundred and sixty (160) of which
shall be unreserved, and located on that certain real property commonly
known as 9151 Eton Ave., Chatsworth, California. The land and all
improvements located at 9151 Eton shall be referred to as the "Garage."
Lessor represents and warrants to Lessee that Lessor is the fee simple
owner of the Garage, free and clear of any liens (other than
non-delinquent real property taxes). Lessee and Lessor acknowledge and
agree that other tenants or Northpark Industrial Center, including, but
not limited to, tenants of the property immediately west of the Premises,
and other persons to whom parking privileges may be granted by Lessor from
time to time, may also park in the Garage, provided that the total of such
parking privileges granted by Lessor in the Garage, including Lessee's
parking spaces in the Garage, shall not exceed at any time the maximum
number of parking spaces located in the Garage. Lessor shall, at Lessor's
sole cost and expense, and without any contribution thereto by Lessee, (i)
maintain, repair and replace the Garage in good order, condition and
repair, (ii) at all times maintain the Garage in compliance with all
Applicable Requirements, as further described below, (iii) insure the
Garage in a manner consistent with other comparable buildings, and (iv)
timely pay all real estate or other taxes applicable thereto, except that
if repairs or maintenance become necessary due to damages caused by
Lessee, then it shall be Lessee's obligation to pay for the same, normal
wear and tear excepted.
52) TERM (PARAGRAPH 1.3, CONTINUED) The original term of this Lease shall be
ten (10) years, which shall commence on the date of the expiration of
Lessee's 60-day Early Possession Period, as such term is defined in
Addendum Paragraph 53. The date on which the said ten-year original term of
this Lease commences is referred to herein as the "Commencement Date."
53) EARLY POSSESSION (PARAGRAPH 1.4, CONTINUED) Lessee shall be entitled to
possession and occupancy of the Premises for a 60-day period, hereinafter
the "Early Possession Period." The Early Possession Period shall commence
upon the Substantial Completion (as hereinafter defined) of Lessor's work
as described in Exhibit A hereto. The date of the Substantial Completion
of Lessor's Exhibit A work shall be determined by mutual agreement of the
parties. Lessor shall give Lessee at least ten (10) days written notice of
the date Lessor proposes Lessor will substantially complete Lessor's
Exhibit A work. If during said 10-day period Lessee agrees to the date
Lessor proposes in Lessor's notice as the date of the Substantial
Completion of Lessor's Exhibit A work or the parties mutually agree to
another date for the Substantial Completion of Lessor's work, then the
date so accepted or agreed upon shall be the date of the Substantial
Completion of Lessor's Exhibit A work and the date of the commencement of
Lessee's Early Possession Period. If, on the other hand, during said
10-day period Lessee does not agree to the date proposed by Lessor in said
notice and the parties are unable to agree upon another date for the date
of the Substantial Completion of Lessor's Exhibit A work, then Lessor
shall give Lessee written notice that Lessor shall proceed to complete all
of Lessor's work as described in Exhibit A, and Lessor shall proceed with
the completion of all of Lessor's Exhibit A work, and the date of the
completion of all of Lessor's work as described in Exhibit A shall be the
date of the Substantial Completion of Lessor's Exhibit A work and the date
of the commencement of Lessee's Early Possession Period. Said date is also
referred to in this Lease as the "Start Date."
<PAGE> 15
ADDENDUM TO LEASE - NET
PAGE 2 OF 15
54) BASE RENT (PARAGRAPH 1.5, CONTINUED) The Base Rent (and prepaid Base Rent)
payable for the Premises during the original ten (10) year lease term shall
be as follows:
The Base Rent payable for months one (1) through six (6) shall be
$30,000.00 per month.
The Base Rent payable for months seven (7) through twenty (20) shall be
$60,000.00 per month.
The Base Rent payable for months twenty-one (21) through forty (40) shall
be $63,000.00 per month. In addition, on the first day of the twenty-first
(21st) month, Lessee shall deposit with Lessor $3,000.00 as additional
security.
The Base Rent payable for months forty-one (41) through sixty (60) shall
be $66,150.00 per month. In addition, on the first day of the forty-first
(41st) month, Lessee shall deposit with Lessor $3,150.00 as additional
security.
The Base Rent payable for months sixty-one (61) through eighty (80) shall
be $69,457.50 per month. In addition, on the first day of the sixty-first
(61st) month, Lessee shall deposit with Lessor $3,307.50 as additional
security.
The Base Rent payable for months eighty-one (81) through one hundred (100)
shall be $72,930.38 per month. In addition, on the first day of the
eighty-first (81st) month, Lessee shall deposit with Lessor $3,472.88 as
additional security.
The Base Rent payable for months one hundred and one (101) through one
hundred twenty (120) shall be $76,576.89 per month. In addition, on the
first day of the one hundred and first (101st) month, Lessee shall deposit
with Lessor $3,646.51 as additional security.
Notwithstanding the above, upon execution of this Lease, Lessee shall pay
to Lessor prepaid Base Rent in the amount of $420,000.00, which shall be
applied to months one (1), two (2), and nine (9) through fourteen (14), so
that said prepaid Base Rent shall be applied two months @ $30,000 per
month and six months @ $60,000.00 per month. During those periods of
prepaid Base Rent, Lessee shall pay to Lessor $7,235.90 per month as
Lessor's estimate for Lessee's share of Real Property Taxes and
landscaping and irrigation system maintenance (see below).
In consideration of Lessor's execution of this Lease and as a material
inducement to Lessor to execute this Lease, Lessee's payment to Lessor of
prepaid Base Rent in the amount of $420,000.00 upon the execution of this
Lease shall be deemed to be earned by Lessor in full upon the execution of
this Lease by Lessor, and, subject to the provisions of Paragraph 9.4, no
part of such prepayment shall be refundable or subject to abatement or
otherwise so long as there is not an early termination of this Lease prior
to the end of the fourteenth month of the original term of this Lease
which is caused by a material default by Lessor of Lessor's obligations
under this Lease. In the event this Lease is terminated prior to the end
of the said fourteenth month of the original term of this Lease, (i) if
such termination is caused by a material default by Lessor of Lessor's
obligations under this Lease, then Lessee shall be entitled to a refund of
such portion of said prepaid Base Rent as would have been applicable to
the payment of the Base Rent for those months of the original term of this
Lease which would occur after the termination date, and (ii) if such
termination occurs after the fourteenth month of the original term of this
Lease, or such termination occurs prior thereto but is not caused by a
material default by Lessor of Lessor's obligations under this Lease, then
Lessee shall not be entitled to a refund of any portion of such prepayment
of any kind.
In addition to the Base Rent that Lessee is obligated to pay under
Paragraphs 1.5 and 4, during the Early Possession Period and during the
term of this Lease and any extension thereof, Lessee will also be
obligated to pay Lessor the sum of $7,235.90 per month as Lessor's monthly
estimate for Lessee's share of Real Property Taxes (see Paragraph 10.1 and
Addendum Paragraph 69) and landscaping and irrigation system maintenance.
The current annual Real Property Taxes for the Premises are $101,152.00.
Lessor is in the process of having the Real Property Taxes appealed and
until such time that the appeal is either upheld or denied, Lessee's
responsibility for Real Property Taxes shall be capped at $6,886 per
month. Once this issue has been resolved (either upheld or denied)
Lessee's tax responsibility shall be based entirely on the Real Property
Taxes per the County Tax Assessor's tax bills. Any reduction in Real
Property Taxes (net of Lessor's expenses in achieving such reduction)
resulting from Lessor's pending appeal will be passed on to Lessee to the
extent such reduction is applicable to any period or periods for which
Lessee pays Real Property Taxes pursuant to this Lease. Every year of this
Lease, during the month of July, and during the month immediately
following the termination of this Lease, Lessor will prepare an accounting
of all actual Real Property Taxes and landscaping and irrigation system
maintenance for the just concluded twelve-month period ending on the last
day of the immediately preceding month (or if this Lease is not in effect
for an entire twelve-month period, then such accounting shall be for the
number of months of the term of this Lease during such period for which
this Lease has been in effect). Any differences between the actual
expenses and Lessor's estimates shall be either immediately refunded to
Lessee or immediately due by the Lessee, whichever the case may be. Lessee
or its authorized agent shall have the right, upon five (5) days prior
written notice to Lessor, to inspect, at Lessor's main accounting offices,
Lessor's unaudited books and records regarding these expenses. Since
Lessee is the Insuring Party under this Lease (see Addendum Paragraph 67
below, amending Paragraph 1.9), Lessee shall pay insurance premiums
directly for all insurance required to be maintained by the Insuring Party
during the term of this Lease.
55) AGREED USE (PARAGRAPH 1.8, CONTINUED) Lessee may use the Premises for
manufacturing, assembly and/or warehousing and general office use
associated therewith or any other lawful use.
56) CONDITION (PARAGRAPH 2.2, CONTINUED) Lessee shall obtain the service
contracts described in Paragraph 7.1(b) within thirty (30) days following
the Commencement Date. All references to the "Start Date" in the first two
sentences of Paragraph 2.2 shall refer to the Commencement Date in place
of the Start Date. The six (6) months and the thirty (30) days set forth
in Paragraph 2.2 (ii) and (iii) shall commence as of the Commencement Date.
The provisions of Paragraph 2.2 (i) with respect to the warranty of the
roof are superseded by the provisions of Addendum Paragraph 66 which set
forth Lessor's obligations with respect to the maintenance of the roof
until the replacement of the existing roof in accordance with the
provisions of Addendum Paragraph 66.
<PAGE> 16
ADDENDUM TO LEASE - NET
PAGE 3 OF 15
57) COMPLIANCE (PARAGRAPH 2.3, CONTINUED) The six-month time period for
Lessee to give Lessor written notice of non-compliance with Applicable
Requirements shall commence on the Commencement Date. The provisions of
Paragraphs 2.3(b) and 7.1(c) are modified so that Capital Expenditures
for seismic retrofitting and Hazardous Substances shall be the sole
responsibility of Lessor, provided, that such Hazardous Substances
existed on the Premises prior to the Start Date (see Addendum Paragraph
64), provided further, that Lessor shall be solely responsible for all
Capital Expenditures on the Garage, including, but not limited to,
Capital Expenditures for seismic retrofitting and Hazardous Substances,
except for any Hazardous Substances brought onto the Garage by or for
Lessee, which shall be Lessee's responsibility.
58) ACKNOWLEDGEMENTS (PARAGRAPH 2.4, CONTINUED) See Addendum Paragraph 64
concerning Hazardous Substances.
59) TERM (PARAGRAPH 3.1, CONTINUED) Within ten (10) days following the
Commencement Date, the parties shall execute a First Amendment to this
Lease in the form of Exhibit D, setting forth the exact date upon which
Base Rent shall commence, the Commencement Date, the Expiration Date
and the dates upon which the Options to Extend must be exercised in
accordance with the provisions of this Lease.
60) EARLY POSSESSION (PARAGRAPH 3.2, CONTINUED) During the Early
Possession Period, Lessee shall not be required to pay Base Rent,
except that during the Early Possession Period Lessee shall pay Real
Property Taxes (see Paragraph 10.1 and Addendum Paragraph 69) and
landscaping and irrigation system maintenance expenses as provided in
Addendum Paragraph 54, and, as the Insuring Party pursuant to Addendum
Paragraph 67, Lessee shall obtain and maintain at Lessee's expense all
insurance required to be obtained and maintained and paid for by the
Insuring Party pursuant to this Lease.
61) DELAY IN POSSESSION (PARAGRAPH 3.3, CONTINUED) If possession of the
Premises is not delivered to Lessee by April 1, 2000, subject to any
delays normally considered to be due to "force majeure" in the
construction industry and subject to any delays caused by the acts or
omissions of Lessee, then Lessee shall have the right to terminate this
Lease upon ten (10) days written notice to Lessor.
62) SECURITY DEPOSIT (PARAGRAPH 5, CONTINUED) The security deposit shall
be used and may be refunded only in accordance with Paragraph 5 and in
connection with this paragraph. Lessee shall not use any portion of the
security deposit to satisfy any of Lessee's rental obligations
hereunder including the last month's rental payment. Any failure of
Lessee to pay any of Lessee's rental obligations when due, including
the obligations to pay real estate taxes or property maintenance,
constitutes a material breach of this Lease for which Lessor may
re-enter and take possession of the Premises provided such re-entering
and taking is in accordance with California law and subject to whatever
grace period is specifically provided for in this Lease,
notwithstanding the fact that Lessor may have possession of a security
deposit.
APPLICATION OF SECURITY DEPOSIT If Lessor intends to apply any portion
of the Security Deposit due to Lessee's Default, Lessor shall give
Lessee ten (10) days prior written notice and Lessee shall have the
right to cure such Default within said ten (10) day period prior to
Lessor's application of the Security Deposit.
RESTORATION OF SECURITY DEPOSIT If Lessor applies the Security Deposit
in an amount in excess of $3,000.00, Lessee shall have thirty (30) days
to restore the Security Deposit to the full amount then required under
this Lease.
63) USE (PARAGRAPH 6.1, CONTINUED) Lessee understands that there are no
restrictions contained in this Lease as to the type of business which
may be conducted by any other present or future tenant of any building
located near or adjacent to the building in which the Premises are
located, and that Lessor may lease space to other tenants whose
business is the same or competitive with that of Lessee; provided,
however, that Lessor shall not allow or permit future tenants to
interfere with Lessee's use of the Premises, including loading,
unloading and parking.
NO OUTSIDE STORAGE Under no circumstances shall Lessee be permitted to
use the exterior areas of the Premises, including driveways, alleyways
or easement ways or anywhere else outside the building, for the
temporary or permanent storage of any property, including but not
limited to inventory, parts, work in process, pallets, or the
installation of any type of equipment, including but not limited to air
compressors or any other equipment, subject to the construction by
Lessee of an exterior fuel storage shed in accordance with the
provisions applicable thereto in Paragraph 7.3 as set forth in Addendum
Paragraph 66 below. In the event that any unauthorized storage or
installation of equipment or property shall occur, then Lessor shall
have the right, without notice, in addition to such other rights and
remedies that it may have, to remove the property and/or equipment at
Lessee's expense, which shall be paid by Lessee upon demand by Lessor.
No lunch areas or unauthorized compressor sheds are permitted anywhere
in the driveways, alleyways or easement ways, or anywhere else outside
the building, subject to Lessee's right to construct an exterior fuel
storage shed in accordance with the provisions applicable thereto in
Paragraph 7.3 as set forth in Addendum Paragraph 66 below.
INGRESS AND EGRESS; LOADING AND UNLOADING It is understood and agreed
that the exterior portions of the Premises are to be used by Lessee
solely for ingress and egress and for the parking of vehicles as
authorized by Lessor. The exterior portions of the Premises at no time
will be used by Lessee for loading or unloading, except at the loading
dock. It is the parties' intention that Lessee will neither cause nor
permit anything which will detract from keeping the exterior of the
building and Premises in a clean, orderly, and uncluttered condition
fully in keeping with the highest standards and reflecting an image of
the highest quality and standards.
<PAGE> 17
ADDENDUM TO LEASE - NET
PAGE 4 OF 15
EXTERIOR WATER USE LIMITATIONS Except for irrigation purposes, Lessee
shall not use any water, either from exterior sources or from sources
within the building, on or about the exterior areas of the Premises for
any purpose whatsoever without Lessor's prior written consent. Any of
Lessee's procedures, processes or other work which require the use of
water shall be done solely within the confines of the building, and no
water shall be allowed to drain onto the exterior areas of the Premises.
64) USE - HAZARDOUS SUBSTANCES (PARAGRAPH 6.2, CONTINUED)
6.2(b) DUTY TO INFORM LESSOR Both Lessor and Lessee shall have similar
obligations to inform the other if either knows or has reasonably cause
to believe that a Hazardous Substance has come to be located in, on,
under or about the Premises.
6.2(c) LESSEE REMEDIATION (i) Lessee accepts responsibility for any
Hazardous Substance brought onto the Premises from the Start Date and
during the term of this Lease by or for Lessee or any third party, (ii)
Lessor accepts responsibility for any Hazardous Substance existing on
the Premises before the Start Date or discovered after the Start Date
but proved to be existing prior to the Start Date, (iii) Lessor shall
be responsible for all Hazardous Substances in, on or under the Garage,
except for any Hazardous Substance brought onto the Garage by or for
Lessee, which shall be Lessee's responsibility, (iv) the words "or
neighboring properties" appearing in the fourth line of Paragraph 6.2(c)
are deleted, and (v) Lessor will be responsibility for Lessor's acts
before the Start Date and during the term of this Lease.
