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As filed with the Securities and Exchange Commission on May 12, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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Active Power, Inc.
(Exact name of registrant as specified in its charter)
Delaware 3261 74-2642142
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number)
Identification Number)
incorporation or
organization) --------------
Active Power, Inc.
11525 Stonehollow Dr.
Suite 110
Austin, TX 78758
Telephone: (512) 836-6464, Facsimile: (512) 836-4511
(Address, including zip code, and telephone number, including area code, of
the registrant's principal executive offices)
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Joseph F. Pinkerton, III
Chief Executive Officer
11525 Stonehollow Drive
Suite 110
Austin, TX 78758
Telephone: (512) 836-6464
Facsimile: (512) 836-4511
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
J. MATTHEW LYONS, P.C. ROBERT S. BAIRD
TED A. GILMAN JEFFREY A. CHAPMAN
Brobeck, Phleger & Harrison SHANNA DINWIDDIE JONES
LLP Vinson & Elkins L.L.P.
301 Congress Avenue, Suite 600 Congress Avenue
1200 Austin, Texas 78701
Austin, Texas 78701 Telephone: (512) 495-8400
Telephone: (512) 477-5495 Facsimile: (512) 495-8612
Facsimile: (512) 477-5813
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
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, as amended, 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, please 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. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Title of each Class of Proposed Maximum Amount of
Securities to be Registered Aggregate Offering Price (1) Registration Fee
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<S> <C> <C>
Common Stock, $0.001 par
value......................... $100,000,000 $26,400
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</TABLE>
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(1)Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o).
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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, as amended, or until the
Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to such Section 8(a), may determine.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 , 2000.
Shares
[LOGO OF ACTIVE POWER APPEARS HERE]
ACTIVE POWER, INC.
Common Stock
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This is an initial public offering of shares of common stock of Active Power,
Inc. All of the shares of common stock are being sold by Active Power.
Prior to this offering, there has been no public market for the common stock.
It is estimated that the initial public offering price per share will be
between $ and $ . Active Power intends to have the common stock approved
for quotation on the Nasdaq National Market under the symbol "ACPW".
See "Risk Factors" beginning on page 7 to read about factors you should
consider before buying shares of our common stock.
-----------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR
ACCURACY 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 Active Power......................... $ $
</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 Active Power and up to an additional shares from a selling
stockholder identified in this prospectus at the initial public offering price
less the underwriting discount. Active Power will not receive any of the
proceeds from the sale of any shares sold by the selling stockholder.
-----------
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
CIBC WORLD MARKETS
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Prospectus dated , 2000.
<PAGE>
[INSIDE FRONT COVER GRAPHICS]
[Description of graphics: The inside front cover has three graphical
depictions.
The first graphic is located on the top half of the page and is captioned
"Improving power quality for the digital economy". This graphic depicts
conceptually how our products shield sensitive electronic equipment from power
supply disturbances. The graphic depicts the flow of electricity from a power
generating facility, located in the far left side of the graphic, along power
transmission lines to the digital equipment of customers, located in the far
right side of the graphic.
Clouds are depicted on the upper left portion of the graphic above the power
transmission lines. Lightning bolts are shown striking down from the clouds
onto the power lines, representing a storm-induced disturbance to the
electricity supply.
In the center of the graphic, separating the power lines from the end-user's
sensitive electronic equipment lies a rectangular box containing the Active
Power name and logo, representing our products which protect the customer's
equipment from the power disturbance.
Arrows pointing down and to the right represent clean electrical power flowing
from the Active Power box to the user's telecommunications equipment, computer
network and circuit boards that are located on the lower right of the graphic.
At the left side of the bottom of the page is a graphic with the caption
"CleanSource UPS Technology". The graphic is a three-dimensional rendering of
our CleanSource UPS product showing the exposed internal components of the
product without its sheet-metal shell. The graphic shows the appearance and
relative size and location of the components of the product. The flywheel
energy storage component is visible at the bottom of the CleanSource UPS
product while the UPS electronics appear closer to the top.
At the right side of the bottom of the page is a graphic with the caption "CAT
branded CleanSource UPS". This graphic is a three-dimensional rendering of a
Caterpillar-branded CleanSource UPS product showing the external appearance of
the product with its painted sheet-metal shell. Caterpillar's "CAT" logo is
visible on the upper left of the front side of the product.]
<PAGE>
PROSPECTUS SUMMARY
This summary provides an overview of the key aspects of the offering.
Because this is a summary, it may not contain all of the information that is
important to you.
Active Power, Inc.
Overview
We design, manufacture and market power quality products that provide the
consistent, reliable electric power required by today's digital economy. We are
the first company to commercialize a flywheel energy storage system that
provides a highly reliable, low-cost and non-toxic replacement for lead-acid
batteries used in conventional power quality installations. Leveraging our
expertise in this technology and in conjunction with Caterpillar, the leading
maker of engine generators for the power reliability market, we have developed
a battery-free power quality system, which is marketed under the Caterpillar
brand name. As an extension of our existing product lines, we are developing a
fully integrated continuous power system. The initial target market for this
product is the rapidly growing telecommunications industry.
Industry Background
The worldwide demand for high quality electricity has been increasing
rapidly in recent years, driven in large part by the growth in the use of
computers, the Internet and telecommunications products. These applications are
far less tolerant of voltage disturbances, such as sags and surges, and power
outages, than conventional uses. A 1999 study by the Electric Power Research
Institute estimated that electric power problems annually cost U.S. industry
more than $30 billion in lost data, material and productivity. Almost all end
users of sophisticated electronic equipment recognize these issues and are
seeking solutions for their power quality and reliability problems.
Conventional Power Quality Systems and Their Limitations
Currently, there are a variety of approaches that attempt to address the
deficiencies of power delivered by the electric utility grid. Conventional
power quality systems have been constructed from an array of devices, including
batteries for short-term power disturbances, engine generators, commonly
referred to as "gensets", for longer-term outages, and control electronics to
bridge the two. A short-term (seconds to minutes) energy storage device with
control electronics is referred to as an uninterruptible power supply, or UPS.
A UPS coupled with a genset to protect against longer-term outages (minutes to
hours or days) is referred to as a continuous power system, or CPS. The
conventional patchwork approach to UPS and CPS has resulted in inefficient
systems that generally are expensive, unreliable and environmentally unsound.
Active Power's Products
Rather than adopt conventional approaches to power quality systems, we
design new solutions specifically for the power quality market. As a result, we
believe that we create products that are less expensive, more efficient and
more reliable than other systems presently available.
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CLEANSOURCE DC
Our first product, CleanSource DC, is a patented flywheel-based energy
storage system that is a cost-effective, reliable, non-toxic replacement for
the lead-acid batteries used in a UPS. Our flywheel stores kinetic energy by
spinning constantly in a patented low-friction environment. When the user
requires power, our product converts the kinetic energy of the spinning
flywheel into electricity. Our first CleanSource DC unit was placed in service
in March 1997. Our installed CleanSource DC units have accumulated over 235,000
hours of field operation without a loss of electric power.