6.2(d) LESSEE INDEMNIFICATION (i) Lessor's gross negligence, intentional
misconduct and breach of this Lease shall be exceptions to Lessee's
indemnification obligations, (ii) Lessee's indemnification obligations
shall be consistent with Lessee's responsibility for Hazardous
Substances in accordance with the provisions set forth above in
Paragraph 6.2(c) of this Addendum Paragraph 64 under the heading "Lessee
Indemnification," (iii) Lessee's indemnification shall terminate upon
delivery to Lessor of a Phase I report of the condition of the Premises
at the date of termination of this Lease, provided said report describes
the condition of the Premises as of said date to be the same or better
than the condition of the Premises described in the Phase I report
delivered to Lessee prior to the execution of this Lease, and provided
further, that Lessee's indemnification shall not terminate with respect
to any contamination which Lessor can substantiate that the cause of
such contamination occurred from the Start Date or during the term of
this Lease.
6.2(e) LESSOR INDEMNIFICATION (i) Lessee's gross negligence, intentional
misconduct and breach of this Lease shall be exceptions to Lessor's
indemnification obligations, (ii) Lessor's indemnification obligations
shall be consistent with Lessor's responsibility for any Hazardous
Substance in accordance with the provisions set forth above in Paragraph
6.2(c) of this Addendum Paragraph 64 under the heading "Lessee
Remediation," (iii) subject to the scope of each party's responsibility
for Hazardous Substances as specified above in Paragraph 6.2(c) of this
Addendum Paragraph 64 under the heading "Lessee Remediation," the
provisions of Lessor's indemnification shall parallel the provisions set
forth in Paragraph 6.2(d) for Lessee's Indemnification.
6.2(f) INVESTIGATIONS AND REMEDIATIONS Each party's responsibility and
payment for any investigations or remediation measures shall be
consistent with the scope of such party's responsibility for Hazardous
Substances in accordance with the provisions set forth above in
Paragraph 6.2(c) of this Addendum Paragraph 64 under the heading "Lessee
Remediation."
6.2(g) LESSOR TERMINATION OPTION Lessor shall have the right to
terminate this Lease as the result of a Hazardous Substance Condition
only if (i) in accordance with the provisions set forth above in
Paragraph 6.2(c) of this Addendum Paragraph 64 under the heading "Lessee
Remediation," Lessee is responsible for the Hazardous Substance
Condition, and (ii) Lessee fails to comply with its obligations under
this Lease with respect to the remediation thereof.
65) USE - INSPECTION; COMPLIANCE (PARAGRAPH 6.4, CONTINUED) Lessor shall
give Lessee no less than 24 hours prior notice for inspections, unless
an emergency, and shall use its best efforts not to interfere with
Lessee's use of the Premises during such inspection and visits. The last
sentence of Paragraph 6.4 will be applicable to a contamination only if
such contamination is within the scope of Lessee's responsibility in
accordance with the provisions set forth above in Paragraph 6.2(c) of
Addendum Paragraph 64 under the heading "Lessee Remediation."
66) MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS (PARAGRAPH 7, CONTINUED)
7.1(a), (b) and (c) LESSEE'S OBLIGATIONS:
1. Until a new exterior membrane of the roof has been installed
on the Premises by Lessor, Lessor will be responsible for maintaining
the existing roof at Lessor's expense, except that any leaks caused by
Lessee's penetrations for venting or other wok by Lessee which affects
the roof shall be Lessee's responsibility. When the useful life of the
existing exterior membrane of the roof on the Premises has ended,
Lessor, at Lessor's cost and expense, will cause the existing exterior
membrane on the roof to be replaced or a new exterior roof membrane to
be added on to the existing roof. Such work shall be done by an
independent non-affiliated third party contractor selected by Lessor for
which Lessor shall obtain at least two bids from such third party
contractors for such work and shall assign to Lessee whatever warranty
is provided with the new exterior roof membrane by the contractor
selected for such work. Thereafter, Lessee shall have the sole
responsibility for maintenance, repair and replacement of the exterior
roof membrane. The foregoing provisions of this paragraph supersede the
provisions set forth in Paragraph 2.2 of the Lease concerning Lessor's
warranty and compliance with respect to the condition of the surface of
the roof.
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2. Foundations and exterior and interior load bearing walls, if any,
and interior structural elements of the roof are deleted from Paragraph 7.1(a),
as the same will be maintained by Lessor at Lessor's cost and expense, except
that any damages caused by Lessee's gross negligence or that of Lessee's
employees, guests, agents or invitees shall be repaired at Lessee's cost and
expense.
3. Lessor shall, at Lessor's sole cost and expense, keep the Garage in
good order, condition and repair during the term of this lease, and any
extensions thereof. Lessor's obligations shall include restorations,
replacements or renewals when necessary to keep the Garage and all improvements
thereon, or a part thereof, in good order, condition and state of repair. Any
damages to the Garage caused by Lessee, Lessee's employees, or agents shall be
repaired at Lessee's cost and expense, normal wear and tear excepted.
4. Lessor hereby consents of Lessee's roof penetrations to be made by
Lessee immediately after the Start Date, as shown in working drawings of work
to be performed by Lessee and attached to this Lease as Exhibit B, provided,
however, that Lessee is responsible for any leaks caused by such penetrations
of the roof.
5. The service contracts described in Paragraph 7.1(b), clauses (ii),
(iv), (v), (vi), (vii) and (viii), are deleted and there is added a service
contract for the elevator in the building.
6. To maintain a cohesive landscaping appearance throughout the
business park in which the Premises are located, Lessor shall maintain all
landscaping and irrigation system contracts, and Lessee shall reimburse Lessor
for those costs pursuant to Addendum Paragraph 54. The current average monthly
cost for landscaping and irrigation for the Premises is $350.00.
7. Paragraph 7.1(c) shall be modified to provide that Lessor and Lessee
shall be responsible for all Hazardous Substances in accordance with the
provisions of Paragraph 6.2, as modified pursuant to Addendum Paragraph 64
above, and Lessor shall be responsible for all seismic retrofitting as
necessary to comply with the Applicable Requirements.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS
1. The figures $50,000 in the aggregate and $10,000 in any one year,
appearing in the last line of Paragraph 7.3(a), are changed to $100,000 in the
aggregate and $25,000 in any one year.
2. Lessee shall be entitled, at its sole cost and expense, to
interconnect its electrical panels with the DWP grid, subject to DWP approval,
in order to allow Lessee the ability to provide power generated by turbine
motors.
3. In addition to any other improvements which Lessee is allowed to
make to the Premises, in order to meet Lessee's necessary fuel storage
requirements, Lessee shall have the right to construct an exterior fuel storage
shed, currently anticipated to be approximately 20' x 25' and to be located on
the southwesterly most portion of the Premises, subject to Lessor's approval of
the design and location thereof, including, but not limited to, a design which
is consistent with the existing architectural design of the Building, which
such approval shall not be unreasonably withheld, and provided the construction
and maintenance of such shed and Lessee's use thereof complies with all
Applicable Requirements.
4. At the end of the term of the Lease, Lessee will not be required to
remove or restore any portion of the Premises which has been constructed,
installed or removed by Lessor or Lessee, including the mezzanine, pursuant to
either Lessor's work or Lessee's work as described in Exhibit A or Exhibit B
attached hereto.
UNAUTHORIZED ALTERATIONS Except for the roof penetrations to which Lessor has
consented as provided above, Lessee shall inform Lessor of any work
anticipated on the roof, in conjunction with its operation and obtain permission
to do same prior to commencement of same. Lessor shall not make any
alterations, improvements or additions to the Premises which require Lessor's
consent in accordance with the dollar limitations set forth above unless and
until Lessor's prior written consent has been obtained. Should Lessee make any
alterations, etc. requiring Lessor's consent without having obtained the prior
written consent of Lessor, Lessor may, at any time during the term of this
Lease or upon its termination, require that Lessee, at its expense, remove any
or all of the same and that Lessee pay to Lessor the amount of any damage to
the roof caused by Lessee, or Lessor may remove same at Lessee's expense.
WINDOW COVERINGS Lessee shall obtain Lessor's prior written approval for the
installation of any interior or exterior window coverings, including but not
limited to drapes, blinds, sunshades, sunscreens, holiday or other decorations
or any type of film window treatment. No exterior painting is permitted. In the
event that any such unauthorized installations or alterations occur, then
Lessor shall have the right, without notice, in addition to such other rights
and remedies that it may have, to remove all of the same at Lessee's expense,
which shall be paid by Lessee upon demand by Lessor.
SECURITY Security bars or other security measures installed by Lessee require
prior written consent of Lessor. Such installations, except for electronic
security systems, shall remain as part of the Premises upon termination of the
Lease unless Lessor requests removal of such installations and restoration of
the Premises in accordance with Paragraph 7.4 of the Lease.
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7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION
1. Lessee shall not be required to remove or restore any of the tenant
improvements made by Lessor or Lessee prior to the Commencement Date,
including the mezzanine, and described in Exhibit A or Exhibit B hereto.
2. The second sentence of Paragraph 7.4(a) is deleted. All of Lessee's
improvements which are to be made by Lessee as described in Exhibit B
hereto and any Alterations and Utility Installations made by Lessee
thereafter, for which Lessee shall have paid the cost thereof, including,
but not limited to site specific electrical installations to accommodate
turbine engines, shall not become the property of Lessor, but rather shall
be Lessee's own property which Lessee may remove from the Premises prior to
or at the end of the term of this Lease, provided that Lessee shall be
responsible to repair any damages caused by the removal thereof.
3. Lessor's right under Paragraph 7.4(b) to require that any or all of
Lessee's improvements and Lessee Owned Alterations or Utility Installations
be removed by Lessee by the expiration or earlier termination of this Lease
applies only to all tenant improvements made after the Commencement Date,
including but not limited to improvements which were made to the Premises
by Lessor after the Commencement Date at the request of Lessee and
improvements made after the Commencement Date the cost of which was
amortized over the term of this Lease or a portion thereof in the form of
additional rent. As stated above, Lessor shall not have the right to
require Lessee to remove any improvements made by Lessor or Lessee prior to
the Commencement Date and described in Exhibit A or Exhibit B hereto.
67) INSURANCE; INDEMNITY (PARAGRAPHS 1.9 AND 8, CONTINUED)
1.9 INSURING PARTY. Lessee shall be the Insuring Party.
8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE
(a) BUILDING AND IMPROVEMENTS
1. With reference to the property insurance required by Paragraph
8.3(a), Lessor and Lessee agree that the full replacement cost of the
Premises will be not less than $6,045,000.00 as of the Commencement Date.
2. The sum of $1,000 per occurrence appearing in the penultimate
line of Paragraph 8.3(a) is deleted and inserted in lieu thereof are the
sum and words "$10,000 per occurrence, or such other deductible amount as
the parties may mutually agree upon in writing."
3. Lessee shall be liable for the deductible amount in the event
of an Insured Loss.
4. Lessee shall be entitled to obtain its own insurance for
improvements made by Lessee as described in Exhibit B and for Lessee Owned
Alternations and/or Utility Installations.
(b) RENTAL VALUE The amount of any rental insurance will be reduced by
the amount of prepaid Base Rent for the periods described in Addendum
Paragraph 54 above.
(c) ADJACENT PREMISES Paragraph 8.3(c) is deleted.
8.7 INDEMNITY In the first line of Paragraph 8.7 after the word
"misconduct," there are inserted the words "Lessor's Breach of this Lease."
8.8 EXEMPTION OF LESSOR FROM LIABILITY
1. At the beginning of Paragraph 8.8 the following is added: "Except
for Lessor's gross negligence, willful misconduct or Breach of this
Lease,..."
2. Lessor will make reasonable efforts to enforce the rules and
regulations applicable to the Garage, upon notice of a violation thereof.
68) DAMAGE OR DESTRUCTION (PARAGRAPH 9, CONTINUED)
9.1 DEFINITIONS
(a) "PREMISES PARTIAL DAMAGE" "Premises Partial Damage" shall mean any
damage or destruction to the Improvements on the Premises, other than
Lessee Owned Alterations and Utility Installations and Trade Fixtures,
which may be repaired at a cost which is less than forty percent (40%) of
the then cost of replacement of the entire building located on the Premises
and which can reasonably be repaired in six (6) months or less from the
date of the damage or destruction. Lessor shall obtain at least three (3)
independent third party bids as to the cost and time to repair the damage
or destruction.
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(b) "PREMISES TOTAL DESTRUCTION" "Premises Total Destruction" shall
mean damage or destruction to the Improvements to the Premises, other than
Lessee Owned Alterations and Utility Installations and Trade Fixtures,
which cannot be repaired at a cost which is less than forty percent (40%)
of the then cost of replacement of the entire building located on the
Premises and cannot reasonably be repaired in six (6) months or less from
the date of the damage or destruction. Lessor shall obtain at least three
(3) independent third party bids as to the cost and time to repair the
damage or destruction.
9.2 PARTIAL DAMAGE -- INSURED LOSS
1. Lessor will exercise reasonable and good faith efforts to make any
repairs Lessor is obligated to make pursuant to the terms of this Lease as
efficiently and promptly as reasonably possible.
2. The last sentence of Paragraph 9.2 is deleted.
9.3 PARTIAL DAMAGE -- Uninsured Loss Lessor shall make any repairs due to a
partial uninsured loss if the cost thereof does not exceed $300,000 and in
such event Lessor shall not have the right to terminate this Lease.
9.4 TOTAL DESTRUCTION -- INSURED LOSS If a Premises Total Destruction
occurs before the end of the fourteenth month of the original term of this
Lease, Lessee shall be entitled to a refund of a portion of Lessee's
prepaid Base Rent as follows:
1. If the date of the destruction or damage is on or prior to the
Commencement Date, the amount of such refund shall be equal to fifty
percent (50%) of the total amount of Lessee's prepaid Base Rent.
2. If the date of the destruction or damage is after the Commencement
Date but prior to the last day of the fourteenth month of the original term
of this Lease, then the amount of the refund shall be equal to (i) fifty
percent (50%) of Lessee's prepaid Base Rent for the months (prorated for
any portion of a month) which have not elapsed prior to the date of the
destruction or damage, plus (ii) fifty percent (50%) of the amount of
Lessee's prepaid Base Rent for the months (prorated for any portion of a
month) which have elapsed prior to the date of the destruction or damage.
3. If the date of the destruction or damage occurs after the end of
the fourteenth month of the original term of this Lease, Lessee shall not
be entitled to any refund of Lessee's prepaid Base Rent.
9.5 DAMAGE NEAR END OF TERM Lessor's right to terminate this Lease
pursuant to Paragraph 9.5 shall be applicable only to a Partial Damage
Uninsured Loss.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES
(a) ABATEMENT The words "but not to exceed the proceeds received
from the Rental Value insurance", appearing at the end of the first
sentence, are deleted.
(b) REMEDIES The following time periods are changed: ninety (90)
is change to sixty (60); sixty (60) is change to thirty (30); and thirty
(30) is change to twenty (20).
69) REAL PROPERTY TAXES (PARAGRAPH 10, CONTINUED)
10.1 DEFINITION OF "REAL PROPERTY TAXES" During the first five (5) years of
the original term of this Lease, Lessor shall not pass on to Lessee any
increase in Real Property Taxes due to a transfer by Lessor or a change of
ownership of all or a portion of the Premises os any interest therein.
10.3 JOINT ASSESSMENT Paragraph 10.3 of this Lease is deleted.
70) UTILITIES (PARAGRAPH 11, CONTINUED) The last sentence of Paragraph 11
of this Lease is deleted.
71) ASSIGNMENT (PARAGRAPH 12, CONTINUED)
12.1 LESSOR'S CONSENT REQUIRED
(b) and (c) Paragraphs 12.1(b) and (c) are deleted and replaced with
the following:
"(b) Lessee may assign its interest in the Lease to a subsidiary
company which is an affiliate of Lessee, or in the event of a sale of the
majority of its stock, it may assign its interest in the Lease to the
acquiring company provided that the use is the same and that the acquiring
company has a net worth of no less than $25,000,000 as of the date of the
assignment.
Notwithstanding anything set forth in the Lease to the contrary,
Lessee shall have the right to assign, sublet, transfer, change its
ownership or control without the consent of Lessor:
(i) in connection with the initial offering of the shares of Lessee;
or
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PAGE 8 OF 15
(ii) to any affiliate of Lessee, any subsidiary of Lessee, any parent
of Lessee, or any subsidiary of any parent of Lessee, provided such
subsidiary, parent or subsidiary of parent is an affiliate of Lessee; or
(iii) to any corporation with which Lessee may merge or consolidate
provided such corporation has a net worth of no less than $25,000,000 as of
the date of the merger or consolidation; or
(iv) in connection with any name change of Lessee.
For purposes of this Paragraph 12, an affiliate of Lessee shall
mean any Person (i.e. any individual, corporation, partnership, joint
venture, trust or other legal entity) which, whether directly or
indirectly, controls, is controlled by, or is under common control with:
(1) Lessee, or (2) any director, officer, or controlling partner or
shareholder of Lessee. For purposes of this definition, control shall mean
the power (whether through direct or indirect ownership of fifty-one
percent (51%) or more of the voting equity interest of such Person, or
otherwise) to direct management and policies of such Person. In the event
Lessee's interest is transferred in accordance with this Paragraph 12, any
change from the use herein permitted shall be subject to the Lessor's
consent pursuant to this Lease. Lessee shall give Lessor prompt written
notice of the transaction and a duly executed acceptance and assignment of
the Lease by the assignee or a duly executed copy of the sublease."