CLEANSOURCE UPS
Our second product, CleanSource UPS, is the primary focus of our current
sales efforts. It integrates UPS electronics, which detect any power quality
problems and correct them by regulating the use of alternative sources of
energy, with our flywheel-based energy storage system. As a result of the
efficiencies created by the significant component overlap in the two systems,
CleanSource UPS represents a compact, reliable and efficient power quality
solution. When used with a genset, CleanSource UPS also provides a continuous
power solution. We developed CleanSource UPS in collaboration with Caterpillar,
the leading manufacturer and supplier of gensets to the power quality and
reliability market. We have granted Caterpillar exclusive distribution rights
to CleanSource UPS, subject to limited exceptions. It markets CleanSource UPS
under the Caterpillar brand name. We believe that our relationship with
Caterpillar provides our product with immediate brand recognition and provides
us with access to Caterpillar's worldwide sales, service and support network.
FUTURE PRODUCTS
We also are developing additional products to increase the quality of power
while decreasing its cost. These include:
FULLY INTEGRATED CONTINUOUS POWER SYSTEM. Leveraging the technology and
design expertise developed in our earlier products, we are developing a fully
integrated continuous power system. This system will combine short and long
term energy storage and UPS functionality into one fully integrated system. We
believe that this product will provide customers with higher levels of power
reliability and lower operating costs than conventional patchwork, lead-acid
battery based approaches. The initial target market for this product is as a
back-up power source for distributed telecommunications applications.
DISTRIBUTED POWER TECHNOLOGY. Under an agreement with Caterpillar, the
world's leading producer of distributed power systems, we are studying the
potential benefits of a new type of electromechanical technology that can be
used in distributed power applications.
OUR BUSINESS STRATEGY
Our goal is to become the leading supplier of power quality and reliability
equipment. Key elements of our strategy include:
. designing, manufacturing and marketing optimal solutions for targeted
markets;
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. leveraging our core technologies to develop next generation products;
. distributing and marketing our products through established original
equipment manufacturer channels;
. leveraging our relationship with Caterpillar to achieve rapid market
penetration;
. outsourcing components to rapidly scale manufacturing; and
. aggressively protecting our intellectual property.
Market Opportunities
The Electric Power Research Institute estimates that power disturbances
cost U.S. businesses more than $30 billion each year. According to industry
sources, in 1999 businesses spent in excess of $10.0 billion globally on power
quality and reliability products in an attempt to reduce these losses. Our
current products, CleanSource DC and CleanSource UPS, are targeted at the $5.5
billion market for UPS, which is expected to grow at an annual rate of 10% to
15% over the next several years. We believe that our CleanSource products are
superior alternatives to conventional UPS and CPS products and should be able
to rapidly penetrate this growing segment of the power quality industry. With
future products, we anticipate that we will be able to compete in most segments
of this market.
We intend to focus on the following market opportunities:
Internet Market
A study conducted by the University of Texas and released by Cisco Systems,
Inc. found that the U.S. Internet economy grew at an estimated average annual
rate of 175% from 1995 to 1998. This study also projected that the U.S.
Internet economy would grow to $507 billion in 1999, up 68% from 1998. To
support this growth, internet service providers must construct new facilities
to house the computers and communications systems required to provide around-
the-clock service to their customers. To ensure continuous service, ISPs are
adding power quality equipment to protect these systems.
Telecommunications Market
To ensure uninterrupted service, wireless telecommunications providers must
have continuous power at each cellular and PCS station. The market for back-up
telecommunications power systems represents approximately $3.0 billion of the
$10.0 billion power quality market and is growing at approximately 10% to 15%
per year. Conventional CPS systems dominate this market using a patchwork of
gensets, lead-acid batteries and UPS electronics. We are designing our next
generation product, a fully integrated CPS, to service the specific needs of
this market, although we expect broader market applications in the future. We
believe that our fully integrated CPS will be well positioned to serve this
market.
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Other Power Quality and Reliability Markets
Industrial. An Electric Power Research Institute study on recurring U.S.
power problems estimated that the average U.S. manufacturing facility
experienced in excess of 20 power disturbances annually. Exacerbating this
problem, manufacturing organizations are employing increasing levels of
automation, especially process and machine control, communications and
computerized optimization of material flow. Even brief power disturbances,
which result in lost material, lost data, and worker and plant down time, can
be very expensive. Industries with the potential to suffer significant loss
from power disturbances include semiconductor and pharmaceutical manufacturing,
plastic and fiber extrusion, textiles, and precision machining.
Commercial Facilities. Many commercial facilities such as office buildings,
hotels and university facilities now have a large number of computers or
servers. Historically, these businesses and their personal computer networks
have been unprotected from power disturbances or have only been spot-protected
with a small PC UPS under each person's desk. A single CleanSource UPS system
can protect as few as 200 PCs more cost effectively than many small PC UPS
products.
Retrofit Market. Caterpillar has the largest installed base of standby
generators in the world. Due to the growing requirement for high quality power,
many of the customers that rely on standby generators for long-term power
outages can no longer afford the five to ten second outage while the generator
starts. We believe that upgrading, or retrofitting, a portion of Caterpillar's
approximately 250,000 installed gensets worldwide by adding our CleanSource
UPS, thereby creating a CPS, represents a significant market opportunity.
Distributed Generation
Fuel cells and microturbines, which allow users to bypass the electric
utility grid by generating power locally, represent potential markets for our
CleanSource products. These distributed generation technologies currently
cannot respond effectively to rapid changes in electric power demands, or
loads, due to their slow response capability. CleanSource DC can absorb sharp
peaks in electrical demand, allowing a relatively expensive microturbine or
fuel cell to be sized for the average power requirement of the customer. This
combination provides a cost competitive alternative to sizing the fuel cell or
microturbine to handle both peak and average electrical demands. In addition,
CleanSource UPS can seamlessly transfer a customer load from utility power to
fuel cell or microturbine standby power in the event of a utility outage.
Corporate Information
We were founded as a Texas corporation in 1992. We changed our name from
Magnetic Bearing Technologies, Inc. to Active Power, Inc. in 1996. We
reincorporated in Delaware in 2000.
Our principal executive offices are located at 11525 Stonehollow Drive,
Suite 110, Austin, Texas 78758. Our telephone number is (512) 836-6464.
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The Offering
Common stock we are offering........ shares
Outstanding common stock after the
offering........................... shares
Use of proceeds..................... We intend to use the net proceeds for
working capital and other general
corporate purposes, including increases
in both component and finished goods
inventory, expansion of our
manufacturing facilities and capacity,
capital expenditures, research and
development, sales and marketing, and
possible acquisitions and international
expansion. See "Use of Proceeds".
Proposed Nasdaq National
Market symbol...................... ACPW
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of April 30, 2000, and assumes
the conversion of all of our preferred stock, other than our 1992 preferred
stock, into 8,084,208 shares of common stock and the likely exercise by a
stockholder of a warrant to purchase 200,000 shares of our common stock, which
warrant otherwise would expire at the closing of this offering. This number
excludes 1,568,864 shares of common stock issuable upon exercise of options
outstanding as of April 30, 2000 with a weighted average exercise price of
$1.68 per share, 93,852 additional shares of common stock reserved under our
option plan as of April 30, 2000, and 200,000 shares of common stock issuable
upon exercise of outstanding warrants as of April 30, 2000 with a weighted
average exercise price of $11.34 per share, and assumes no exercise of the
underwriters' over-allotment option.