(d) The words "or a noncurable Breach without the necessity of any
notice or grace period", appearing in the second line of this Paragraph
12.1(d), and "(i) terminate this Lease", appearing in the third line, are
deleted.
(e) Paragraph 12.1(e) is deleted.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING
(e) The fee which will be payable to Lessor for considering and
processing a request for consent to an assignment or subletting shall be an
amount which is equal to Lessor's actual out-of-pocket expenses for
considering and processing said request.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING
1. Lessee shall pay to Lessor as additional Base Rent, fifty percent
(50%) of any Profits (as defined below) actually received by Lessee
pursuant to such approved assignment or sublease. Whenever Lessor is
entitled to share in any excess income resulting from an assignment or
sublease of the Premises, the following shall constitute the definition of
"Profits"; the gross revenue received from the assignee or sublessee during
the sublease term or during the assignment, with respect to the space
covered by the sublease or assignment ("Transferred Space"), less: (a) the
gross revenue paid to Lessor by Lessee during the period of the sublease
term or during the assignment with respect to the Transferred Space; (b)
any improvement allowance or other economic concession (planning allowance,
moving expenses, etc.) paid by Lessee to the sublessee or assignee; (c)
brokers' commissions; (d) attorneys' fees; (e) lease takeover payments; (f)
costs of advertising the space for sublease or assignment; (g) unamortized
cost of initial and subsequent improvements to the Transferred Space by
Lessee; and (h) any other costs actually paid in assigning or subletting
the Transferred Space; provided, however, under no circumstances shall
Lessor be paid any Profits until Lessee has recovered all of the items set
forth in subparts (a) through (h) for such Transferred Space, it being
understood that if in any year the gross revenues, less the deductions set
forth in subparts (a) through (h) above (the "Net Revenues") are less than
any and all costs actually paid in assigning or subletting the affected
space (collectively "Transaction Costs"), the amount of the excess
Transaction Costs shall be carried over to the next year and then deducted
from Net Revenues with the procedure repeated until a Profit is achieved.
Within five (5) days of Lessee entering into a written sublease of the
Premises in accordance with this Paragraph 12, Lessee shall deliver to
Lessor an executed copy of such sublease.
2. In the event Lessee requests Lessor's signature or consent to any
other action or on any other document, including, but not limited to, loan
or security documents relating to a loan transaction in which Lessee is
taking part, Lessor may require Lessee to pay Lessor a fee for considering
and processing said request in the amount described above in Paragraph
12.2(e) of this Addendum Paragraph 71.
72) DEFAULT; BREACH; REMEDIES (PARAGRAPH 13, CONTINUED)
13.1 DEFAULT; BREACH
(a) So long as Lessee is performing all of its obligations under
this Lease, an abandonment or vacating of the Premises shall not
constitute a Default.
(b) The words "whether to Lessor or a third party," appearing in
the first and second lines of Paragraph 13.1(a), are deleted and the
time period in the third line of "three (3) business days" is changed
to "seven (7) business days."
(c) The time period of "ten (10) days" is changed to "thirty
(30) days" unless a shorter time period is specified elsewhere in the
Lease.
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(E) The events described in this Paragraph 13.1(e) shall not, in and
of themselves, be a cause for a Default so long as Lessee is satisfying all
of its monetary and other obligations under the Lease.
13.3 INDUCEMENT RECAPTURE The provisions of Paragraph 13.3 of the Lease
shall not require Lessee to re-install the mezzanine to the Premises or to
pay Lessor for said mezzanine, and any concessions involving free rent or
reduced rent or the costs of the improvements made by Lessor as described
in Exhibit A shall not be subject to recapture.
13.4 LATE CHARGES The time period of "five (5) days," appearing in the
fourth line, is changed to "ten (10) days," and the late charge of "ten
percent (10%)," appearing in the fifth line, is changed to "six percent
(6%)."
13.5 INTEREST The second sentence is deleted and replaced with "The
interest ("Interest") charged shall be at the rate of ten percent (10%) per
annum, but shall not exceed the maximum rate permitted by law."
13.6 BREACH BY LESSOR
(a) NOTICE OF BREACH The following language is added at the beginning
of Paragraph 13.6 (a): "Except as provided elsewhere in the Lease, ..."
(b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR The words "the greater
of one month's Base Rent or the Security Deposit, and to pay an excess of
such expense under protest, reserving Lessee's right to reimbursement from
Lessor," appearing in the third and fourth lines, are deleted and replaced
with "the actual amount spent by Lessee."
73) CONDEMNATION (PARAGRAPH 14, CONTINUED) In the event of a taking of
Lessee's onsite parking spaces, Lessor will provide substitute parking in
the Garage, in which case no other adjustments shall be made by reason of
any taking of Lessee's onsite parking spaces. If Lessor does not provide
for such substituted parking in the Garage, then Lessee shall have the
right to terminate the Lease. In the event the taking includes any
improvements made by Lessee to the Premises, Lessee shall be entitled to
participate in the condemnation award to the extent of Lessee's investment
in said improvements.
74) ESTOPPEL CERTIFICATES (PARAGRAPH 16, CONTINUED)
(a) Ten (10) days is changed to thirty (30) days in the first line of
Paragraph 16(a).
(c) Financial statements required to be delivered by Lessee pursuant
to Paragraph 16(c) will be those financial statements of Lessee which are
prepared in the ordinary course of business.
75) NO RIGHT TO HOLDOVER (PARAGRAPH 26, CONTINUED)
1. The language "one hundred fifty percent (150%)" is deleted from the
second sentence and replaced with "one hundred ten percent (110%)."
2. If Lessee remains in possession of the Premises after the
expiration of the Lease term, without Lessor's written consent, then
Lessee's occupancy of the premises shall be deemed to be a holdover tenancy
upon all of the provisions of this Lease pertaining to obligations of
Lessee, but not including any options or rights of first refusal, if any,
granted to Lessee under this lease. If Lessee's hold-over tenancy exceeds
ten (10) days, Lessee may terminate the tenancy only by giving sixty (60)
days written notice of termination to Lessor, whereas Lessor may terminate
the tenancy or change the terms of the Lease upon giving to Lessee sixty
(60) days written notice thereof. The termination date shall be the last
day of the month in which the notice requirement has been met.
3. Notwithstanding anything to the contrary contained in Paragraphs
1.3, 1.5, 3.1, 4 or elsewhere in this Lease, Lessee's obligation to pay
rent shall continue until (i) Lessee has removed all of its property from
the Premises, (ii) Lessee has made any repairs required under Paragraph
7.4(c), (iii) Lessee has removed all Alterations, improvements, additions
and Utility Installations which Lessor requires Lessee to remove pursuant
to Paragraph 7.4(b), and (iv) Lessee has notified Lessor in writing that
all of the items (i) through (iii) of this paragraph, to the extent
applicable, have been accomplished.
76) SUBORDINATION; ATTORNMENT; NON-DISTURBANCE (PARAGRAPH 30, CONTINUED)
30.1 SUBORDINATION
1. Lessor represents and warrants to Lessee that there are no
Security Devices affecting the Premises or the Garage as of the date
hereof, and no Security Devices shall be entered into from the date hereof
through and including thirty (30) days after the Start Date.
2. Lessee shall be allowed to record a memorandum of the Lease in
the form of Exhibit E, provided that if a memorandum of the Lease is
recorded, Lessee shall be required to record a termination of the Lease
within thirty (30) days after the date of the termination of the Lease.
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77) ATTORNEYS' FEES (PARAGRAPH 31, CONTINUED) Wherever in this Lease attorneys'
fees and costs are to be paid, whether in this Paragraph 31 or in other
provisions relating to indemnification, all such fees and costs shall be
reasonable.
78) LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS (PARAGRAPH 32, CONTINUED) Lessor
agrees that it may show the Premises upon 24 hours prior notice and will
use its best efforts not to interfere with Lessee's use of the Premises.
The language "or liability" is deleted from the second sentence.
79) SIGNS (PARAGRAPH 34, CONTINUED) Lessee may install exterior and monument
signs with Lessor's prior written consent.
80) GUARANTOR (PARAGRAPH 37, CONTINUED) Paragraph 37 of the Lease is deleted.
81) OPTIONS (PARAGRAPH 39, CONTINUED)
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE Paragraph 39.2 of the Lease is
deleted.
39.4 EFFECT OF DEFAULT ON OPTIONS
(a) Except for clause (iv), any Default by Lessee shall be
curable by Lessee, and when and if cured by Lessee, shall not cause Lessee
to lose a right to exercise an Option.
82) MULTIPLE BUILDINGS (PARAGRAPH 40, CONTINUED) The language appearing at the
end of this Paragraph "and that Lessee will pay its fair share of common
expenses incurred in connection therewith" is deleted.
83) DECLARATION OF COVENANTS, CONDITIONS AND RESTRICTIONS FOR NORTHPARK
INDUSTRIAL CENTER. Lessee acknowledges receipt of a copy of the Declaration
of Covenants, Conditions and Restrictions ("CC&R's") for Northpark
Industrial Center recorded with the County of Los Angeles as document
numbers 79-760182 and 85-1324915. Lessee has reviewed and approved said
documents and agrees to be bound by all the terms and conditions therein.
Lessee further agrees that said CC&R's shall be binding upon Lessee and any
sublessee, successor and assign. Lessor's compliance covenants in Paragraph
2.3 of this Lease shall be deemed to include the CC&R's to the extent
applicable to the Premises and Garage Start Date.
84) ENVIRONMENTAL SITE ASSESSMENT REPORT. Lessor acknowledges receipt of, and
its satisfaction with, the Environmental Site Assessment Report prepared
for the Premises by GlenFos, Inc., Project No. P1-91311-092799, dated
October 11, 1999 (the "Report"). The Report recommends no further
subsurface investigation. Prior to the Start Date, Lessor shall remove from
the Premises approximately eight (8) 55-gallon drums of liquid referenced
in the Report. Lessee shall provide Lessor with a similar report made as of
a date which is no earlier than ninety (90) days prior to the termination
date of the Lease and Lessee's vacancy of the Premises and Lessee shall
deliver such report to Lessor no later than thirty (30) days prior to the
termination date of the Lease and Lessee's vacancy of the Premises.
85) LESSOR'S TENANT IMPROVEMENTS. Attached hereto and marked Exhibit A to this
Lease are plans and specifications describing the improvements and other
work to be done by Lessor's cost and expense. In addition, Lessor, at
Lessor's cost and expense, shall do the following:
a. Re-stretch and repair (where required, to be mutually agreed upon by
Lessor and Lessee) and steam clean all carpeting and flooring. Replace
where necessary, to be mutually agreed upon by Lessor and Lessee, at a
cost not to exceed $14.00 per yard inclusive of all costs (carpet,
pad, base, installation, taxes, etc.)
b. Clean, smooth (if necessary) and seal warehouse floor.
c. Paint all offices, production and warehouse areas as needed.
86) PARKING; GARAGE; RULES
PARKING-GENERAL
1. Lessee or Lessee's employees, visitors, customers, or guests shall
not use public driveways, alleyways or easement ways or other public areas
for parking purposes.
2. No automotive repair, car washing, waxing and detailing, or covered
parking is permitted at any time.
3. Prohibited vehicles are not permitted; examples of prohibited
vehicles shall include, but shall not be limited to, trailers, campers,
recreational vehicles, boats, "dead automobiles" or automobiles parked
longer than 48 hours.
4. If Lessee permits or allows parking other than in the areas
intended for parking or permits or allows any of the aforedescribed
prohibited vehicles to park on any portion of the parking areas or
anywhere else within the Premises, then Lessor shall have the right,
without notice, in addition to other rights and remedies it may have, to
remove or tow away the vehicle involved and charge the cost to Lessee,
which cost shall be immediately payable by Lessee upon demand by Lessor.
<PAGE> 24
ADDENDUM TO LEASE - NET
PAGE 11 of 15
5. Lessor shall not relocate any of Lessee's parking spaces except for
onsite parking spaces in the event of condemnation, in which case Lessor
may replace onsite parking spaces with an equivalent number of additional
parking spaces in the Garage.
GARAGE-GENERAL
1. All parking in the Garage is on an unreserved first-come
first-served basis. Lessee's right to use the Garage is strictly limited
to the 160 parking spaces located there for Lessee's use as provided in
Addendum Paragraph 51 above. there will be no additional fee payable by
Lessee for the said 160 parking spaces located in the Garage. In no event
may the Garage or any portion thereof be used by Lessee for testing
equipment or for any other purpose. The Garage is accessible 365 days a
year and 24 hours each day. Additional parking rules applicable to parking
in the Garage are set forth in Exhibit C hereto. No portion of the Garage
is specifically assigned to any tenant; provided, however, Lessor reserves
the right to assign specific spaces and to reserve spaces for visitors,
small cars, handicapped persons and for other legal requirements, and
Lessee's use thereof shall comply with such reservations.
2. Except for Lessor's gross negligence, willful misconduct or Breach
of the Lease, Lessor shall have no liability whatsoever for any damage to
property or any other items located in the Garage, nor for any personal
injuries or death arising out of any incident or matter relating to the
Garage. In all events, Lessee agrees to look first to its insurance
carrier for payment of any losses sustained in connection with Lessee's
use of the Garage. Lessee hereby waives on behalf of its insurance
carriers all rights of subrogation against Lessor.
3. Lessor also reserves the right to close all or any portion of the
Garage from time to time in order to make repairs or perform maintenance
services, or to alter, modify, re-stripe the Garage, or if required by
casualty, strike, condemnation, act of God, governmental law or other
reason beyond Lessor's reasonable control.
4. Lessee shall at all times comply with all Applicable Requirements
concerning use of the Garage. Lessee shall extend all of its insurance
policies required under this lease to include vehicles to be parked in the
Garage hereunder and personal property located therein or thereon. Upon
request, Lessee shall provide Lessor with certificates or other
satisfactory evidence of such insurance.
5. Lessee will be issued one card-key for each of Lessee's parking
spaces in the Garage. Prior to furnishing any card-keys to any person,
Lessee shall provide Lessor with a list including all names, type of
automobile, year of manufacture, drivers license number and automobile
license number for all persons using the Garage at any time. Lessee shall
be responsible for the return of said card-keys upon termination of the
Lease. A replacement fee of $25.00 may be charged for any lost or damaged
card-key, and if any card-key is not returned to Lessor upon termination
of the Lease, Lessor may charge Lessee's Security deposit for such
replacement fee.
GARAGE RULES Lessor reserves the right to adopt, modify, and enforce
reasonable rules governing the use of the Garage from time to time,
including any card-key, sticker or other identification or entrance
system, and hours of operation. The Rules set forth in Exhibit C hereto
are currently in effect. Lessee agrees to acquaint all persons to whom
Lessee assigns parking spaces in the Garage of such Rules. Lessor may
refuse to permit any person who violates such rules to park in the Garage,
and any violation of the Rules shall subject the car to removal from the
Garage. Lessor may deactivate the respective card-key of such person upon
ten (10) days written notice if such person fails to cure the violation or
is a repeat offender.
87) OPTION TO EXTEND - FIRST OF TWO
A. Lessor hereby grants to Lessee the option to extend the term of this
lease for a five (5) year period commencing when the original term of this
lease expires, upon each and all of the following terms and conditions;
(i) Lessee gives to Lessor and Lessor receives written notice
of the exercise of the option to extend this Lease for said additional
term no earlier than nine months and no later than six months prior to
the time that the option period would commence if the option were
exercised, time being of the essence. If said notification of the
exercise of said option is not so given and received, this option shall
automatically expire. The time period for the exercise of the options
shall be set forth in the First Amendment to Lease provided for in
Addendum Paragraph 59 above;
(ii) The provisions of Paragraph 39, including the provision
relating to default of Lessee set forth in Paragraph 39.4 of this Lease
are conditions of this option;
(iii) All of the terms and conditions of this Lease except
where specifically modified by this option shall apply;
(iv) Subject to the provisions of the last sentence of this
paragraph (iv), the rent payable for the first twelve months of the
term of this option shall be one hundred percent (100%) of the fair
market rental value for the Premises. Said fair market rental value shall
be based upon the prevailing market rate at the commencement of the
option term for rentals then being offered prospective tenants for new
leases or recently executed leases for comparable space within a three
(3) mile radius of the Premises. The determination of such fair market
rental value shall also take into consideration all the elements
<PAGE> 25
ADDENDUM TO LEASE - NET
PAGE 12 OF 15
which are generally and usually considered in the real estate industry to
establish a fair market value. In the event the fair market rental value
is not able to be determined in accordance with the foregoing provisions
of this paragraph (iv) due to a lack of comparable space within said three
(3) mile radius from the Premises, or due to the fact that the parties are
unable to agree with respect to said fair market rental value of the
Premises or for any other reason, then, subject to the provisions of the
last sentence of this paragraph (iv), the fair market rental value of the
Premises shall be determined by appraisal in accordance with the following
provisions:
a. If the fair market rental value of the Premises has not
been determined in accordance with the foregoing provisions of this
paragraph (iv), or by mutual agreement of the parties, within sixty (60)
days of the commencement of this option period, then within ten (10) days
thereafter both Lessor and Lessee shall each select an appraiser and the
two appraisers so selected by Lessor and Lessee shall select a third
appraiser;
b. Within thirty (30) days of the selection of the third
appraiser, the three appraisers shall determine the fair market rental
value of the Premises for the first twelve months of the term of this
option. The determination of the fair market rental value of the Premises
by a majority of the three appraisers shall be binding upon Lessor and
Lessee, subject to the provisions of the last sentence of this paragraph
(iv);
c. If either Lessor or Lessee shall fail to select an
appraiser within the aforesaid ten (10) day period, the appraiser timely
selected by one of them may determine the fair market rental value of the
Premises on his or her own, and said appraiser's determination shall be
binding upon both parties, subject to the provisions of the last sentence
of this paragraph (iv); and
d. Lessor and Lessee shall pay the cost of such appraisal
equally.