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Assumptions that Apply to this Prospectus
This offering is for shares. The underwriters have a 30-day option to
purchase up to additional shares from us and up to additional shares
from a selling stockholder to cover over-allotments. Unless we state otherwise,
the information in this prospectus assumes that the underwriters will not
exercise the over-allotment option.
Except where we state otherwise, the information we present in this
prospectus:
. reflects our reincorporation in Delaware in March 2000, at which time
each share of common stock and preferred stock issued by our predecessor
Texas corporation was exchanged for two shares of a similar series of
common stock or preferred stock in the successor Delaware corporation;
and
. reflects the conversion of all outstanding shares of preferred stock,
other than our 1992 preferred stock, into 8,084,208 shares of common
stock upon the closing of this offering and the exercise by a stockholder
of a warrant to purchase 200,000 shares of our common stock, which
warrant otherwise would expire at the closing of this offering.
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All references in this prospectus to "we", "us", "ours" and "Active Power"
are intended to include Active Power, Inc., including our predecessor Texas
corporation.
5
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SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
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1997 1998 1999 1999 2000
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(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Product revenue................ $ 137 $ 915 $ 1,047 $ 203 $ 182
Product margin................. (20) (323) (1,959) (348) (339)
Development funding............ -- -- 5,000 3,000 --
Total operating expenses....... 3,862 5,971 7,794 1,427 3,572
Operating income (loss)........ (3,882) (6,294) (4,753) 1,225 (3,912)
Net income (loss).............. (3,738) (5,979) (7,419) 1,153 (5,108)
</TABLE>
The following table contains a summary of our unaudited balance sheet:
. on an actual basis at March 31, 2000;
. on a pro forma basis to reflect the conversion of all outstanding shares
of convertible preferred stock into 8,084,208 shares of common stock and
the likely exercise by a stockholder of a warrant to purchase 200,000
shares of common stock, which warrant otherwise would expire at the
closing of this offering, in each case as if such conversion or exercise
had occurred on March 31, 2000; and
. on a pro forma as adjusted basis at March 31, 2000 to additionally
reflect net proceeds from the sale of shares of common stock offered
hereby at an initial public offering price of $ per share.
<TABLE>
<CAPTION>
MARCH 31, 2000
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PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term invest-
ments.......................................... $ 23,360 $23,390 $
Working capital................................. 23,661 23,691
Total assets.................................... 26,377 26,407
Redeemable convertible preferred stock.......... 54,962 --
Stockholders' equity (deficit).................. (34,398) 25,250
</TABLE>
6
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RISK FACTORS
You should carefully consider the following risks and all other information
contained in this prospectus before deciding to invest in our common stock.
WE HAVE INCURRED SIGNIFICANT LOSSES AND ANTICIPATE LOSSES FOR THE NEXT SEVERAL
YEARS.
We have incurred operating losses since our inception and expect to
continue to incur losses in the foreseeable future. As of March 31, 2000, we
had an accumulated deficit of $29.1 million. To date, our product revenue has
been insignificant, and we have funded our operations through sales of our
equity and a $5.0 million development funding payment from Caterpillar. We will
need to generate significant revenue to achieve profitability, and we cannot
assure you that we will ever realize sufficient revenue to achieve
profitability. We also expect to incur significant product development, sales
and marketing and administrative expenses and, as a result, we expect to
continue to incur losses.
DUE TO OUR LIMITED OPERATING HISTORY AND THE UNCERTAIN MARKET ACCEPTANCE OF OUR
PRODUCTS, WE MAY NOT EVER ACHIEVE SIGNIFICANT REVENUE AND MAY HAVE DIFFICULTY
ACCURATELY PREDICTING REVENUE FOR FUTURE PERIODS AND APPROPRIATELY BUDGETING
FOR EXPENSES.
We have generated a total of $2.0 million in product revenue over the past
two years, and we have sold fewer than 100 CleanSource DC and CleanSource UPS
products. We are uncertain whether our products will achieve market acceptance
such that our revenues will increase or whether we will be able to achieve
significant revenue. Therefore, we have a very limited ability to predict
future revenue. In addition, we currently have only a small backlog of orders.
Our limited operating experience, the uncertain market acceptance for our
products, and other factors that are beyond our control make it difficult for
us to accurately forecast our quarterly and annual revenue. However, we use our
forecasted revenue to establish our expense budget. Most of our expenses are
fixed in the short term or incurred in advance of anticipated revenue. As a
result, we may not be able to decrease our expenses in a timely manner to
offset any revenue shortfall. Further, we are expanding our staff and
facilities and increasing our expense levels in anticipation of future revenue
growth. If our revenue does not increase as anticipated, we will incur
significant losses.
OUR BUSINESS IS SUBJECT TO FLUCTUATIONS IN OPERATING RESULTS, WHICH COULD
NEGATIVELY IMPACT THE PRICE OF OUR STOCK.
Our product revenue, expense and operating results have varied in the past
and may fluctuate significantly in the future due to a variety of factors, many
of which are outside of our control. These factors include, among others:
. our ability to timely develop and market new products;
. the timing of orders from our customers and the possibility that these
customers may change their order requirements with little or no advance
notice to us;
. deferrals of customer orders in anticipation of new products, services
or product enhancements from us or other providers of power quality
systems;
. the uncertainty regarding the adoption of our current and future
products;
. the rate of adoption of our CleanSource UPS as an alternative to current
UPS systems;
. effects of pricing pressures from manufacturers of competing or
alternative products and technologies;
. availability and cost of supplies and components of our products;
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. intellectual property disputes;
. quality problems with our products;
. the loss of significant personnel; and
. the rate of growth of the markets for our products.
OUR BUSINESS IS DEPENDENT ON THE MARKET FOR POWER QUALITY PRODUCTS, AND IF THIS
MARKET DOES NOT EXPAND AS WE ANTICIPATE, OR IF ALTERNATIVES TO OUR PRODUCTS ARE
SUCCESSFUL, OUR BUSINESS WILL SUFFER.
The market for power quality products is rapidly evolving and it is
difficult to predict its potential size or future growth rate. Most of the
organizations that may purchase our products have invested substantial
resources in their existing power systems and, as a result, may be reluctant or
slow to adopt a new approach. Moreover, our products are alternatives to
existing UPS and CPS systems and may never be accepted by our customers or may
be made obsolete by other advances in power quality technologies. Improvements
may also be made to the existing alternatives to our products which could
render them less desirable or obsolete.
WE HAVE LIMITED PRODUCT OFFERINGS, AND OUR SUCCESS DEPENDS ON OUR ABILITY TO
DEVELOP IN A TIMELY MANNER NEW AND ENHANCED PRODUCTS THAT ACHIEVE MARKET
ACCEPTANCE.
We have only one principal product that has any significant operating
history at customer sites, CleanSource DC, and we have only recently introduced
our CleanSource UPS product. To grow our revenue, we must rely on Caterpillar
to successfully market our CleanSource UPS product, and we must develop and
introduce to market new products and product enhancements in a timely manner.
Even if we are able to develop and commercially introduce new products and
enhancements, they may not achieve market acceptance. This would substantially
impair our revenue prospects.
Factors that may affect the market acceptance of our products, some of
which are beyond our control, include the following:
. the growth of, and changing requirements of customers within, the power
quality and reliability market;
. the performance, quality, price and total cost of ownership of our
products when compared to competing or alternative products and
technologies;
. the success of our relationship with Caterpillar, the exclusive,
worldwide distributor of our CleanSource UPS product, and Caterpillar's
success in introducing our CleanSource UPS product to its power quality
customers;
. our development of relationships with existing and new original
equipment manufacturer, or OEM, customers and their success in marketing
our products;
. power quality customers' reluctance to try a new product or technology;
. power quality customers' perceptions of the safety and quality of our
products; and
. the emergence of alternative technologies and products or the
improvement of existing alternatives to our products.
FAILURE TO EXPAND OUR DISTRIBUTION CHANNELS AND MANAGE OUR DISTRIBUTION
RELATIONSHIPS COULD IMPEDE OUR FUTURE GROWTH.
The future growth of our business will depend in part on our ability to
expand our existing relationships with OEMs, to identify and develop additional
channels for the distribution and sale of our products and to manage these
relationships. As part of our growth strategy, we intend to expand
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our relationships with OEMs and to develop relationships with new OEMs. We will
also look to identify and develop relationships with additional partners that
could serve as distributors for our products. Our inability to successfully
execute this strategy and to reduce our reliance on Caterpillar could impede
our future growth.
WE ARE HEAVILY DEPENDENT ON OUR RELATIONSHIP WITH CATERPILLAR. IF OUR
RELATIONSHIP IS UNSUCCESSFUL, OUR BUSINESS AND REVENUE WILL SUFFER.
Caterpillar provided us with $5.0 million in funding to support the
development of our CleanSource UPS product. In exchange for this payment,
Caterpillar received co-ownership of the proprietary rights in this product.
During 1999 and the first quarter of 2000, we received approximately $412,000,
or 39%, and $181,000, or 99%, respectively, of our product revenue from
Caterpillar. We have entered into an agreement with Caterpillar whereby they
are the exclusive distributor, subject to limited exceptions, of our
CleanSource UPS product. Caterpillar is not obligated to purchase any
CleanSource UPS units. If our relationship with Caterpillar is not successful,
or if Caterpillar's distribution of our CleanSource UPS product is not
successful, our business and revenue will suffer.
WE DEPEND ON A LIMITED NUMBER OF OEM CUSTOMERS FOR THE VAST MAJORITY OF OUR
REVENUE, AND THE LOSS OF OR SIGNIFICANT REDUCTION IN ORDERS FROM ANY KEY OEM
CUSTOMER, PARTICULARLY CATERPILLAR, WOULD SIGNIFICANTLY REDUCE OUR REVENUE.
We rely on OEMs as a primary distribution channel as they are able to sell
our products to a large number of end-user organizations. We believe that the
use of OEM channels will enable our products to achieve broad market
penetration, while we devote a limited amount of our resources to sales,
marketing and customer service and support. Our operating results in the
foreseeable future will continue to depend on sales to a relatively small
number of OEM customers, primarily Caterpillar. Therefore, the loss of any of
our key OEM customers, particularly Caterpillar, or a significant reduction in
sales to any one of them, would significantly reduce our revenue.
OEMS MAY DEVOTE A LIMITED AMOUNT OF THEIR RESOURCES TO SALES, MARKETING AND
CUSTOMER SERVICE AND SUPPORT OF OUR PRODUCTS, WHICH WOULD ADVERSELY AFFECT OUR
PRODUCT REVENUES.
As a part of our OEM strategy, we do not make all of our products available
to all of our OEMs. Consequently, an OEM could sell one of our products and
compete with another product that we have not made available to it. For
example, because of our relationship with Caterpillar, none of our current or
potential future CleanSource DC OEMs, other than Caterpillar, is able to sell
CleanSource UPS. As a result, OEMs may devote a limited amount of resources to
sales, marketing and customer service and support of our products.
WE MAY HAVE DIFFICULTY MANAGING THE EXPANSION OF OUR OPERATIONS.
We are undergoing rapid growth in the number of our employees, the size of
our physical facilities and the scope of our operations. For example, we had 38
employees on January 1, 1998 and expect to have approximately 136 by July 1,
2000. Such rapid expansion is likely to place a significant strain on our
senior management team and other resources. Our business, prospects, results of
operations or financial condition could be harmed if we encounter difficulties
in effectively managing the budgeting, forecasting and other process control
issues presented by such a rapid expansion.
WE HAVE NO EXPERIENCE MANUFACTURING OUR PRODUCTS IN THE QUANTITIES WE EXPECT TO
SELL IN THE FUTURE.
To be financially successful, we will have to manufacture our products in
commercial quantities at acceptable costs while also preserving the quality
levels achieved in manufacturing these products
9
<PAGE>
in more limited quantities. This presents a number of technological and
engineering challenges for us. We cannot assure you that we will be successful
in executing the planned expansion of our manufacturing activities. We have not
previously manufactured our products in high volume. We do not know whether or
when we will be able to develop efficient, low-cost manufacturing capability
and processes that will enable us to meet the quality, price, engineering,
design and product standards or production volumes required to successfully
manufacture large quantities of our products. Even if we are successful in
developing our manufacturing capability and processes, we do not know whether
we will do so in time to meet our product commercialization schedule or to
satisfy the requirements of our customers.
WE ARE SUBJECT TO INCREASED INVENTORY RISKS AND COSTS BECAUSE WE OUTSOURCE THE
MANUFACTURING OF COMPONENTS OF OUR PRODUCTS IN ADVANCE OF BINDING COMMITMENTS
FROM OUR CUSTOMERS TO PURCHASE OUR PRODUCTS.
To assure the availability of our products to our OEM customers, we
outsource the manufacturing of components prior to the receipt of purchase
orders from OEM customers based on their forecasts of their product needs.
However, these forecasts do not represent binding purchase commitments, and we
do not recognize revenue for such products until the product is shipped to the
OEM. As a result, we incur inventory and manufacturing costs in advance of
anticipated revenue. As demand for our products may not materialize, this
product delivery method subjects us to increased risks of high inventory
carrying costs and obsolescence and may increase our operating costs. In
addition, we may from time to time make design changes to our products which
could lead to obsolescence of inventory.
WE DEPEND ON SOLE SOURCE AND LIMITED SOURCE SUPPLIERS FOR CERTAIN KEY
COMPONENTS, AND IF WE ARE UNABLE TO BUY THESE COMPONENTS ON A TIMELY BASIS, OUR
DELAYED ABILITY TO DELIVER OUR PRODUCTS TO OUR CUSTOMERS MAY RESULT IN REDUCED
REVENUE AND LOST SALES.
We purchase power electronic converters, forged steel and other key
components for our products from sole or limited sources. We do not have long-
term contracts with any of our suppliers, and to date most of our component
purchases have been made in relatively small volumes. As a result, if our
suppliers receive excess demand for their products, we may receive a low
priority for order fulfillment as large volume customers will receive priority.
If we are delayed in acquiring components for our products, the manufacture and
shipment of our products also will be delayed. We generally use a twelve month
forecast of our future product sales to determine our component requirements.
Lead times for ordering materials and components vary significantly and depend
on factors such as specific supplier requirements, contract terms, the
extensive production time required and current market demand for such
components. Some of these delays may be substantial. As a result, we purchase
these components in large quantities to protect our ability to deliver finished
products. If we overestimate our component requirements, we may have excess
inventory, which will increase our costs. If we underestimate our component
requirements, we will have inadequate inventory, which will delay our
manufacturing and render us unable to deliver products to customers on
scheduled delivery dates. If we are unable to obtain a component from a
supplier or if the price of a component has increased substantially, we will be
required to manufacture the component internally, which will result in delays.