Notwithstanding the foregoing provisions of this paragraph
(iv), in no event shall the monthly rental for the first twelve months of
the term of this option be less than one hundred percent (100%) of the
rent payable for the month immediately preceding commencement of the term
of this option.
(v) On the first day of the 13th month, 25th month, 37th month
and 49th month of the term of this option, the monthly rent payable under
paragraph (iv) shall all be adjusted by the increase, if any, from the
date the term of this option commenced in the C.P.I. As used herein, the
term "C.P.I." shall mean the Consumer Price Index of the Bureau of Labor
Statistics of the U.S. Department of Labor for All Urban Consumers, Los
Angeles-Anaheim-Riverside, California (1982/84=100), "All Items", herein
referred to as "C.P.I."
a. The monthly rent payable in accordance with Paragraph
87A(v) of this Addendum shall be calculated as follows: the rent payable
for the first month of the term of this option, as determined in
accordance with Paragraph 87A(iv) of this Addendum, shall be multiplied by
a fraction the numerator of which shall be the C.P.I. of the calendar
month immediately preceding the effective date of the subject rent
escalation, and the denominator of which shall be the C.P.I. for the
calendar month in which the term of this option commenced. The sum so
calculated shall constitute the new monthly rent hereunder, but, in no
event, shall such new monthly rent be less than the rent payable for the
month immediately preceding the date for rent adjustment.
b. In the event the compilation and/or publication of the
C.P.I. shall be discontinued, then the index most nearly the same as the
C.P.I. shall be used to make such calculation. In the event that Lessor
and Lessee cannot agree on such alternative index, then the matter shall
be submitted for decision to the American Arbitration Association in
accordance with the rules of said association and the decision of the
arbitrators shall be binding upon the parties. The cost of said
arbitrators shall be paid equally by Lessor and Lessee.
c. Lessor shall notify Lessee of any rental increases
pursuant to this paragraph as soon as practicable after the relevant
C.P.I. figures have been released. Until such notification, Lessee shall
continue to pay the rent in effect during the prior rental period. After
notification of a rental increase, Lessee shall commence making rental
payments in the increased amount and shall, within ten (10) days after
such notification, pay to Lessor the amount of any rental increases due
for previous months.
B. If this option to extend is exercised, the term of this option
shall commence on the first day following the date of the expiration of
the original term of this Lease and shall end on the date which is five
(5) years thereafter.
88) OPTION TO EXTEND -- SECOND OF TWO
A. In the event Lessee exercises the first option to extend the term
of this Lease pursuant to Addendum Paragraph 87, then Lessor hereby grants
to Lessee the option to extend the term of this Lease for a second five
(5) year period upon the expiration of the term of the first option, upon
each and all of the following terms and conditions:
<PAGE> 26
ADDENDUM TO LEASE -- NET
PAGE 13 OF 15
(i) Lessee gives to Lessor and Lessor receives written notice of the
exercise of the option to extend this Lease for said additional term no earlier
than nine months and no later than six months prior to the time that the term of
this option would commence if the option were exercised, time being of the
essence. If said notification of the exercise of said option is not so given and
received, this option shall automatically expire;
(ii) The provisions of Paragraph 39, including the provision relating to
default of Lessee set forth in Paragraph 39.4 of this Lease are conditions of
this option;
(iii) All of the terms and conditions of this Lease except where
specifically modified by this option shall apply;
(iv) Subject to the provisions of the last sentence of this paragraph
(iv), the rent payable for the first twelve months of the term of this option
shall be one hundred percent (100%) of the fair market rental value for the
Premises. Said fair market rental value shall be based upon the prevailing
market rate at the commencement of the term of this option for rentals then
being offered prospective tenants for new leases or recently executed leases for
comparable space within a three (3) mile radius of the Premises. The
determination of such fair market rental value shall also take into
consideration all the elements which are generally and usually considered in the
real estate industry to establish a fair market value. In the event the fair
market rental value is not able to be determined in accordance with the
foregoing provisions of this paragraph (iv) due to a lack of comparable space
within said three (3) mile radius from the Premises, or due to the fact that the
parties are unable to agree with respect to said fair market rental value of
the Premises or for any other reason, then, subject to the provisions of the
last sentence of this paragraph (iv), the fair market rental value of the
Premises shall be determined by appraisal in accordance with the following
provisions:
a. If the fair market rental value of the Premises has not been
determined in accordance with the foregoing provisions of this paragraph (iv),
or by mutual agreement of the parties, within sixty (60) days of the
commencement of this option period, then within ten (10) days thereafter both
Lessor and Lessee shall each select an appraiser and the two appraisers so
selected by Lessor and Lessee shall select a third appraiser;
b. Within thirty (30) days of the selection of third appraiser, the
three appraisers shall determine the fair market rental value of the Premises
for the first twelve months of the term of this option. The determination of the
fair market rental value of the Premises by a majority of the three appraisers
shall be binding upon Lessor and Lessee, subject to the provisions of the last
sentence of this paragraph (iv);
c. If either Lessor or Lessee shall fail to select an appraiser
within the aforesaid ten (10) day period, the appraiser timely selected by one
of them may determine the fair market rental value of the Premises on his or
her own, and said appraiser's determination shall be binding upon both parties,
subject to the provisions of the last sentence of this paragraph (iv); and
d. Lessor and Lessee shall pay the cost of such appraisal equally.
Notwithstanding the foregoing provisions of this paragraph (iv), in no event
shall the monthly rental for the first twelve months of the term of this option
be less than one hundred percent (100%) of the rent payable for the month
immediately preceding commencement of the term of this option.
(v) On the first day of the 13th month, 25th month, 37th month and 49th
month of the term of this option, the monthly rent payable under paragraph (iv)
shall all be adjusted by the increase, if any, from the date the term of this
option commenced in the C.P.I. As used herein, the term "C.P.I." shall mean the
Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department
of Labor for All Urban Consumers, Los Angeles-Anaheim-Riverside, California
(1982/84=100), "All Items", herein referred to as "C.P.I."
a. The monthly rent payable in accordance with Paragraph 88A(v) of
this Addendum shall be calculated as follows: the rent payable for the first
month of the term of this option, as determined in accordance with Paragraph
88A(iv) of this Addendum, shall be multiplied by a fraction the numerator of
which shall be the C.P.I. of the calendar month immediately preceding the
effective date of the subject rent escalation, and the denominator of which
shall be the C.P.I. for the calendar month in which the term of this option
commenced. The sum so calculated shall constitute the new monthly rent
hereunder, but, in no event, shall such new monthly rent be less than the rent
payable for the month immediately preceding the date for rent adjustment.
b. In the event the compilation and/or publication of the C.P.I.
shall be discontinued, then the index most nearly the same as the C.P.I. shall
be used to make such calculation. In the event that Lessor and Lessee cannot
agree on such alternative index, then the matter shall be submitted for
decision to the American Arbitration Association in accordance with the rules
of said association and decision of the arbitrators shall be binding upon the
parties. The cost of said arbitrators shall be paid equally by Lessor and
Lessee.
<PAGE> 27
ADDENDUM TO LEASE - NET
PAGE 14 OF 15
c. Lessor shall notify Lessee of any rental increases
pursuant to this paragraph as soon as practicable after the relevant
C.P.I. figures have been released. Until such notification, Lessee shall
continue to pay the rent in effect during the prior rental period. After
notification of a rental increase, Lessee shall commence making rental
payments in the increased amount and shall, within ten (10) days after
such notification, pay to Lessor the amount of any rental increases due
for previous months.
B. If this option to extend is exercised, the term of this option
shall commence on the first day following the date of the expiration of
the term of the first option pursuant to Addendum Paragraph 87 of this
Lease and shall end on the date which is five (5) years thereafter.
89) NOTICES (PARAGRAPH 23, CONTINUED)
23.1 NOTICE REQUIREMENTS:
1. Subject to change from time to time by written notice to Lessee,
the address of Lessor is: c/o West America Construction Corporation, 8929
Wilshire Boulevard, Suite 400, Beverly Hills, California 90211.
2. Subject to change from time to time by written notice to Lessor,
prior to the Commencement Date the address of Lessee is 6430 Independence
Avenue, Woodland Hills, California 91367, attention Jeffrey R. Watts,
Chief Financial Officer, and from and after the Commencement Date, the
address of Lessee will be 21211 Nordoff Street, Chatsworth, California
91311, attention Jeffrey R. Watts, Chief Financial Officer.
LESSOR: LESSEE:
NORTHPARK INDUSTRIAL, CAPSTONE TURBINE CORPORATION,
a California general partnership a California corporation
By: NORTHWEST INDUSTRIAL CENTER,
a California limited partnership,
General Partner By: /s/
------------------------------
Name: [illegible]
By: /s/ MURRAY SIEGEL ----------------------------
------------------------------ Title: CFO
Murray Siegel, General Partner ---------------------------
By: /s/
------------------------------
Name: [illegible]
By: /s/ GARY SIEGEL ----------------------------
------------------------------ Title: President & CEO
Gary Siegel, General Partner ---------------------------
By: NORTHPARK INDUSTRIAL-LEAHY DIVISION LLC,
a California limited liability company
General Partner
By: WEST AMERICA CONSTRUCTION CORPORATION,
a California corporation,
Manager
By: /S/ NICHOLAS M. BROWN
----------------------------------
Nicholas M. Brown, President
By: /s/ THOMAS L. HARNER
----------------------------------
Thomas L. Harner, Secretary
NORTHWEST INDUSTRIAL CENTER,
a California limited partnership,
By: /S/ MURRAY SIEGEL
------------------------------
Murray Siegel, General Partner
By: /s/ GARY SIEGEL
------------------------------
Gary Siegel, General Partner
<PAGE> 28
ADDENDUM TO LEASE - NET
PAGE 15 OF 15
LESSOR'S SIGNATURES CONTINUED:
By: NORTHPARK INDUSTRIAL-LEAHY DIVISION LLC,
a California limited liability company
By: WEST AMERICA CONSTRUCTION CORPORATION,
a California corporation,
Manager
By: /S/ NICHOLAS M. BROWN
----------------------------------
Nicholas M. Brown, President
By: /s/ THOMAS L. HARNER
----------------------------------
Thomas L. Harner, Secretary
<PAGE> 29
EXHIBIT A
[FIRST FLOOR PLAN]
LESSOR [Illegible] LESSEE [Illegible]
------------------------- -------------------------
------------------------- -------------------------
-------------------------
-------------------------
<PAGE> 30
EXHIBIT A CONT.
[SECOND FLOOR PLAN]
LESSOR [Illegible] LESSEE [Illegible]
------------------------- -------------------------
------------------------- -------------------------
-------------------------
-------------------------
<PAGE> 31
EXHIBIT B
[FIRST FLOOR PLAN]
LESSOR [Illegible] LESSEE [Illegible]
------------------------- -------------------------
------------------------- -------------------------
-------------------------
-------------------------
<PAGE> 32
EXHIBIT B CONT.
SECOND FLOOR PLAN
LESSOR [Illegible] LESSEE [Illegible]
------------------------- -------------------------
------------------------- -------------------------
-------------------------
-------------------------
<PAGE> 33
EXHIBIT C
GARAGE PARKING RULES
a. Garage hours: Twenty-four (24) hours, seven (7) days a week.
b. Cars must be parked entirely within the stall lines painted on the floor,
and only small cars may be parked in areas reserved for compacts. All cars
must be parked head-in only.
c. All directional signs and arrows must be observed.
d. Speed limit shall be 5 miles per hour.
e. Parking is prohibited in all areas not expressly designated for parking,
including without limitation:
1. Aisles.
2. Loading zones.
3. Areas not striped for parking.
4. Areas where "No Parking" signs are posted.
5. Ramps, right side up - left side down.
f. Spaces reserved for handicapped parking must be used only be vehicles
properly designated.
g. Parking stickers, card-key or any other devices or forms of identification
or entry supplied by Lessor shall remain the property of Lessor. Such
devices must be displayed as requested and may not be mutilated in any
manner. The serial number of the parking identification device may not be
obliterated. Devices are not transferable and any device in the possession
of any unauthorized holder will be void.
h. Garage managers or personnel are not authorized to make or allow any
exceptions to these Rules.
i. Each driver of a vehicle is required to drive and park safely, and lock
and secure his or her own vehicle.
j. Loss or theft of parking identification, card-keys or other such devices
must be reported to Lessor immediately. Any parking devices reported lost
or stolen or found on any unauthorized car will be confiscated and the
illegal holder will be fined at the prevailing written rate. Lost or stolen
devices found by Lessee or its employees must be returned to Lessor.
k. Washing, waxing, cleaning or servicing of any vehicle is prohibited.
Parking spaces may only be used for parking automobiles.
l. Parking space shall be used only for parking by vehicles no larger than
full size passenger automobiles or pick-up trucks. Prohibited vehicles are
not permitted; examples of prohibited vehicles shall include, but shall not
be limited to, vehicles exceeding 6'6" in height, trucks or trucking
equipment, trailers, campers, recreational vehicles, boats, "dead
automobiles" or automobiles parked longer than 48 hours. No automotive
repair or work is permitted. Lessor shall have the right, without notice,
in addition to other rights and remedies it may have, to remove or tow
away any prohibited vehicle and charge the cost to the owner, which cost
shall be immediately payable upon demand by Lessor.
m. Other prohibitions include but are not limited to: eating in Garage,
loitering, throwing trash, leaky vehicles, damage to gates, arms, card-key
readers, entry or exit equipment, other vehicles, real or personal
property, fences, rails or walls.
n. Lessor may prohibit violators of Rules from using parking spaces provided
to Lessor hereunder. In such case, Lessor shall void the violator's
card-key and notify Lessee in writing. Said individual(s) would be
prohibited from using Garage, until a fine of $75.00 is paid or until
Lessor agrees to reinstate the violator, at Lessor's option.
<PAGE> 34
EXHIBIT D
FORM OF
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE (the "First Amendment"), dated ________,
2001, is made by and between Northpark Industrial, a California general
partnership, Northwest Industrial Center, a California limited partnership and
Northpark Industrial-Leahy Division, LLC, a California limited liability
company (collectively, "Lessor"), with offices at 8929 Wilshire Boulevard,
Suite 400, Beverly Hills, California 90211, and CAPSTONE TURBINE CORPORATION, a
California corporation ("Lessee"), with offices at 21211 Nordhoff Street,
Chatsworth, California 91311.
WHEREAS, Lessor and Lessee have entered into that certain Standard
Industrial Commercial Single-Tenant Lease - Net, including Addendum and
Exhibits thereto, dated, for reference purposes only, December 1, 1999
("Lease"), for a concrete tilt-up building consisting of approximately 98,370
square feet of area including 200 parking spaces located on certain real
property known as 21211 Nordhoff Street, Chatsworth, California and 9151 Eton
Avenue, Chatsworth, California.
WHEREAS, the provisions of the Lease specify that the Commencement
Date shall be the date of the expiration of Lessee's 60-day Early Possession
Period, as defined in Addendum Paragraph 53 to the Lease.
NOW THEREFORE, in consideration of the covenants and provisions
contained herein, and other good and valuable consideration, the sufficiency of
which Lessor and Lessee hereby acknowledge, Lessor and Lessee agree as follows:
1. CONFIRMATION OF DEFINED TERMS. Unless modified herein all terms
previously defined and capitalized in the Lease shall hold the same meaning for
the purposes of this First Amendment.
2. CONFIRMATION OF COMMENCEMENT DATE AND TERM. The Commencement
Date is hereby confirmed to be _________, 2001, and the Term is hereby
confirmed to be the ten (10) year period commencing on _________, 2001, and
ending on ________, 2011.
3. CONFIRMATION OF BASE RENT AND BASE RENT PAYMENT PERIODS. The
Base Rent payable for the Premises during the initial ten (10) year term of the
Lease shall be as follows:
a. The Base Rent payable for the period of _________, 2001 through
_________, 200_ shall be $30,000.00 per month;
b. The Base Rent payable for the period of _________, 200_ through
_________, 200_ shall be $60,000.00 per month;
<PAGE> 35
c. The Base Rent payable for the period of ________, 200__ through
________, 200__ shall be $63,000.00 per month. In addition, on ________, 200__,
Lessee shall deposit with Lessor $3,000.00 as additional security deposit;
d. The Base Rent payable for the period of ________, 200__ through
________, 200__ shall be $66,150.00 per month. In addition, on ________, 200__,
Lessee shall deposit with Lessor $3,150.00 as additional security deposit;
e. The Base Rent payable for the period of ________, 200__ through
________, 200__ shall be $69,457.50 per month. In addition, on ________, 200__,
Lessee shall deposit with Lessor $3,307.50 as additional security deposit;
f. The Base Rent payable for the period of ________, 200__ through
________, 200__ shall be $72,930.38 per month. In addition, on ________, 200__,
Lessee shall deposit with Lessor $3,472.88 as additional security deposit; and
g. The Base Rent payable for the period of ________, 200__ through
________, 200__ shall be $76,576.89 per month. In addition, on ________, 200__,
Lessee shall deposit with Lessor $3,646.51 as additional security deposit.
4. CONFIRMATION OF FIRST OPTION TO EXTEND. Based upon the Commencement
Date and Term specified hereinabove, the period of time in which Lessee is
permitted to validly exercise its first Option to Extend the Term of the Lease
is hereby confirmed to be ________ through ________.
5. CONFIRMATION OF SECOND OPTION TO EXTEND. Based upon the Commencement
Date and Term specified hereinabove, the period of time in which Lessee is
permitted to validly exercise its second Option to Extend the Term of the Lease
is hereby confirmed to be ________ through ________.
6. WARRANTY OF AUTHORITY. If Lessor or Lessee signs as a corporation,
partnership or limited liability company, each of the persons executing this
First Amendment on behalf of Lessor and Lessee hereby covenants and warrants
that the entity executing hereinbelow is a duly authorized and existing entity
that is qualified to do business in California; that the persons(s) signing on
behalf of either Lessor or Lessee have full right and authority to enter into
this First Amendment; and that each and every person signing on behalf of
either Lessor or Lessee are authorized in writing to do so.
7. SUCCESSORS AND HEIRS. The provisions of this First Amendment shall
inure to the benefit of Lessor's and Lessee's respective successors, assigns,
heirs and all persons claiming by, through or under them.
<PAGE> 36
8. SUBMISSION OF DOCUMENT. No expanded contractual or other rights shall
exist between Lessor and Lessee with respect to the Premises, as contemplated
under this First Amendment, until both Lessor and Lessee have executed and
delivered this First Amendment, whether or not any additional rental or
security deposits have been received by Lessor, and notwithstanding that Lessor
has delivered to Lessee an unexecuted copy of this First Amendment. Execution
of this First Amendment by Lessee and its return to Lessor shall not be binding
upon either party, notwithstanding any time interval, until Lessor has in fact
executed and delivered this First Amendment to Lessee.
9. GOVERNING LAW. The provisions of this First Amendment shall be
governed by the laws of the State of California.
10. REAFFIRMATION. Lessor and Lessee acknowledge and agree that the
Lease, as amended herein, constitutes the entire agreement by and between
Lessor and Lessee, and supersedes any and all other agreements written or oral
between the parties hereto. Furthermore, except as modified herein, all other
covenants and provisions of the Lease shall remain unmodified and in full force
and effect.
[INTENTIONALLY LEFT BLANK]
<PAGE> 37
IN WITNESS WHEREOF, Lessor and Lessee have duly executed this document as
of the day and year written below.
LESSOR:
NORTHPARK INDUSTRIAL,
a California general partnership
By: NORTHWEST INDUSTRIAL CENTER, a California
limited partnership, General Partner
By:
-------------------------------------------------------
Murray Siegel, General Partner
By:
-------------------------------------------------------
Gary Siegel, General Partner
By: NORTHPARK INDUSTRIAL-LEAHY DIVISION LLC,
a California limited liability company, General Partner
By: WEST AMERICA CONSTRUCTION
CORPORATION, a California corporation,
Manager
By:
--------------------------------------------------
Nicholas M. Brown, President
By:
--------------------------------------------------
Thomas L. Harner, Secretary
NORTHWEST INDUSTRIAL CENTER,
a California limited partnership
By:
------------------------------------------------------------
Murray Siegel, General Partner
By:
------------------------------------------------------------
Gary Siegel, General Partner
NORTHPARK INDUSTRIAL-LEAHY DIVISION LLC,
a California limited liability company
By: WEST AMERICA CONSTRUCTION CORPORATION,
a California corporation, Manager
By:
-------------------------------------------------------
Nicholas M. Brown, President
By:
-------------------------------------------------------
Thomas L. Harner, Secretary
<PAGE> 38
EXHIBIT E
FORM OF
MEMORANDUM OF LEASE
AND OPTION TO EXTEND
RECORDING REQUESTED BY
AND WHEN RECORDED RETURN TO:
Capstone Turbine Corporation
c/o Buchalter, Nemer, Fields & Younger
601 south Figueroa Street, Suite 2400
Los Angeles, California 90017
Attn: Dina Tecimer
- --------------------------------------------------------------------------------
MEMORANDUM OF LEASE
AND OPTION TO EXTEND
THIS MEMORANDUM OF LEASE AND OPTION TO EXTEND ("Memorandum") of that
certain Standard Industrial/Commercial Single Tenant Lease - Net ("Lease"), is
entered into this ____ day of December, 1999, by and between Northpark
Industrial, a California general partnership, Northwest Industrial Center, a
California limited partnership and Northpark Industrial-Leahy Division, LLC
(collectively, "Lessor"), and CAPSTONE TURBINE CORPORATION, a California
corporation ("Lessee"), for the purpose of memorializing their execution of
said Lease on December __, 1999.
1. Lessor does hereby lease to Lessee and Lessee does hereby rent from
Lessor, at the rent and upon the terms and conditions described in the Lease
and Addendum attached thereto, that certain real property located in the City
of Chatsworth, County of Los Angeles, State of California, described in Exhibit
"A" attached hereto and incorporated herein by this reference ("21211
Nordhoff").
2. In addition to the real property referenced in Paragraph 1 hereto, the
Lease Premises include Lessee's right to use (i) forty (40) parking spaces on
21211 Nordhoff, and (ii) one hundred and sixty (160) parking spaces located on
certain real property located in the City of Chatsworth, County of Los Angeles,
State of California, described in Exhibit "B" attached hereto and incorporated
herein by this reference ("9151 Eton").
3. The term of the Lease is for a period of ten (10) years commencing
on the "Commencement Date" as defined in said Lease and ending ten (10) years
after said "Commencement Date."
4. Pursuant to the Lease, Lessor grants to Lessee two (2) five (5) year
options to extend the term of the Lease, the first of which commences when the
original Term of this Lease expires ("First Option"), and the second of which
option commences upon expiration of the First Option Period and continues for
an additional five (5) years thereafter.
5. In the event of any conflict or inconsistency with the terms and
conditions of this Memorandum and the terms and conditions of the Lease, then
the terms and conditions of the Lease shall govern. This Memorandum may be
executed in two or more counterparts with the combined counterparts
constituting one integrated agreement.
<PAGE> 39
This Memorandum shall be deemed to have been executed as of the date of
the last acknowledged signature hereto, provided however, the signatories
hereto intend that said Memorandum shall be deemed to be effective as of the
date of the execution of the Lease.
IN WITNESS WHEREOF, the parties hereto have executed this Memorandum as of
the date first above-written.
LESSOR:
NORTHPARK INDUSTRIAL,
a California general partnership
By: NORTHWEST INDUSTRIAL CENTER, a California
limited partnership, General Partner
By:
-----------------------------------------------
Murray Siegel, General Partner
By:
-----------------------------------------------
Gary Siegel, General Partner
By: NORTHPARK INDUSTRIAL-LEAHY DIVISION LLC,
a California limited liability company, General Partner
By: WEST AMERICA CONSTRUCTION
CORPORATION, a California corporation,
Manager
By:
-----------------------------------------
Nicholas M. Brown, President
By:
-----------------------------------------
Thomas L. Harner, Secretary
NORTHWEST INDUSTRIAL CENTER,
a California limited partnership
By:
----------------------------------------------------
Murray Siegel, General Partner
By:
----------------------------------------------------
Gary Siegel, General Partner
<PAGE> 40
LESSOR'S SIGNATURES CONTINUED:
NORTHPARK INDUSTRIAL-LEAHY DIVISION LLC,
a California limited liability company
By: WEST AMERICA CONSTRUCTION CORPORATION,
a California corporation, Manager
By:
-----------------------------------
Nicholas M. Brown, President
By:
-----------------------------------
Thomas L. Harner, Secretary
LESSEE:
CAPSTONE TURBINE CORPORATION,
a California corporation
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
<PAGE> 41
EXHIBIT A
LOT 3 OF TRACT NO. 33398, IN THE CITY OF LOS ANGELES, COUNTY OF LOS ANGELES,
STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 896 PAGES 17 TO 20 INCLUSIVE
OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY.
EXCEPT AS UNDIVIDED 1/4 INTEREST IN ALL PETROLEUM, OIL, ASPHALTUM, GAS AND
OTHER HYDROCARBON SUBSTANCES IN AND UNDER SAID LAND, AS RESERVED IN THE DEED
FROM GUINN WILLIAMS, RECORDED JANUARY 6, 1939 IN BOOK 16242 PAGE 356, OFFICIAL
RECORDS BY A DEED RECORDED JUNE 14, 1960 AS INSTRUMENT NO. 4143, OFFICIAL
RECORDS, SAID GUINN WILLIAMS QUITCLAIMED TO THE RECORD OWNERS OF SAID LAND ALL
HIS RIGHT, TITLE AND INTEREST IN AND TO THAT PORTION OF SAID LAND LYING ABOVE A
DEPTH OF 500 FEET, MEASURED VERTICALLY FROM THE SURFACE, TOGETHER WITH ANY
RIGHT OF ENTRY ON THE SURFACE THEREOF.
ALSO EXCEPT THEREFROM AN UNDIVIDED 1/4 INTEREST IN ALL PETROLEUM, OIL,
ASPHALTUM, GAS AND OTHER HYDROCARBON SUBSTANCES AS RESERVED IN THE DEED FROM B.
F. PORTER ESTATE, A CORPORATION, RECORDED JANUARY 6, 1939 IN BOOK 16242 PAGE
356, OFFICIAL RECORDS, BY A DEED RECORDED SEPTEMBER 22, 1960 AS INSTRUMENT NO.
4090, OFFICIAL RECORDS, ALL RIGHTS TO ENTER UPON THE SURFACE AND THAT PORTION
OF THE SUBSURFACE LYING ABOVE A DEPTH OF 500 FEET BELOW THE SURFACE OF SAID
LAND WAS QUITCLAIMED TO THE RECORD OWNERS OF LOTS 1 TO 7 INCLUSIVE, 27 TO 33
INCLUSIVE 38, 39, 40 AND THAT PORTION OF LOTS 8, 9, 10, 26, 34 AND 37 LYING
SOUTHERLY OF THE NORTHERLY LINE OF THE LAND DESCRIBED IN SAID DEED LASTLY ABOVE
DESCRIBED EXCEPTING AND RESERVING AS A DRILL-SITE, THAT PORTION OF LOTS 7, 8
AND 9 LYING WITHIN THE AREA OF LAND AS THEREIN PROVIDED.
ALSO EXCEPT SUCH INTEREST IN THE REMAINDER OF THE OIL, GAS, MINERALS AND OTHER
HYDROCARBON SUBSTANCES IN OR UNDER SAID LAND, AS RESERVED BY SECURITY PACIFIC
NATIONAL BANK, A NATIONAL BANKING ASSOCIATION, AND JOHN J. TUTTLE, AS
CO-EXECUTORS OF THE ESTATE OF MINNIE JOUGHIN, DECEASED, IN DEED RECORDED
FEBRUARY 9, 1973 AS INSTRUMENT NO. 195, OFFICIAL RECORDS.
<PAGE> 42
EXHIBIT "B"
LOT 40, EXCEPT THEREFROM THE NORTHERLY 9 FEET MEASURED ALONG THE WESTERLY LINE
OF SAID LOT, OF TRACT NO. 33398, IN THE CITY OF LOS ANGELES, COUNTY OF LOS
ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 896 PAGES 17 TO 20
INCLUSIVE OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY.
EXCEPT AN UNDIVIDED 1/4 INTEREST IN ALL PETROLEUM, OIL, ASPHALTUM, GAS AND
OTHER HYDROCARBON SUBSTANCES IN AND UNDER SAID LAND, AS RESERVED IN THE DEED
FROM GUINN WILLIAMS, RECORDED JANUARY 6, 1939 IN BOOK 16424 PAGE 352, OFFICIAL
RECORDS, BY DEED RECORDED JUNE 14, 1960 AS INSTRUMENT NO. 4143, SAID GUINN
WILLIAMS QUITCLAIMED TO THE RECORD OWNERS OF SAID LAND ALL HIS RIGHTS, TITLE
AND INTEREST IN AND TO THAT PORTION OF SAID LAND LYING ABOVE A DEPTH OF 500
FEET, MEASURED VERTICALLY FROM THE SURFACE, TOGETHER WITH ANY RIGHT OF ENTRY ON
THE SURFACE THEREOF.
ALSO EXCEPT THEREFROM AN UNDIVIDED 1/4 INTEREST IN ALL PETROLEUM, OIL,
ASPHALTUM, GAS AND OTHER HYDROCARBON SUBSTANCES, AS RESERVED IN THE DEED FROM
B. F. PORTER ESTATE, A CORPORATION, RECORDED JANUARY 6, 1939 IN BOOK 16242 PAGE
356, OFFICIAL RECORDS, BY A DEED RECORDED SEPTEMBER 22, 1960 AS INSTRUMENT NO.
4090, ALL RIGHTS TO ENTER UPON THE SURFACE AND THAT PORTION OF THE SUBSURFACE
LYING ABOVE A DEPTH OF 500 FEET BELOW THE SURFACE OF SAID LAND, WAS QUITCLAIMED
ON THE RECORD OWNERS OF LOTS AS THEREIN DESCRIBED.
ALSO EXCEPT SUCH INTEREST IN THE REMAINDER OF THE OIL, GAS, MINERALS AND OTHER
HYDROCARBON SUBSTANCES IN OR UNDER SAID LAND, AS RESERVED BY SECURITY PACIFIC
NATIONAL BANK, A NATIONAL BANKING ASSOCIATION, AND JOHN J. TUTTLE, AS
CO-EXECUTORS OF THE ESTATE OF MINNIE JOUGHIN, DECEASED, IN DEED RECORDED
FEBRUARY 9, 1973 AS INSTRUMENT NO. 195.
<PAGE> 43
No. 031263
________________________________________________________________________________
VENDOR NO: 1183 VENDOR NAME: NORTHPARK INDUSTRIAL
INVOICE NO INV DATE INVOICE AMOUNT DISC TAKEN PAYMENT AMOUNT
- ---------- ---------- -------------- ---------- --------------
DEPOSIT NEW BLDG 12/30/1999 480,000.00 0.00 480,000.00
PREPAID RENT $420,000 - SEC. DEP $60,000
________________________________________________________________________________
Total: 480,000.00 0.00 480,000.00
________________________________________________________________________________
<TABLE>
<S> <C>
11-24 WELLS FARGO BANK
[CAPSTONE LOGO] ------- 6001 TOPANGA CANYON BLVD. No. 031263
1210(8) WOODLAND HILLS, CA 91367
Pay FOUR HUNDRED EIGHTY THOUSAND USD and 00/100
-------------------------------
DATE AMOUNT
-------------------------------
12/30/1999 $ ***480,000.00*
TO -------------------------------
THE NORTHPARK INDUSTRIAL
ORDER 21211 NORDHOFF
OF CHATSWORTH CA 91311 /s/
-------------------------------
/s/
-------------------------------
- -------------------------------------------------------------------------------------------
031263 121000248 4443 331152
</TABLE>
<PAGE> 44
[THE SEELEY COMPANY LOGO]
MEMO
TO: Karl Daly, Chicago Title - Pasadena Branch
FROM: Mike Tingus, Vice President
The Seeley Company
DATE: January 4, 2000
SUBJECT: 21211 Nordhoff Street & 9151 Eton Avenue, Chatsworth, CA
- --------------------------------------------------------------------------------
Please record this document as an accommodation for these principals for the
above referenced properties.