Manufacturing delays could negatively impact our ability to sell our products
and could damage our customer relationships.
WE 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 power needs. A
malfunction or the inadequate design of our products could result in tort or
warranty claims. Although we attempt to reduce the risks of these types of
losses by limiting the scope and coverage of our product warranties and through
warranty disclaimers and liability indemnification clauses in our agreements,
10
<PAGE>
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.
WE DEPEND ON KEY PERSONNEL TO MANAGE OUR BUSINESS AND DEVELOP NEW PRODUCTS IN A
RAPIDLY CHANGING MARKET, AND IF WE ARE UNABLE TO RETAIN OUR CURRENT PERSONNEL
AND HIRE ADDITIONAL PERSONNEL, OUR ABILITY TO DEVELOP AND SELL OUR PRODUCTS
COULD BE IMPAIRED.
We believe our future success will depend in large part upon our ability to
attract and retain highly skilled managerial, engineering and sales and
marketing personnel. In particular, due to the relatively early stage of our
business, we believe that our future success is highly dependent on Joseph F.
Pinkerton, III, our founder, chief executive officer and president, to provide
continuity in the execution of our growth plans. We do not have employment
contracts with any of our key personnel. The loss of the services of any of our
key employees, the inability to attract or retain qualified personnel in the
future or delays in hiring required personnel, particularly engineers and sales
personnel, could delay the development and introduction of, and negatively
impact our ability to sell, our products.
WE HAVE HIRED A SUBSTANTIAL NUMBER OF OUR EMPLOYEES FROM OUR CURRENT CUSTOMERS
AND FROM SOME OF OUR COMPETITORS, WHICH COULD DAMAGE OUR CUSTOMER RELATIONSHIPS
AND EXPOSE US TO POTENTIAL LITIGATION.
There is a limited supply of skilled employees in the power quality
industry. We have hired many of our current employees from our customers and
our competitors. As a result, some of our current customers might begin to view
us as competitors in the future, and one or more of our competitors could file
lawsuits against us alleging the infringement of their trade secrets and other
intellectual property. Although we do not believe we have infringed upon the
intellectual property of our competitors, such lawsuits could divert our
attention and resources from our business operations.
WE ARE A RELATIVELY SMALL COMPANY WITH LIMITED RESOURCES COMPARED TO SOME OF
OUR CURRENT AND POTENTIAL COMPETITORS, AND COMPETITION WITHIN OUR MARKETS MAY
LIMIT OUR SALES GROWTH.
The markets for power quality and power reliability are intensely
competitive. There are many companies engaged in all areas of traditional and
alternative UPS and CPS systems in the United States, Canada and abroad,
including, among others, major electric and specialized electronics firms, as
well as universities, research institutions and foreign government-sponsored
companies. There are many companies located in the United States, Canada and
abroad that are developing flywheel-based energy storage systems and flywheel-
based power quality systems. We also compete indirectly with companies that are
developing other types of power technologies, such as Superconducting Magnetic
Energy Storage, ultra-capacitors and dynamic voltage restorers.
Many of our current and potential competitors have longer operating
histories, significantly greater resources, broader name recognition and a
larger customer base than we have. As a result, these competitors may have
greater credibility with our existing and potential customers. They also may be
able to adopt more aggressive pricing policies and devote greater resources to
the development, promotion and sale of their products than we can to ours,
which would allow them to respond more quickly than us to new or emerging
technologies or changes in customer requirements. In addition, some of our
current and potential competitors have established supplier or joint
development relationships with our current or potential customers. These
competitors may be able to leverage their existing relationships to discourage
these customers from purchasing products
11
<PAGE>
from us or to persuade them to replace our products with their products.
Increased competition could decrease our prices, reduce our sales, lower our
margins, or decrease our market share. These and other competitive pressures
could prevent us from competing successfully against current or future
competitors and could materially harm our business.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WE MAY BE UNABLE TO
COMPETE.
Our products rely on our proprietary technology, and we expect that future
technological advancements made by us will be critical to sustain market
acceptance of our products. Therefore, we believe that the protection of our
intellectual property rights is, and will continue to be, important to the
success of our business. We rely on a combination of patent, copyright,
trademark and trade secret laws and restrictions on disclosure to protect our
intellectual property rights. We also enter into confidentiality or license
agreements with our employees, consultants and business partners and control
access to and distribution of our software, documentation and other proprietary
information. Despite these efforts, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. Monitoring unauthorized
use of our products is difficult, and we cannot be certain that the steps we
have taken will prevent unauthorized use of our technology, particularly in
foreign countries where applicable laws may not protect our proprietary rights
as fully as in the United States. In addition, the measures we undertake may
not be sufficient to adequately protect our proprietary technology and may not
preclude competitors from independently developing products with functionality
or features similar to those of our products.
OUR EFFORTS TO PROTECT OUR INTELLECTUAL PROPERTY MAY CAUSE US TO BECOME
INVOLVED IN COSTLY AND LENGTHY LITIGATION WHICH COULD SERIOUSLY HARM OUR
BUSINESS.
In recent years, there has been significant litigation in the United States
involving patents, trademarks and other intellectual property rights. Although
we have not been involved in intellectual property litigation, we may become
involved in litigation in the future to protect our intellectual property or
defend allegations of infringement asserted by others. Legal proceedings could
subject us to significant liability for damages or invalidate our intellectual
property rights. Any litigation, regardless of its outcome, would likely be
time consuming and expensive to resolve and would divert management's time and
attention. Any potential intellectual property litigation also could force us
to take specific actions, including:
. cease selling our products that use the challenged intellectual
property;
. obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology or trademark, which
license may not be available on reasonable terms, or at all; or
. redesign those products that use infringing intellectual property or
cease to use an infringing trademark.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL
CONDITION.
As part of our growth strategy, we intend to review opportunities to
acquire other businesses or technologies that would complement our current
products, expand the breadth of our markets or enhance our technical
capabilities. We have no experience in making acquisitions. Acquisitions entail
a number of risks that could materially and adversely affect our business and
operating results, including:
. problems integrating the acquired operations, technologies or products
with our existing business and products;
12
<PAGE>
. potential disruption of our ongoing business and distraction of our
management;
. difficulties in retaining business relationships with suppliers and
customers of the acquired companies;
. difficulties in coordinating and integrating overall business
strategies, sales and marketing, and research and development efforts;
. the maintenance of corporate cultures, controls, procedures and
policies;
. risks associated with entering markets in which we lack prior
experience; and
. potential loss of key employees.
WE MAY REQUIRE SUBSTANTIAL ADDITIONAL FUNDS IN THE FUTURE TO FINANCE OUR
PRODUCT DEVELOPMENT AND COMMERCIALIZATION PLANS.
Our product development and commercialization schedule could be delayed if
we are unable to fund our research and development activities or the
development of our manufacturing capabilities with our revenue, cash on hand
and proceeds from this offering. We expect that the net proceeds of this
offering, together with our other available sources of working capital, will be
sufficient to fund development activities for at least 24 months. However,
unforeseen delays or difficulties in these activities could increase costs and
exhaust our resources prior to the full commercialization of our products under
development. We do not know whether we will be able to secure additional
funding, or funding on terms acceptable to us, to continue our operations as
planned. If financing is not available, we may be required to reduce, delay or
eliminate certain activities or to license or sell to others some of our
proprietary technology.
INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER OUR COMPANY AFTER THIS
OFFERING AND COULD DELAY OR PREVENT A CHANGE IN CORPORATE CONTROL.
Upon completion of this offering, our executive officers and directors, and
their respective affiliates, will beneficially own, in the aggregate,
approximately % of our outstanding common stock. As a result, these
stockholders will be able to exert significant control over all matters
requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. This concentration of voting
power could delay or prevent an acquisition of our company on terms which other
stockholders may desire.
PROVISIONS IN OUR CHARTER DOCUMENTS AND OF DELAWARE LAW, AND PROVISIONS IN OUR
AGREEMENT WITH CATERPILLAR, COULD PREVENT, DELAY OR IMPEDE A CHANGE IN CONTROL
OF OUR COMPANY AND MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
Provisions of our certificate of incorporation and bylaws could have the
effect of discouraging, delaying or preventing a merger or acquisition that a
stockholder may consider favorable. We also are subject to the anti-takeover
laws of the State of Delaware which may further discourage, delay or prevent
someone from acquiring or merging with us. In addition, our agreement with
Caterpillar for the distribution of CleanSource UPS provides that Caterpillar
may terminate the agreement in the event we are acquired or undergo a change in
control. The possible loss of our most significant customer could be a
significant deterrent to possible acquirors and may substantially limit the
number of possible acquirors. All of these factors may decrease the likelihood
that we would be acquired, which may depress the market price of our common
stock. Please see "Description of Capital Stock--Anti-Takeover Effects" for
more information concerning the anti-takeover provisions applicable to us.
13
<PAGE>
OUR STOCK PRICE MAY BE VOLATILE, AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES
AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.
Prior to this offering, there has been no public market for our common
stock. Although we have applied to have our common stock quoted on the Nasdaq
National Market, an active trading market for our shares may never develop or
be sustained following this offering. The initial public offering price for our
common stock will be determined through negotiations between the underwriters
and us. This initial public offering price may vary from the market price of
our common stock after the offering. If you purchase shares of common stock,
you may not be able to resell those shares at or above the initial public
offering price. The market price of our common stock may fluctuate
significantly in response to numerous factors, some of which are beyond our
control, including the following:
. actual or anticipated fluctuations in our operating results;
. changes in financial estimates by securities analysts or our failure to
perform in line with such estimates;
. changes in market valuations of other technology companies, particularly
those that sell products used in power quality systems;
. announcements by us or our competitors of significant technical
innovations, acquisitions, strategic partnerships, joint ventures or
capital commitments;
. introduction of technologies or product enhancements that reduce the
need for flywheel energy storage systems;
. the loss of one or more key OEM customers; and
. departures of key personnel.
WE MAY BE SUBJECT TO LITIGATION IF OUR STOCK PRICE IS VOLATILE
Our stock price may be volatile due to numerous factors, including those
listed above. In addition, the stock market has recently experienced extreme
volatility that often has been unrelated to the performance of particular
companies. These market fluctuations may cause our stock price to fall
regardless of our performance. In the past, companies that have experienced
volatility in the market price of their stock have been the subject of
securities class action litigation. We may be involved in a securities class
action litigation in the future. Such litigation often results in substantial
costs and a diversion of management's attention and resources and could harm
our business, prospects, results of operations or financial condition.
14
<PAGE>
Of our total outstanding shares, , or %, are restricted from immediate
resale but may be sold into the market in the near future. This could cause the
market price of our common stock to drop significantly, even if our business is
doing well.
After this offering, we will have outstanding shares of common stock based
on the number of shares outstanding at April 30, 2000. This includes the
shares we are selling in this offering, which may be resold in the public
market immediately. The remaining 13,372,927 shares will become available for
resale in the public market as shown in the chart below.
<TABLE>
<CAPTION>
Number of Shares/%
of Total Shares
Outstanding Date of availability for resale into the public market
------------------ -----------------------------------------------------------
<C> <S>
Immediately (except to the extent purchased by our
affiliates).
2,278,424/ % 90 days after the date of this prospectus due to lock-up
agreements these stockholders have with the underwriters if
the conditions described under "Shares Eligible for Future
Sale--Lock-up Agreements" are satisfied.
2,278,949/ % 120 days after the date of this prospectus if additional
conditions described under "Shares Eligible for Future
Sale--Lock-up Agreements" are satisfied.
6,879,682/ % 180 days after the date of this prospectus due to the
release of the lock-up agreement these shareholders have
with the underwriters.
1,935,872/ % Between 181 and 365 days after the date of this prospectus
subject to the requirements of the federal securities laws.
</TABLE>
As restrictions on resale end, the market price of our stock could drop
significantly if the holders of restricted shares sell them or are perceived by
the market as intending to sell them. For more detailed information, see
"Shares Eligible for Future Sale" on page 58.
Our management may apply the proceeds of this offering to uses that our
stockholders may not agree with and in ways that do not improve our efforts to
achieve profitability or increase our stock price.
Although in "Use of Proceeds" we have specified some ways in which we
initially intend to use a portion of the proceeds of this offering, our
management will have considerable discretion in the application of the net
proceeds received by us from this offering, and you will not have the
opportunity, as part of your investment decision, to assess whether the
proceeds are being used appropriately. You must rely on the judgment of our
management regarding the application of the proceeds of this offering. The net
proceeds may be used for corporate purposes that do not improve our efforts to
achieve profitability or increase our stock price. Pending application of the
net proceeds from this offering, they may be placed in investments that do not
produce income or that lose value.
15
<PAGE>
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as:
. ""may''
. ""will''
. ""expect''
. ""intend''
. ""anticipate''
. ""believe''
. ""estimate''
. ""continue''
. and other similar words.
You should read statements that contain these words and other forward-
looking statements carefully because they discuss our future expectations, make
projections of our future results of operations or of our financial condition
or state other "forward-looking" information. We believe that it is important
to communicate our future expectations to our investors. However, there may be
events in the future that we are not able to accurately predict or control. The
factors listed in the sections captioned "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations", as
well as any cautionary language in this prospectus, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. Before you
invest in our common stock, you should be aware that the occurrence of the
events described in the "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" sections and
elsewhere in this prospectus could have a material adverse effect on our
business, operating results and financial condition.
16
<PAGE>
USE OF PROCEEDS
At the initial public offering price of $ per share, we will receive
approximately $ million from our sale of shares of common stock, net of
estimated offering expenses and underwriting discounts and commissions payable
by us. If the underwriters exercise their over-allotment option in full, we
will receive an additional $ million in net proceeds and the selling
stockholder will receive an aggregate of $ in net proceeds. We will not
receive any portion of the net proceeds received by a selling stockholder from
the sale of his shares upon exercise of the underwriters' over-allotment
option. See "Principal and Selling Stockholders".
The principal purposes of this offering are to increase our equity capital,
create a public market for our common stock under market conditions that we
believe are favorable, facilitate future access by us to public equity markets
and provide us with increased visibility in our markets. We estimate that we
will use the net proceeds of the offering for general corporate purposes,
including increases in both component and finished goods inventory, expansion
of our manufacturing facilities and capacity, capital expenditures, research
and development, sales and marketing and possible acquisitions and
international expansion. Additionally, following this offering, our board of
directors may determine to use $210,000 of our proceeds to redeem our 1992
preferred stock. As of the date of this prospectus, we have not allocated any
specific amount of proceeds for these purposes.