Should you have any questions, please do not hesitate to give me a call at
(818) 905-5800.
Thank you.
<PAGE> 45
MEMORANDUM OF LEASE
AND OPTION TO EXTEND
RECORDING REQUESTED BY
AND WHEN RECORDED RETURN TO:
Capstone Turbine Corporation
c/o Buchalter, Nemer, Fields & Younger
601 south Figueroa Street, Suite 2400
Los Angeles, California 90017
Attn: Dina Tecimer
- --------------------------------------------------------------------------------
MEMORANDUM OF LEASE
AND OPTION TO EXTEND
THIS MEMORANDUM OF LEASE AND OPTION TO EXTEND ("Memorandum") of that
certain Standard Industrial/Commercial Single Tenant Lease - Net ("Lease"), is
entered into this 30th day of December, 1999, by and between Northpark
Industrial, a California general partnership, Northwest Industrial Center, a
California limited partnership and Northpark Industrial-Leahy Division, LLC
(collectively, "Lessor"), and CAPSTONE TURBINE CORPORATION, a California
corporation ("Lessee"), for the purpose of memorializing their execution of said
Lease on December 30, 1999.
1. Lessor does hereby lease to Lessee and Lessee does hereby rent from
Lessor, at the rent and upon the terms and conditions described in the Lease
and Addendum attached thereto, that certain real property located in the City
of Chatsworth, County of Los Angeles, State of California, described in Exhibit
"A" attached hereto and incorporated herein by this reference ("21211
Nordhoff").
2. In addition to the real property reference in Paragraph 1 hereto, the
Lease Premises include Lessee's right to use (i) forty (40) parking spaces on
21211 Nordhoff, and (ii) one hundred and sixty (160) parking spaces located on
certain real property located in the City of Chatsworth, County of Los Angeles,
State of California, described in Exhibit "B" attached hereto and incorporated
herein by this reference ("9151 Eton").
3. The term of the Lease is for a period of ten (10) years commencing on
the "Commencement Date" as defined in said Lease and ending ten (10) years
after said "Commencement Date."
4. Pursuant to the Lease, Lessor grants to Lessee two (2) five (5) year
options to extend the term of the Lease, the first of which commences when the
original Term of this Lease expires ("First Option"), and the second of which
option commences upon expiration of the First Option Period and continues for
an additional five (5) years thereafter.
5. In the event of any conflict or inconsistency with the terms and
conditions of this Memorandum and the terms and conditions of the Lease, then
the terms and conditions of the Lease shall govern. This Memorandum may be
executed in two or more counterparts with the combined counterparts
constituting one integrated agreement.
<PAGE> 46
This Memorandum shall be deemed to have been executed as of the date of
the last acknowledged signature hereto, provided however, the signatories
hereto intend that said Memorandum shall be deemed to be effective as of the
date of the execution of the Lease.
IN WITNESS WHEREOF, the parties hereto have executed this Memorandum as
of the date first above-written.
LESSOR:
NORTHPARK INDUSTRIAL,
a California general partnership
By: NORTHWEST INDUSTRIAL CENTER,
a California limited partnership,
General Partner
By: /s/ MURRAY SIEGEL
---------------------------------
Murray Siegel, General Partner
By: /s/ GARY SIEGEL,
---------------------------------
Gary Siegel, General Partner
By: NORTHPARK INDUSTRIAL-LEAHY
DIVISION LLC, a California
limited liability company,
General Partner
By: WEST AMERICA CONSTRUCTION
CORPORATION, a California
corporation, Manager
By: /s/ NICHOLAS M. BROWN
----------------------
Nicholas M. Brown,
President
By: /s/ THOMAS L. HARNER
----------------------
Thomas L. Harner,
Secretary
NORTHWEST INDUSTRIAL CENTER,
a California limited partnership
By: /s/ MURRAY SIEGEL
-------------------------------------
Murray Siegel, General Partner
By: /s/ GARY SIEGEL
-------------------------------------
Gary Siegel, General Partner
<PAGE> 47
LESSOR'S SIGNATURES CONTINUED:
NORTHPARK INDUSTRIAL-LEAHY DIVISION LLC,
a California limited liability company
By: WEST AMERICA CONSTRUCTION
CORPORATION, a California
corporation, Manager
By: /s/ NICHOLAS M. BROWN
---------------------------------
Nicholas M. Brown, President
By: /s/ THOMAS L. HARNER
---------------------------------
Thomas L. Harner, Secretary
LESSEE:
CAPSTONE TURBINE CORPORATION,
a California corporation
By: /s/ AKE ALMGREN
-------------------------------------
Name: Ake Almgren
-----------------------------------
Title: President & CEO
----------------------------------
BY: /s/ J. WATTS
-------------------------------------
Name: J. Watts
-----------------------------------
Title: CFO
----------------------------------
<PAGE> 48
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On December 22, 1999, before me, the undersigned, a notary public in and
for said State, personally appeared Ake Amgren, personally known to me to be the
person whose name is subscribed to the within instrument and acknowledged to me
that such person executed the same in the person's authorized capacity, and that
by the person's signature on the instrument, the person, or the entity on behalf
of which the person acted, executed the instrument.
WITNESS my hand and official seal.
DEBBIE BERNARD
Commission # 1237244 /s/ DEBBIE BERNARD
[LOGO] Notary Public - California ---------------------------
Los Angeles County Notary Public
My Comm. Expires Oct 22, 2003
[SEAL]
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On December 22, 1999, before me, the undersigned, a notary public in and
for said State, personally appeared Jeff Watts, personally known to me to be the
person whose name is subscribed to the within instrument and acknowledged to me
that such person executed the same in the person's authorized capacity, and that
by the person's signature on the instrument, the person, or the entity on behalf
of which the person acted, executed the instrument.
WITNESS my hand and official seal.
DEBBIE BERNARD
Commission # 1237244 /s/DEBBIE BERNARD
[LOGO] Notary Public - California ---------------------------
Los Angeles County Notary Public
My Comm. Expires Oct 22, 2003
[SEAL]
<PAGE> 49
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On December 22, 1999, before me, the undersigned, a notary public in and
for said State, personally appeared Nicholas M. Brown, personally known to me to
be the person whose name is subscribed to the within instrument and acknowledged
to me that such person executed the same in the person's authorized capacity,
and that by the person's signature on the instrument, the person, or the entity
on behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
LEONA DAVIS
Commission # 1125439 /s/ LEONA DAVIS
[LOGO] Notary Public - California ----------------------------
Los Angeles County Notary Public
My Comm. Expires Feb 9, 2001
[SEAL]
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On December 22, 1999, before me, the undersigned, a notary public in and
for said State, personally appeared Thomas L. Harner, personally known to me to
be the person whose name is subscribed to the within instrument and acknowledged
to me that such person executed the same in the person's authorized capacity,
and that by the person's signature on the instrument, the person, or the entity
on behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
LEONA DAVIS
Commission # 1125439 /s/ LEONA DAVIS
[LOGO] Notary Public - California ----------------------------
Los Angeles County Notary Public
My Comm. Expires Feb 9, 2001
[SEAL]
<PAGE> 50
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On December 30, 1999, before me, the undersigned, a notary public in and
for said State, personally appeared Murray Siegel, proved to me on the basis
of satisfactory evidence to be the person whose name is subscribed to the
within instrument and acknowledged to me that such person executed the same in
the person's authorized capacity, and that by the person's signature on the
instrument, the person, or the entity on behalf of which the person acted,
executed the instrument.
WITNESS my hand and official seal.
----------------------------
DEBBIE BERNARD
Commission # 1237244
Notary Public - California /s/ DEBBIE BERNARD
Los Angeles County -----------------------
My Comm. Expires Oct 22, 2003 Notary Public
- ------------------------------
[SEAL]
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On December 30, 1999, before me, the undersigned, a notary public in and
for said State, personally appeared Gary Siegel, proved to me on the basis
of satisfactory evidence to be the person whose name is subscribed to the
within instrument and acknowledged to me that such person executed the same in
the person's authorized capacity, and that by the person's signature on the
instrument, the person, or the entity on behalf of which the person acted,
executed the instrument.
WITNESS my hand and official seal.
----------------------------
DEBBIE BERNARD
Commission # 1237244
Notary Public - California /s/ DEBBIE BERNARD
Los Angeles County -----------------------
My Comm. Expires Oct 22, 2003 Notary Public
- ------------------------------
[SEAL]
<PAGE> 51
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On December 22, 1999, before me, the undersigned, a notary public in and
for said State, personally appeared Nicholas M. Brown, personally known to me to
be the person whose name is subscribed to the within instrument and acknowledged
to me that such person executed the same in the person's authorized capacity,
and that by the person's signature on the instrument, the person, or the entity
on behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
- ------------------------------
LEONA DAVIS
Commission # 1125439
Notary Public - California /s/ LEONA DAVIS
Los Angeles County -----------------------
My Comm. Expires Feb 9, 2001 Notary Public
- ------------------------------
[SEAL]
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On December 22, 1999, before me, the undersigned, a notary public in and
for said State, personally appeared Thomas L. Harner, personally known to me to
be the person whose name is subscribed to the within instrument and acknowledged
to me that such person executed the same in the person's authorized capacity,
and that by the person's signature on the instrument, the person, or the entity
on behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
- ------------------------------
LEONA DAVIS
Commission # 1125439
Notary Public - California /s/ LEONA DAVIS
Los Angeles County -----------------------
My Comm. Expires Feb 9, 2001 Notary Public
- ------------------------------
[SEAL]
<PAGE> 52
EXHIBIT A
LOT 3 OF TRACT NO. 33398, IN THE CITY OF LOS ANGELES, COUNTY OF LOS ANGELES,
STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 896 PAGES 17 TO 20 INCLUSIVE
OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY.
EXCEPT AN UNDIVIDED 1/4 INTEREST IN ALL PETROLEUM, OIL, ASPHALTUM, GAS AND OTHER
HYDROCARBON SUBSTANCES IN AND UNDER SAID LAND, AS RESERVED IN THE DEED FROM
GUINN WILLIAMS, RECORDED JANUARY 6, 1939 IN BOOK 16242 PAGE 356, OFFICIAL
RECORDS BY A DEED RECORDED JUNE 14, 1960 AS INSTRUMENT NO. 4143, OFFICIAL
RECORDS, SAID GUINN WILLIAMS QUITCLAIMED TO THE RECORD OWNERS OF SAID LAND ALL
HIS RIGHT, TITLE AND INTEREST IN AND TO THAT PORTION OF SAID LAND LYING ABOVE A
DEPTH OF 500 FEET, MEASURED VERTICALLY FROM THE SURFACE, TOGETHER WITH ANY
RIGHT OF ENTRY ON THE SURFACE THEREOF.
ALSO EXCEPT THEREFROM AN UNDIVIDED 1/4 INTEREST IN ALL PETROLEUM, OIL,
ASPHALTUM, GAS AND OTHER HYDROCARBON SUBSTANCES AS RESERVED IN THE DEED FROM B.
F. PORTER ESTATE, A CORPORATION, RECORDED JANUARY 6, 1939 IN BOOK 16242 PAGE
356, OFFICIAL RECORDS, BY A DEED RECORDED SEPTEMBER 22, 1960 AS INSTRUMENT NO.
4090, OFFICIAL RECORDS, ALL RIGHTS TO ENTER UPON THE SURFACE AND THAT PORTION
OF THE SUBSURFACE LYING ABOVE A DEPTH OF 500 FEET BELOW THE SURFACE OF SAID
LAND WAS QUITCLAIMED TO THE RECORD OWNERS OF LOTS 1 TO 7 INCLUSIVE, 27 TO 33
INCLUSIVE 38, 39, 40 AND THAT PORTION OF LOTS 8, 9, 10, 26, 34 AND 37 LYING
SOUTHERLY OF THE NORTHERLY LINE OF THE LAND DESCRIBED IN SAID DEED LASTLY ABOVE
DESCRIBED EXCEPTING AND RESERVING AS A DRILL-SITE, THAT PORTION OF LOTS 7, 8
AND 9 LYING WITHIN THE AREA OF LAND AS THEREIN PROVIDED.
ALSO EXCEPT SUCH INTEREST IN THE REMAINDER OF THE OIL, GAS, MINERALS AND OTHER
HYDROCARBON SUBSTANCES IN OR UNDER SAID LAND, AS RESERVED BY SECURITY PACIFIC
NATIONAL BANK, A NATIONAL BANKING ASSOCIATION, AND JOHN J. TUTTLE, AS
CO-EXECUTORS OF THE ESTATE OF MINNIE JOUGHIN, DECEASED, IN DEED RECORDED
FEBRUARY 9, 1973 AS INSTRUMENT NO. 195, OFFICIAL RECORDS.
<PAGE> 53
EXHIBIT "B"
LOT 40, EXCEPT THEREFROM THE NORTHERLY 9 FEET MEASURED ALONG THE WESTERLY LINE
OF SAID LOT, OF TRACT NO. 33398, IN THE CITY OF LOS ANGELES, COUNTY OF LOS
ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 896 PAGES 17 TO 20
INCLUSIVE OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY.
EXCEPT AN UNDIVIDED 1/4 INTEREST IN ALL PETROLEUM, OIL, ASPHALTUM, GAS AND OTHER
HYDROCARBON SUBSTANCES IN AND UNDER SAID LAND, AS RESERVED IN THE DEED FROM
GUINN WILLIAMS, RECORDED JANUARY 6, 1939 IN BOOK 16424 PAGE 352, OFFICIAL
RECORDS, BY A DEED RECORDED JUNE 14, 1960 AS INSTRUMENT NO. 4143, SAID GUINN
WILLIAMS QUITCLAIMED TO THE RECORD OWNERS OF SAID LAND ALL HIS RIGHTS, TITLE AND
INTEREST IN AND TO THAT PORTION OF SAID LAND LYING ABOVE A DEPTH OF 500 FEET,
MEASURED VERTICALLY FROM THE SURFACE, TOGETHER WITH ANY RIGHT OF ENTRY ON THE
SURFACE THEREOF.
ALSO EXCEPT THEREFROM AN UNDIVIDED 1/4 INTEREST IN ALL PETROLEUM, OIL,
ASPHALTUM, GAS AND OTHER HYDROCARBON SUBSTANCES, AS RESERVED IN THE DEED FROM B.
F. PORTER ESTATE, A CORPORATION, RECORDED JANUARY 6, 1939 IN BOOK 16242 PAGE
356, OFFICIAL RECORDS, BY A DEED RECORDED SEPTEMBER 22, 1960 AS INSTRUMENT NO.
4090, ALL RIGHTS TO ENTER UPON THE SURFACE AND THAT PORTION OF THE SUBSURFACE
LYING ABOVE A DEPTH OF 500 FEET BELOW THE SURFACE OF SAID LAND, WAS QUITCLAIMED
TO THE RECORD OWNERS OF LOTS AS THEREIN DESCRIBED.
ALSO EXCEPT SUCH INTEREST IN THE REMAINDER OF THE OIL, GAS, MINERALS AND OTHER
HYDROCARBON SUBSTANCES IN OR UNDER SAID LAND, AS RESERVED BY SECURITY PACIFIC
NATIONAL BANK, A NATIONAL BANKING ASSOCIATION, AND JOHN J. TUTTLE, AS
CO-EXECUTORS OF THE ESTATE OF MINNIE JOUGHIN, DECEASED, IN DEED RECORDED
FEBRUARY 9, 1973 AS INSTRUMENT NO. 195.