Notwithstanding the estimates set forth above, our management will have
significant flexibility in applying the net proceeds of this offering. For
example, we may use a portion of the net proceeds to acquire businesses,
products or technologies that are complimentary to our current or future
business and product lines. Although we are not subject to any agreement or
letter of intent with respect to potential acquisitions, we have from time to
time engaged in acquisition discussions with other parties. Pending any such
uses of the proceeds of this offering, we will invest the net proceeds of this
offering in short-term, investment grade, interest-bearing instruments.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future. Any determination to pay dividends in the future will
be at the discretion of our board of directors and will depend upon, among
other factors, our results of operations, financial condition and capital
requirements. Our credit agreements prohibit us from paying cash dividends.
17
<PAGE>
CAPITALIZATION
The following table sets forth our short-term debt and capitalization:
. on an actual basis at March 31, 2000;
. on a pro forma basis at March 31, 2000 to reflect the conversion of all
outstanding shares of our preferred stock, other than the 1992 preferred
stock, into 8,084,208 shares of our common stock, and the likely
exercise by a stockholder of warrants to purchase 200,000 shares of
common stock, which warrant otherwise would expire at the closing of
this offering;
. on a pro forma as adjusted basis at March 31, 2000 to additionally
reflect net proceeds from the sale of shares of common stock offered
hereby at an assumed initial public offering price of $ per share.
You should read the following table in conjunction with our financial
statements and the notes to those statements which are included in this
prospectus.
<TABLE>
<CAPTION>
As of March 31, 2000
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands, except share
data)
(unaudited)
<S> <C> <C> <C>
Warrants with redemption rights................. $ 4,656 -- --
Redeemable convertible preferred stock, $0.001
par value, 8,527,166 shares designated,
7,732,082 issued and outstanding, actual; no
shares designated, issued or outstanding, pro
forma and pro forma as adjusted................ 54,962 -- --
1992 preferred stock, $0.001 par value, 420,000
shares designated, issued and outstanding...... -- -- --
Stockholders' equity (deficit):
Common stock, $0.001 par value, 30,000,000
shares authorized; 5,233,042 shares issued
and outstanding, actual; 13,517,250 shares
issued and outstanding, pro forma; shares
issued and outstanding, pro forma as
adjusted..................................... 3 11
Additional paid-in capital...................... 3,648 63,288
Unearned stock compensation..................... (8,926) (8,926) (8,926)
Accumulated deficit............................. (29,123) (29,123) (29,123)
------- ------- -------
Total stockholders' equity (deficit)........ (34,398) 25,250
------- ------- -------
Total capitalization...................... $25,220 $25,250 $
======= ======= =======
</TABLE>
- --------
The share information set forth above excludes:
. 200,000 shares issuable upon exercise of warrants with a weighted
average exercise price of $11.34 per share;
. 1,633,408 shares issuable upon exercise of outstanding options under
our stock option plan with a weighted average exercise price of $1.05
per share; and
. 13,852 additional shares of common stock reserved for issuance under
our stock option plan.
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<PAGE>
DILUTION
Our pro forma net tangible book value at March 31, 2000, was $25.3 million,
or $1.87 per share of common stock. Pro forma net tangible book value per share
represents the amount of our total tangible assets reduced by the amount of our
total liabilities, divided by the pro forma number of shares of common stock
outstanding as of March 31, 2000 after giving effect to the conversion of all
outstanding shares of our convertible preferred stock into 8,084,208 shares of
common stock and the likely exercise by a stockholder of a warrant to purchase
200,000 shares of common stock, which warrant otherwise would expire at the
closing of this offering.
Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the pro forma net tangible book value per share of
common stock immediately after the completion of this offering. After giving
effect to our sale of shares of common stock in this offering at an initial
public offering price of $ per share, and after deducting underwriting
discounts and commissions and estimated offering expenses payable by us, our
adjusted pro forma net tangible book value at March 31, 2000 would have been
$ million, or $ per share. This amount represents an immediate increase
in pro forma net tangible book value to our existing stockholders of $ per
share and an immediate dilution to new investors of $ per share. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share......................... $
Pro forma net tangible book value per share at March 31,
2000......................................................... $1.87
Increase in pro forma net tangible book value per share
attributable to new investors................................
-----
Pro forma net tangible book value per share after this
offering.......................................................
----
Dilution per share to new investors............................. $
====
</TABLE>
If the underwriters exercise their over-allotment option in full, our
adjusted pro forma net tangible book value at March 31, 2000 would have been
$ million, or $ per share, representing an immediate increase in pro
forma net tangible book value to our existing stockholders of $ per share
and an immediate dilution to new investors of $ per share.
The following table summarizes, on a pro forma basis at March 31, 2000,
after giving effect to the pro forma adjustments described above, the
differences between the number of shares of common stock purchased from us, the
aggregate cash consideration paid to us and the average price per share paid by
our existing stockholders and by new investors purchasing shares of common
stock in this offering. The calculation below is based on an initial public
offering price of $ per share, before deducting underwriting discounts and
commissions and estimated offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 13,517,250 % $43,933,215 % $3.25
New investors..................
---------- ----- ----------- ----- -----
Total........................ 100.0% 100.0%
========== ===== =========== ===== =====
</TABLE>
This discussion and table assume no exercise of any stock options
outstanding at March 31, 2000 and, except as referenced otherwise above, no
exercise of any outstanding warrants. Assuming the warrant exercise referenced
above, at March 31, 2000, there were warrants to purchase 200,000 shares of
common stock with a weighted average exercise price of $11.34 per share, and
options outstanding under our stock option plan to purchase a total of
1,633,408 shares of common stock with a weighted average exercise price of
$1.05 per share. To the extent that any of these warrants or options are
exercised, there will be further dilution to new investors.
19
<PAGE>
SELECTED FINANCIAL DATA
You should read the selected financial data set forth below in conjunction
with our financial statements and the notes thereto, "Management's Discussion
and Analysis of Financial Condition and Results of Operations", and other
financial information appearing elsewhere in this prospectus.