<PAGE> 1
EXHIBIT 10.3
CAPSTONE TURBINE CORPORATION
1993 INCENTIVE STOCK PLAN
(AS AMENDED DECEMBER 1995 AND APRIL 1996)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
1. Purposes of this Plan................................. 1
2. Definitions........................................... 1
3. Stock Subject to this Plan............................ 3
4. Administration of this Plan........................... 4
(a) Procedure........................................ 4
(b) Powers of the Board.............................. 5
(c) Board Determinations............................. 5
5. Eligibility........................................... 5
6. Term of Plan.......................................... 6
7. Exercise Price and Consideration...................... 6
8. Options............................................... 8
(a) Term of Option................................... 8
(b) Exercise of Option............................... 8
(i) Procedure for Exercise; Rights as a
Shareholder................................ 8
(ii) Termination of Status as an Employee or
Consultant................................. 9
(iii) Disability of Optionee..................... 9
(iv) Death of Optionee.......................... 9
9. Stock Purchase Rights................................. 10
(a) Rights to Purchase............................... 10
(b) Issuance of Shares............................... 10
(c) Repurchase Option................................ 10
(d) Other Provisions................................. 11
10. Non-Transferability of Options and Stock Purchase
Rights................................................ 11
11. Adjustments Upon Changes in Capitalization, Merger or
Other Events.......................................... 11
12. Time of Grant......................................... 12
13. Amendment and Termination............................. 12
(a) Amendment........................................ 12
(b) Shareholder Approval............................. 12
(c) Suspension and Termination....................... 13
(d) Effect of Amendment; Termination or Suspension... 13
14. Conditions Upon Issuance of Shares.................... 13
15. Reservation of Shares................................. 13
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
16. Option, Stock Purchase and Stock Bonus Agreements..... 14
17. Shareholder Approval.................................. 14
18. Information to Optionees and Purchasers............... 14
19. Right of Company to Terminate Employment or Consulting
Services.............................................. 14
20. Rights of First Refusal and Repurchase................ 14
21. Withholding........................................... 15
22. Separability.......................................... 15
23. Non-Exclusivity of this Plan.......................... 16
24. Governing Law......................................... 16
25. Cancellation of and Substitution for Nonstatutory
Options............................................... 16
26. Market Standoff....................................... 16
</TABLE>
<PAGE> 4
CAPSTONE TURBINE CORPORATION
1993 INCENTIVE STOCK PLAN,
as amended December 1995 and April 1996
1. Purposes of this Plan. The general purpose of this 1993 Incentive
Stock Plan is to promote the interests of the Company and its shareholders by
(i) providing certain Employees of and Consultants to the Company with
additional incentives to continue and increase their efforts with respect to
achieving success in the business of the Company and its Subsidiaries, and (ii)
attracting and retaining the best available personnel to participate in the
ongoing business operations of the Company and its Subsidiaries.
Options granted under this Plan may be either Incentive Stock
Options or Nonstatutory Stock Options, as determined at the discretion of the
Board and as reflected in the terms of the written option agreements. The Board
may also grant Stock Purchase Rights hereunder.
2. Definitions. As used in this Plan, the following definitions shall
apply:
(a) "Board" shall mean the Committee, if one has been appointed, or
the Board of Directors of the Company, if no Committee is appointed.
(b) "Board of Directors" means the full Board of Directors of the
Company.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time, or any successor statute or statutes thereto. Reference to
any particular Code section shall include any successor section.
(d) "Committee" shall mean the Committee appointed by the Board of
Directors in accordance with Section 4(a) of this Plan, if one is appointed.
(e) "Common Stock" shall mean the Common Stock of the Company.
(f) "Company" shall mean the Capstone Turbine Corporation, a
Delaware.
(g) "Consultant" shall mean any person who is engaged by the Company
or by any Parent or Subsidiary to render consulting services and is compensated
for such consulting services, and any director of the Company whether
compensated for such services, or not.
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<PAGE> 5
(h) "Continuous Status as an Employee or Consultant" shall mean the
absence of any interruption or termination of service as an Employee or
Consultant, as applicable. Continuous Status as an Employee of Consultant shall
not be considered interrupted in the case of sick leave, military leave, or any
other leave of absence approved by the Board; provided that such leave is for
a period of not more than 90 days or reemployment upon the expiration of such
leave is guaranteed by contract or statute.
(i) "Disinterested Person" shall mean a member of the Board of
Directors of the Company: (i) who was not during the one year prior to service
as an administrator of this Plan granted or awarded equity securities pursuant
to this Plan, or any other plan of the Company or any of its affiliates
entitling the participants therein to acquire equity securities of the Company
or any of its affiliates except as permitted by Rule 16b-3(c)(2)(i) promulgated
under the Exchange Act ("Rule 16b-3(c)(2)(i)"); or (ii) who is otherwise
considered to be a "disinterested person" in accordance with Rule
16b-3(c)(2)(i), or any other applicable rules, regulations or interpretations
of the Securities and Exchange Commission.
(j) "Employee" shall mean any person, including officers and
directors, employed by the Company or any Parent or Subsidiary of the Company
as a common-law employee. The payment of a director's fee by the Company shall
not be sufficient to constitute "employment" by the Company.
(k) "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
(l) "Incentive Stock Option" shall mean an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code.
(m) "Major Event" shall be deemed to have occurred if (i) there
shall be consummated any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or pursuant to which
shares of the Company's common stock would be converted into cash, securities
or other property, other than a merger of the Company in which the holders of
the Company's common stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation
immediately after the merger; (ii) there shall be consummated any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the Company;
(iii) proceedings or actions for the liquidation or dissolution of the Company
are initiated by the Company; or (iv) any "person" (as defined in Sections
13(d) and 14(d) of the Exchange Act) (other than persons who beneficially own
more than 30% of the capital stock of the Company on a fully diluted and as
converted basis outstanding as of January 1, 1993) becomes the "beneficial
2
<PAGE> 6
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of 30% or more of the Company's outstanding capital stock on a
fully diluted and as converted basis at such time; provided, however, that a
"Major Event" shall not be deemed to have occurred solely by reason of the
consummation of a firmly underwritten public offering by the Company of common
stock registered under the Securities Act.
(n) "Nonstatutory Stock Option" shall mean an Option which is not
intended to qualify as an Incentive Stock Option.
(o) "Option" shall mean a stock option granted pursuant to this Plan.
(p) "Optioned Stock" shall mean the Common Stock subject to an Option.
(q) "Optionee" shall mean an Employee or Consultant who receives an
Option.
(r) "Parent" shall mean a "parent corporation", whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(s) "Plan" shall mean this 1993 Incentive Stock Plan, as amended as of
December, 1995.
(t) "Purchaser" shall mean an Employee or Consultant who exercises a
Stock Purchase Right.
(u) "Securities Act" shall mean the Securities Act of 1933, as amended.
(v) "Share" shall mean a share of Common Stock, as adjusted in
accordance with Section 11 of this Plan.
(w) "Stock Purchase Right" shall mean a right to purchase Common Stock
pursuant to this Plan or the right to receive a bonus of Common Stock for past
services.
(x) "Subsidiary" shall mean a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to this Plan. Subject to the provisions of Section 11 of
this Plan, the maximum aggregate number of Shares under this Plan is 3,500,000.
The Shares may be authorized but unissued, or reacquired Common Stock, or both.
If an Option or Stock Purchase Right should expire, terminate, be
cancelled or become unexercisable for any reason without having been exercised
in full, then the unpurchased Shares which were subject thereto shall, unless
this Plan shall have been terminated, become available for future grant or sale
3
<PAGE> 7
under this Plan. In addition, Shares issued under this Plan and later
repurchased or otherwise reacquired by the Company shall, unless this Plan
shall have been terminated, become available for future grant or sale under
this Plan.
4. Administration of this Plan.
(a) Procedure. This Plan shall be administered by the Board of
Directors of the Company unless and until the Board of Directors delegates
administration to a Committee, as provided in this Section 4(a).
(i) Subject to Section 4(a)(ii), the Board of Directors may
appoint a Committee consisting of not less than two persons (who need not be
members of the Board of Directors) to administer this Plan on behalf of the
Board of Directors, subject to such terms and conditions not inconsistent with
this Plan as the Board of Directors may prescribe. Once appointed, the Committee
shall continue to serve until otherwise directed by the Board of Directors.
Members of the Board who are either eligible for Options and/or Stock Purchase
Rights or have been granted Options and/or Stock Purchase Rights may vote on any
matters affecting the administration of this Plan or the grant of any Options
and/or Stock Purchase Rights pursuant to this Plan, except that no such member
shall act upon the granting of an option to such member, but any such member may
be counted in determining the existence of a quorum at any meeting of the Board
during which action is taken with respect to the granting of Options and/or
Stock Purchase Rights to such member.
(ii) Notwithstanding the foregoing Section 4(a)(i), if the
Company registers any class of any equity security pursuant to Section 12 of the
Exchange Act, from the effective date of such registration until six months
after the termination of such registration, any grants of Options and/or Stock
Purchase Rights to directors or officers who are subject to Section 16 of the
Exchange Act shall be made only by a Committee consisting of two or more
persons, each of whom shall be a Disinterested Person (if necessary to meet the
requirements of Rule 16b-3 promulgated under the Exchange Act). The Board shall
otherwise comply with the requirements of Rule 16b-3 promulgated under the
Exchange Act, as from time to time in effect, unless the Board expressly
declares that any such requirement shall not apply.
(iii) Subject to the foregoing Sections 4(a)(i) and 4(a)(ii),
from time to time the Board of Directors may increase the size of the Committee
and appoint additional members thereof, remove members (with or without cause)
and appoint new members in substitution therefor, fill vacancies however
caused, or remove all members of the Committee and thereafter directly
administer this Plan. Once appointed, the Committee shall continue to serve
until otherwise directed by the Board of Directors.
4
<PAGE> 8
(b) Powers of the Board. Subject to the provisions of this Plan, the
Board shall have plenary authority, in its discretion and without limitation, to
do the following: (i) to grant Incentive Stock Options, Nonstatutory Stock
Options or Stock Purchase Rights; (ii) to determine, upon review of relevant
information and in accordance with Section 7 of this Plan, the fair market value
of the Common Stock; (iii) to determine the exercise price per share of Options
or Stock Purchase Rights to be granted, which exercise price shall be determined
in accordance with Section 7 hereof; (iv) to determine the Employees or
Consultants to whom, and the time or times at which, Options or Stock Purchase
Rights shall be granted and the number of Shares to be represented by each
Option or Stock Purchase Right; (v) to interpret this Plan; (vi) to prescribe,
amend and rescind rules and regulations relating to this Plan, and in the
exercise of this power, to correct any defect, omission or inconsistency in this
Plan or in any agreement relating to an Option or Stock Purchase Right, in a
manner and to the extent the Board shall deem necessary or expedient to make
this Plan fully effective; (vii) to determine the terms and provisions of each
Option or Stock Purchase Right granted (which need not be identical) and, with
the consent of the holder thereof, modify or amend each Option or Stock Purchase
Right; (viii) to authorize any person to execute on behalf of the Company any
instrument required to effectuate the grant of an Option or Stock Purchase Right
previously granted by the Board; and (ix) to make all other determinations
deemed necessary or advisable for the administration of this Plan.
(c) Board Determinations. In making determinations under this Plan,
the Board may take into account the nature of the services rendered by the
respective Employees and Consultants, their present and potential contributions
to the success of the Company, or its Subsidiaries, as the case may be, and
such other factors as the Board in its discretion shall deem relevant. All
decisions, determinations and interpretations of the Board shall be final and
binding on all Optionees, Purchasers and any other holders of any Options
and/or Stock Purchase Rights granted under this Plan.
5. Eligibility.
(a) Options and Stock Purchase Rights may be granted to Employees
and Consultants, provided that Incentive Stock Options may only be granted to
Employees. An Employee or Consultant who has been granted an Option or Stock
Purchase Right may, if such Employee or Consultant is otherwise eligible, be
granted additional Option(s) or Stock Purchase Right(s).
(b) No Incentive Stock Option may be granted to an Employee which,
when aggregated with all other incentive stock options granted to such Employee
by the Company or by any Parent or Subsidiary, would result in Shares having an
aggregate fair market value (determined for each Share as of the date of grant
5
<PAGE> 9
of the Option covering such Share) in excess of $100,000 becoming first
available for purchase upon exercise of one or more incentive stock options
during any calendar year.
(c) Section 5(b) of this Plan shall apply only to an Incentive Stock
Option evidenced by a stock option agreement which sets forth the intention of
the Company and the Optionee that such Option shall qualify as an Incentive
Stock Option. Section 5(b) of this Plan shall not apply to any Option evidenced
by a stock option agreement which sets forth the intention of the Company and
the Optionee that such Option shall be a Nonstatutory Stock Option.
(d) On and after the effective date of the registration of any class
of equity security of the Company pursuant to Section 12 of the Exchange Act, a
member of the Board of Directors who is not an Employee shall not be eligible
for the benefits of this Plan unless at the time an Option or Stock Purchase
Right is granted to such member, the Board expressly declares that such
exclusion will not apply.
6. Term of Plan. This Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by vote of the
holders of a majority of the outstanding shares of the Company entitled to vote
on the adoption of this Plan. It shall continue in effect for a term of ten
(10) years unless sooner terminated under Section 13 of this Plan.
7. Exercise Price and Consideration.
(a) The per share exercise price for the Shares to be issued
pursuant to exercise of an Option or Stock Purchase Right shall be such price
as is determined by the Board, but shall be subject to the following provisions:
(i) In the case of an Incentive Stock Option:
(A) granted to an Employee who, at the time of the grant
of such Incentive Stock Option, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per share exercise price shall be no less than 110% of the
fair market value per share on the date of grant.
(B) granted to any Employee other than an Employee
described in Section 7(a)(i)(A), the per share exercise price shall be no less
than 100% of the fair market value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option:
(A) granted to an Employee or Consultant who, at the time
of the grant of such Options, owns stock
6
<PAGE> 10
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the per share exercise price
shall be no less than 110% of the fair market value per share on the date of
the grant.
(B) granted to any Employee or Consultant, other than an
Employee or Consultant described in Section 7(a)(ii)(A), the per share exercise
price shall be no less than 85% of the fair market value per share on the date
of grant.
(iii) In the case of a Stock Purchase Right granted to any
person, the per share exercise price shall be no less than 85% of the fair
market value per share on the date of grant; provided, however, that if such
person at the time of the grant of such Stock Purchase Right, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the per share exercise price
shall be no less than 100% of the fair market value per share on the date of
the grant.
(b) Fair market value shall be determined by the Board in its
discretion; provided, however, that where there is an active public market for
the Common Stock, the fair market value per share shall be determined as
follows:
(i) If the Company's Common Stock is traded on an exchange or
is quoted on the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") National Market System, then the closing or last sale
price, respectively, on the date of grant, as reported in the Wall Street
Journal (or, if not so reported, as otherwise reported by the NASDAQ System).
(ii) If the Company's Common Stock is not traded on an exchange
or on the NASDAQ National Market System but is traded in the over-the-counter
market, then the mean of the closing bid and asked prices on the date of grant
as reported in the Wall Street Journal (or, if not so reported, as otherwise
reported by the NASDAQ System).
(c) The consideration to be paid for the Shares to be issued upon
exercise of an Option or Stock Purchase Right, including the method of payment,
shall be determined by the Board and may consist entirely of cash, check,
promissory note or other deferred payment arrangement, other Shares of Common
Stock having a fair market value on the date of surrender equal to the
aggregate exercise price of the Shares as to which said Option or Stock
Purchase Right shall be exercised, or any combination of such methods of
payment, or such other consideration and method of payment for the issuance of
Shares to the extent permitted under Sections 408 and 409 of the California
General Corporation Law. In making its determination as to the type of
consideration to accept, the Board shall consider if acceptance of such
consideration may be reasonably expected to benefit the Company (Section 315(b)
of the California General Corporation Law).
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<PAGE> 11
8. Options.
(a) Term of Option. The term of each Option shall be ten (10) years
from the date of grant thereof or such shorter term as may be provided in the
stock option agreement relating to such Option; provided that the term of a
Nonstatutory Stock Option may, as provided in Section 8(b)(iv), be extended for
a period of up to six (6) months. However, in the case of an Option granted to
an Employee who, at the time the Option is granted, owns stock representing
more than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, the term of the Option shall be five (5)
years from the date of grant thereof or such shorter time as may be provided in
the stock option agreement relating to such Option.
(b) Exercise of Option.
(i) Procedure for Exercise; Rights as a Shareholder. Any
Option granted under this Plan shall be exercisable at such times and under
such conditions as determined by the Board, such as vesting conditions and/or
performance criteria with respect to the Company and/or the Optionee, and as
shall be permissible under the terms of this Plan. The Board may, in its
discretion, waive any vesting provisions contained in a stock option agreement.
Notwithstanding anything herein to the contrary, no Option granted hereunder
shall have a vesting period in excess of five (5) years.
An Option may, but need not, include a provision whereby at any
time prior to termination of the Optionee's Continuous Status as an Employee or
Consultant, the Optionee may elect to exercise the Option as to all or any part
of the Shares subject to the Option prior to the stated vesting date of the
Option or of any vesting installment or installments specified in the Option.
Any shares so purchased from any unvested installment or Option may be subject
to a repurchase right in favor of the Company or to any restriction the Board
determines to be appropriate.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. An Option may not be exercised for a fraction of a Share. Full payment
may, as authorized by the Board, consist of any consideration and method of
payment allowable under Section 7 of this Plan. Until the issuance (as
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company) of the stock certificate evidencing
such Shares, no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock, notwithstanding the
exercise of
8
<PAGE> 12
the Option. The Company shall issue (or cause to be issued) such stock
certificate promptly upon exercise of the Option. No adjustment will be made
for a dividend or other right for which the record date is prior to the date
the stock certificate is issued, except as provided in Section 11 of this Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of this
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(ii) Termination of Status as an Employee or Consultant. In the
event of termination of an Optionee's Continuous Status as an Employee or
Consultant (as the case may be), such Optionee may, but only within thirty (30)
days after the date of such termination (but in no event later than the date of
expiration of the term of such Option as set forth in the Option Agreement),
exercise the Option to the extent that such Employee or Consultant was entitled
to exercise it at the date of such termination. To the extent that such
Employee or Consultant was not entitled to exercise the Option at the date of
such termination, or if such Employee or Consultant does not exercise such
Option (which such Employee or Consultant was entitled to exercise) within such
thirty (30) day time period, the Option shall terminate.
(iii) Disability of Optionee. Notwithstanding the provisions of
Section 8(b)(ii) above, in the event of termination of an Optionee's Continuous
Status as an Employee or Consultant as a result of such Employee's or
Consultant's disability, such Employee or Consultant may, but only within six
(6) months from the date of such termination (but in no event later than the
date of expiration of the term of such option as set forth in the Option
Agreement), exercise the Option to the extent such Employee or Consultant was
entitled to exercise it at the date of such termination; provided however, that
if the Option is an Incentive Stock Option and the disability is not a total
and permanent disability (as defined in Section 422(c)(6) of the Code), then if
the Optionee does not exercise the Option within three months after such
termination, such Option shall automatically convert into a Nonstatutory Stock
Option; and provided, further, that if the termination is as a result of a total
and permanent disability (as defined in Section 422(c)(6) of the Code), such
Employee or Consultant may within one (1) year from the date of such
termination, but in no event later than the date of expiration of the term of
such option as set forth in the Option Agreement), exercise the Option to the
extent such Employee or Consultant was entitled to exercise it at the date of
such termination. To the extent that such Employee or Consultant was not
entitled to exercise the Option at the date of termination, or if such Employee
or Consultant does not exercise such Option (which such Employee or Consultant
was entitled to
9
<PAGE> 13
exercise) within the time periods specified above, as the case may be, the
Option shall terminate.
(iv) Death of Optionee. In the event of the death of an
Optionee: (A) while the Optionee is an Employee or Consultant, (B) during the 30
(30) day period described in Section 8(b)(ii), or (C) during the one (1) year
period described in Section 8(b)(iii), the Option may be exercised, at any time
within one (1) year following the date of death (but, in the case of an
Incentive Stock Option, in no event later than the date of expiration of the
term of such Incentive Stock Option as set forth in the Option Agreement), by
the Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent of the right to
exercise that had accrued at the time of death of the Optionee. To the extent
that such Employee or Consultant was not entitled to exercise the Option at the
date of death, or if such Employee, Consultant, estate or other person does not
exercise such Option (which such Employee, Consultant, estate or person was
entitled to exercise) within the one (1) year time period specified in this
Plan, the Option shall terminate.
9. Stock Purchase Rights.
(a) Rights to Purchase. After the Board determines that it will
offer an Employee or Consultant a Stock Purchase Right, it shall deliver to the
offeree a stock purchase agreement or stock bonus agreement, as the case may
be, setting forth the terms, conditions and restrictions relating to the offer,
including the number of Shares which such person shall be entitled to purchase,
and the time within which such person must accept such offer, which shall in no
event exceed six (6) months from the date upon which the Board made the
determination to grant the Stock Purchase Right. The offer shall be accepted by
execution of a stock purchase agreement or stock bonus agreement in the form
approved by the Board.
(b) Issuance of Shares. Forthwith after payment therefor, the
Shares purchased shall be duly issued; provided, however, that the Board may
require that the Purchaser make adequate provision for any federal and state
withholding obligations of the Company as a condition to the Purchaser
purchasing such Shares.
(c) Repurchase Option. The Board may require, at its option, that a
stock purchase agreement or stock bonus agreement grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the Purchaser's employment with the Company for any reason (including death or
disability). The repurchase price shall be at the higher of the original
purchase price or fair value of the Shares on the date of termination of
employment. If the Board so determines, the purchase price for shares
repurchased may be paid by cancellation of any indebtedness of the Purchaser to
the Company. The
10
<PAGE> 14
repurchase option must be exercised by the Company within 90 days of
termination of employment for cash or cancellation of money indebtedness for
the Shares and the right shall terminate when the Company's Common Stock
becomes publicly traded. The repurchase option shall lapse at such rate as the
Board may determine but, if the repurchase price is the original purchase price
for the Shares, the right to repurchase at the original purchase price shall
lapse at the rate of at least 20% per year over 5 years from the date the
Shares were originally purchased by the Purchaser.
(d) Other Provisions. The stock purchase agreement or stock bonus
agreement shall contain such other terms, provisions and conditions not
inconsistent with this Plan as may be determined by the Board, including rights
of first refusal as set forth in Section 20 hereof.
10. Non-Transferability of Options and Stock Purchase Rights. Options and
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee or Purchaser, only by the Optionee or Purchaser.
11. Adjustments Upon Changes in Capitalization, Merger or Other Events.
Subject to any required action by the shareholders of the Company, the number
of shares of Common Stock covered by each outstanding Option and Stock Purchase
Right, and the number of shares of Common Stock which have been authorized for
issuance under this Plan but as to which no Options or Stock Purchase Rights
have yet been granted or which have been returned to this Plan upon
cancellation or expiration of an Option or Stock Purchase Right, or repurchase
of Shares from a Purchaser or Optionee upon termination of employment or
otherwise, as well as the price per share of Common Stock covered by each such
outstanding Option or Stock Purchase Right, shall be proportionately adjusted
for any increase or decrease in the number of issued shares of Common Stock
resulting from a stock split, reverse stock split, stock dividend, combination
or reclassification of the Common Stock of the Company or the payment of a stock
dividend with respect to the Common Stock or any other increase or decrease in
the number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Rights.
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<PAGE> 15
In the event of the dissolution or liquidation of the Company, all
Options and Stock Purchase Rights will terminate immediately prior to the
consummation of such proposed action if not previously exercised. The Board, at
its option, may provide for one or more of the following from time to time or
in any stock option agreement or stock purchase agreement that, in the event of
a Major Event, then (A) all Options and Stock Purchase Rights will be assumed
or equivalent options or stock purchase rights will be substituted by such
surviving corporation (or other entity) or a parent or subsidiary of such
surviving corporation (or other entity), (B) all Options and Stock Purchase
Rights will continue in full force and effect, or (C) all Options and Stock
Purchase Rights will terminate if not exercised prior to the consummation of
the transaction.
The foregoing adjustments shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive.
The grant of an Option or Stock Purchase Right pursuant to this Plan
shall not affect in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structure or to merge or to consolidate or to dissolve, liquidate or
sell, or transfer all or any part of its business or assets.
12. Time of Grant. The date of grant of an Option or Stock Purchase Right
shall, for all purposes, be the date on which the Board makes the determination
granting such Option or Stock Purchase Right. Notice of the determination shall
be given to each Employee or Consultant to whom an Option or Stock Purchase
Right is so granted within a reasonable time after the date of such grant.
13. Amendment and Termination.
(a) Amendment. The Board may amend this Plan from time to time in
such respects as the Board may deem advisable; provided that the shareholders
of the Company must approve the following amendments or revisions within 12
months before or after the adoption of such revision or amendment:
(i) any increase in the number of Shares subject to this
Plan, other than in connection with an adjustment under Section 11 of this Plan;
(ii) any change in the designation of the class of persons
eligible to be granted Options (to the extent such modification requires
shareholder approval in order for the plan to satisfy the requirements of
Section 422(b) of the Code or to comply with the requirements of Rule 16b-3
promulgated under the Exchange Act); or
12
<PAGE> 16
(iii) any other revision or amendment if such revision or
amendment requires shareholder approval in order for this Plan to satisfy the
requirements of Section 422(b) of the Code or to comply with the requirements of
Rule 16b-3 promulgated under the Exchange Act.
(b) Shareholder Approval. If any amendment requiring shareholder
approval under Section 13(a) of this Plan is made subsequent to the first
registration of any class of equity securities by the Company under Section 12
of the Exchange Act, such shareholder approval shall be solicited as described
in Section 17 of this Plan.
(c) Suspension and Termination. The Board may suspend or terminate
this Plan at any time. No Options or Stock Purchase Rights may be granted while
this Plan is suspended or after it is terminated.
(d) Effect of Amendment; Termination or Suspension. Any such
amendment, termination or suspension of this Plan shall not affect Options or
Stock Purchase Rights already granted and such Options or Stock Purchase Rights
shall remain in full force and effect as if this Plan had not been amended,
terminated or suspended, unless mutually agreed otherwise between the Optionee
or Purchaser (as the case may be) and the Company, which agreement must be in
writing and signed by the Optionee or Purchaser (as the case may be) and the
Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery
of such Shares pursuant thereto shall comply with all relevant provisions of
law, including, without limitation, the Securities Act, the Exchange Act, the
rules and regulations promulgated thereunder, and the requirements of any stock
exchange or other stock trading system upon which the Shares may then be
listed, and shall be further subject to the approval of counsel for the Company
with respect to such compliance.
As a condition to the exercise of an Option or Stock Purchase Right,
the Company may require the person exercising such Option or Stock Purchase
Right to make such representations and warranties at the time of any such
exercise as the Company may at that time determine, including without
limitation, representations and warranties that (i) the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares in violation of applicable federal or state securities
laws, and (ii) such person is knowledgeable and experienced in financial and
business matters and is capable of evaluating the merits and the risks
associated with purchasing the Shares.
13
<PAGE> 17
15. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of this Plan.
The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares under this Plan,
shall relieve the Company of any liability in respect of the failure to issue
or sell such Shares as to which such requisite authority shall not have been
obtained.
16. Option, Stock Purchase and Stock Bonus Agreements. Options shall be
evidenced by written stock option agreements in such form as the Board shall
approve. Upon the exercise of Stock Purchase Rights, the Purchaser shall sign a
stock purchase agreement or stock bonus agreement in such form as the Board
shall approve.
17. Shareholder Approval.
(a) If the Company registers any class of equity securities pursuant
to Section 12 of the Exchange Act, any required approval of the shareholders of
the Company obtained after such registration shall be solicited substantially in
accordance with Section 14(a) of the Exchange Act and the rules and regulations
promulgated thereunder.
(b) If the Company registers any class of equity securities pursuant
to Section 12 of the Exchange Act and if prior to such time either (x) the
shareholders of the Company did not approve this Plan or (y) the Company did
not solicit shareholder approval substantially in accordance with Section 14(a)
of the Exchange Act and the rules and regulations promulgated thereunder, then
the Company shall take all necessary actions to qualify the Plan under Rule
16(b)(3) promulgated under the Exchange Act at or prior to the later of (A) the
first annual meeting of shareholders held subsequent to the first registration
of any class of equity securities of the Company under Section 12 of the
Exchange Act or (B) the granting of an Option hereunder to an officer or
director after such registration.
18. Information to Optionees and Purchasers. The Company shall provide
annually to each Optionee and Purchaser, during the period that such Optionee
or Purchaser has one or more options or Stock Purchase Rights outstanding,
copies of the financial statements of the Company, even if such statements are
not provided to the shareholders of the Company.
19. Right of Company to Terminate Employment or Consulting Services. This
Plan shall not confer upon any Optionee or holder of a Stock Purchase Right any
right with respect to continuation of employment by or the rendition of
consulting services to the
14
<PAGE> 18
Company, any of its Subsidiaries or its Parent, nor shall it interfere in any
way with his or her right or the Company's, any of its Subsidiaries' or its
Parent's right to terminate his or her employment or services at any time, with
or without cause.
20. Rights of First Refusal and Repurchase. The written agreements
evidencing Options or Stock Purchase Rights may contain such provisions as the
Board shall determine (or pursuant to a separate agreement) to the effect that
(i) if an Optionee or Purchaser elects to sell all or any Shares that the
Optionee or Purchaser acquired upon the exercise of an Option or Stock Purchase
Right, then any proposed sale of such Shares by such Optionee or Purchaser
shall be subject to a right of first refusal in favor of the Company; and (ii)
upon the occurrence of certain specified events (including, without limitation,
termination of employment, divorce, bankruptcy or insolvency) the Company shall
have the right to repurchase from such Optionee or Purchaser all or any shares
(if less than all, with the consent of the Optionee or the Purchaser, as the
case may be) of Common Stock that such Optionee or Purchaser acquired upon the
exercise of an Option or Stock Purchase Right at the fair market value for such
shares on the date that such right of repurchase is triggered. Certificates
representing shares issued upon exercise of Options or Stock Purchase Rights
shall bear a restrictive legend to the effect that the transferability of such
shares is subject to the restrictions contained in this Plan and the applicable
written agreement between the Optionee or Purchaser and the Company.
21. Withholding. The Company's obligation to deliver shares of Common
Stock under this Plan shall be subject to applicable federal, state and local
tax withholding requirements. To the extent provided by the terms of the stock
option agreement relating to an Option, the Optionee may satisfy any federal,
state or local tax withholding obligation relating to the exercise of such
Option by any or a combination of the following means: (i) cash payment or wage
withholding; (ii) authorizing the Company to withhold from the Shares otherwise
issuable to the Optionee upon exercise of the Option the number of Shares
having a fair market value less than or equal to the amount of the withholding
tax obligation; or (iii) delivering to the Company unencumbered shares of
Common Stock owned by the Optionee having a fair market value less than or
equal to the amount of the withholding tax obligation; provided, however, that
with respect to clauses (ii) and (iii) above the Board in its sole discretion
may disapprove such payment and require that such taxes be paid in cash.
22. Separability. At a time when the Company has a class of equity
securities registered pursuant to Section 12 of the Exchange Act, if any of the
terms or provisions of this Plan conflict with the requirements of Rule 16b-3
promulgated under the Exchange Act and/or Section 422 of the Code, then such
terms or provisions shall be deemed inoperative to the extent they so
15
<PAGE> 19
conflict with the requirements of Rule 16b-3 promulgated under the Exchange
Act, and/or with respect to Incentive Stock Options, Section 422 of the Code.
The foregoing sentence shall not apply with respect to the requirements of Rule
16b-3 promulgated under the Exchange Act if the Board has expressly declared
that such requirements shall not apply. With respect to Incentive Stock
Options, if this Plan does not contain any provision required to be included
herein under Section 422 of the Code, such provision shall be deemed to be
incorporated herein with the same force and effect as if such provision had
been set out at length herein. To the extent any Option that is intended to
qualify as an Incentive Stock Option cannot so qualify, such Option, to that
extent, shall be deemed to be a Nonstatutory Stock Option for all purposes of
this Plan.
23. Non-Exclusivity of this Plan. The adoption of this Plan by the Board
shall not be construed as creating any limitations on the power of the Board to
adopt such other incentive arrangements as it may deem desirable, including,
without limitation, the granting of stock options and the awarding of stock and
cash otherwise than under this Plan, and such arrangements may be either
generally applicable or applicable only in specific cases.
24. Governing Law. This Plan shall be governed by, and construed in
accordance with the laws of the State of California.
25. Cancellation of and Substitution for Nonstatutory Options. The
Company shall have the right to cancel any Nonstatutory Stock Option at any
time before it otherwise would have expired by its terms and to grant to the
same Optionee in substitution therefor a new Nonstatutory Stock Option stating
an option price which is lower (but not higher) than the option price stated in
the cancelled Option. Any such substituted option shall contain all the terms
and conditions of the cancelled Option; provided, however, that such
substituted Option shall not be exercisable after the expiration of ten (10)
years and one day from the date of grant of the cancelled Option.
26. Market Standoff. Unless the Board determines otherwise, each Optionee
or Purchaser shall not sell or otherwise transfer any Shares or other
securities of the Company during the 180-day period following the effective
date of a registration statement of the Company filed under the Securities Act;
provided, however, that such restriction shall apply only to the first two
registration statements of the Company to become effective under the Securities
Act which includes securities to be sold on behalf of the Company to the public
in an underwritten public offering under the Securities Act. The Company may
impose stop-transfer instructions with respect to securities subject to the
foregoing restrictions until the end of such 180-day period.
16
<PAGE> 1
EXHIBIT 16.1
March 21, 2000
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Gentlemen:
We have read "Change of Auditors" section of Form S-1 dated March 21, 2000, of
Capstone Turbine Corporation and are in agreement with the statements contained
therein. We have no basis to agree or disagree with other statements of the
registrant contained therein.
/s/ Ernst & Young LLP
---------------------
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders of
Capstone Turbine Corporation:
We consent to the use in this Registration Statement of Capstone Turbine
Corporation, on Form S-1 of our report dated March 20, 2000, appearing in the
Prospectus, which is part of this Registration Statement and our report dated
March 20, 2000, relating to the financial statement schedule appearing elsewhere
in this Registration Statement.
We also consent to the reference to us under the headings "Experts" and
"Selected Historical Financial Data" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
March 21, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated April 3, 1998 in the Registration Statement (Form S-1)
and related Prospectus of Capstone Turbine Corporation for the registration of
shares of its common stock.
/s/ ERNST & YOUNG LLP
---------------------
Woodland Hills, California
March 21, 2000
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