The statement of operations data set forth below for the years ended
December 31, 1997, 1998 and 1999 and the balance sheet data as of December 31,
1998 and 1999 are derived from, and qualified by reference to, our audited
financial statements appearing elsewhere in this prospectus. The statement of
operations data for the years ended December 31, 1995 and 1996 and the balance
sheet data as of December 31, 1995, 1996 and 1997 have been derived from
audited financial statements not included in this prospectus. The statement of
operations data for the three months ended March 31, 1999 and 2000 and the
balance sheet data as of March 31, 2000 are derived from unaudited financial
statements appearing elsewhere in this prospectus which, in the opinion of our
management, reflect all normal recurring adjustments that we consider necessary
for a fair presentation of such information in accordance with generally
accepted accounting principles. Operating results for the three months ended
March 31, 2000 are not necessarily indicative of the results that may be
expected for the full fiscal year or future results.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1999 2000
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Product revenue......... $ 120 $ -- $ 137 $ 915 $ 1,047 $ 203 $ 182
Cost of goods sold...... -- -- 157 1,238 3,006 551 521
--------- --------- --------- --------- --------- --------- ---------
Product margin.......... $ 120 $ -- $ (20) $ (323) $ (1,959) $ (348) $ (339)
Development funding..... -- -- -- -- 5,000 3,000 --
Operating expenses:
Research and develop-
ment.................. 430 968 2,598 4,045 4,441 957 1,463
Selling, general and
administrative........ 179 483 1,264 1,926 2,644 470 1,098
Amortization of de-
ferred stock compensa-
tion.................. -- -- -- -- 709 -- 1,011
--------- --------- --------- --------- --------- --------- ---------
Total operating ex-
penses................ $ 609 $ 1,451 $ 3,862 $ 5,971 $ 7,794 $ 1,427 $ 3,572
--------- --------- --------- --------- --------- --------- ---------
Operating income
(loss)................. $ (489) $ (1,451) $ (3,882) $ (6,294) $ (4,753) $ 1,225 $ (3,912)
Other income (expense),
net.................... 25 109 144 315 (2,666) (72) (1,196)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)....... $ (464) $ (1,342) $ (3,738) $ (5,979) $ (7,419) $ 1,153 $ (5,108)
========= ========= ========= ========= ========= ========= =========
Net income (loss) to
common stockholders.... (517) (1,635) (4,564) (8,767) (12,732) 151 (8,228)
========= ========= ========= ========= ========= ========= =========
Net income (loss) per
share of common stock,
basic and diluted...... $ (0.12) $ (0.37) $ (1.03) $ (1.93) $ (2.75) $ 0.03 $ (1.68)
Shares used in computing
net income (loss) per
share:
basic.................. 4,332,862 4,364,100 4,439,566 4,532,133 4,634,053 4,575,693 4,886,942
diluted................ 4,332,862 4,364,100 4,439,566 4,532,133 4,634,053 5,346,406 4,886,942
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
-------------------------------------- MARCH 31,
1995 1996 1997 1998 1999 2000
---- ------ ------ ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments..... $419 $2,434 $4,340 $ 7,536 $26,265 $23,360
Working capital............. 384 2,470 4,565 8,008 26,394 23,661
Total assets................ 476 3,002 5,921 9,734 28,366 26,377
Long-term obligations, less
current portion............ -- -- 170 55 -- --
Redeemable convertible pre-
ferred stock............... 918 4,960 11,786 24,575 51,841 54,962
Total stockholders' defi-
cit........................ (535) (2,167) (6,742) (15,524) (27,424) (34,398)
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and related notes which appear elsewhere in the prospectus. The
following discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those discussed below and elsewhere in this prospectus, particularly
under the heading "Risk Factors". Please also see "Cautionary Note Regarding
Forward-Looking Statements".
Overview
We design, manufacture and market power quality products that provide the
consistent, reliable electric power required by today's digital economy. We are
the first company to commercialize a flywheel energy storage system that
provides a highly reliable, low-cost and non-toxic replacement for lead-acid
batteries used in conventional power quality installations. Leveraging our
expertise in this technology and in conjunction with Caterpillar, the leading
maker of engine generators for the power reliability market, we have developed
a battery-free power quality system, which is marketed under the Caterpillar
brand name. Our products are sold for use in the facilities of companies in
many different industries that all share a critical need for reliable, high
quality power, such as Internet service providers, semiconductor manufacturers,
telecommunications providers, pharmaceutical manufacturers, hospitals, electric
utilities and broadcasters. As an extension of these existing product lines, we
are developing a fully integrated continuous power system. The initial target
market for this product is the rapidly growing telecommunications industry.
To date, we have primarily funded our operations through sales of shares of
our preferred stock, which have resulted in gross proceeds of approximately
$42.8 million, as well as $5.0 million in development funding received from
Caterpillar in 1999. Since 1996, we have focused our efforts and financial
resources primarily on the design and development of our CleanSource line of
power quality products and on establishing effective OEM channels to market our
products. As of March 31, 2000, we had generated an accumulated deficit of
$29.1 million and expect to continue to sustain operating losses for the next
several years.
Since our inception, a small number of customers have accounted for the
majority of our annual sales. During 1999, our four largest customers accounted
for 89% of our sales, with our largest customer, Caterpillar, accounting for
39%. In the first quarter of 2000, Caterpillar accounted for 99% of our revenue
as we have shifted focus to our CleanSource UPS product. We expect to continue
to be dependent on a few OEM customers, in particular Caterpillar, for the
majority of our sales for the foreseeable future.
With the commercial release of our second generation product line,
CleanSource UPS, in May 2000 under the Caterpillar brand name, and a growing
market demand for power quality equipment, we believe the demand for our
products will increase significantly. To prepare for this anticipated growth in
demand and to position us for future growth, we have increased and expect to
continue to increase the scale of our operations in the following ways:
. Expand our manufacturing facilities and add manufacturing personnel to
address anticipated product demand;
. Increase our personnel levels in product development and engineering to
accelerate time to market on new products and enhance existing product
lines; and
. Add sales and marketing personnel to support our OEM customers.
21
<PAGE>
We believe that, although these efforts will increase our operating
expenses, they will also enable us to realize accelerated revenue growth.
In connection with the grant of stock options to our employees in 1999 and
during the three months ended March 31, 2000, we recorded deferred stock
compensation aggregating $10.6 million. Deferred stock compensation represents
the difference between the deemed fair value of the common stock underlying the
options and the options' exercise price on the date of grant. We amortize
deferred stock compensation to operating expense over the vesting period,
generally four years. Additionally, in April 2000 we recorded deferred stock
compensation of $2.0 million. In 1999, we amortized $709,000 of the deferred
stock compensation to expense and during the three months ended March 31, 2000
we amortized an additional $1.0 million to expense. We currently expect to
amortize the deferred stock compensation remaining at March 31, 2000 in the
periods below (in millions):
<TABLE>
<S> <C>
April 1, 2000 to December 31, 2000................ $3.8
January 1, 2001 to December 31, 2001.............. 2.8
January 1, 2002 to December 31, 2002.............. 1.5
January 1, 2003 to December 31, 2003.............. 0.7
January 1, 2004 to December 31, 2004.............. 0.1
----
$8.9
====
</TABLE>
Comparison of 1999 to 1998
Product Revenue. Product revenue primarily consists of sales of our
CleanSource power quality products. Sales increased $132,000, or 14%, to $1.05
million in 1999 from $915,000 in 1998. This increase was attributable to the
continued acceptance of our first product, CleanSource DC, as well as the
initial beta sales of our second product, CleanSource UPS, in the fourth
quarter of 1999. The average selling price of our products increased in 1999
due to the introduction and the initial sales of our CleanSource UPS product,
which carries a higher selling price than our CleanSource DC product.
Cost of goods sold. Cost of goods sold includes the cost of component parts
of our product that are sourced from suppliers, personnel, equipment and other
costs associated with our assembly and test operations, shipping costs, and the
costs of manufacturing support functions such as logistics and quality
assurance. In addition, a portion of our occupancy expenses as well as product
warranty costs are allocated to costs of good sold. Cost of goods sold
increased $1.8 million, or 143%, to $3.0 million in 1999 from $1.2 million in
1998. In anticipation of future demand for our products, we expanded our
manufacturing capacity in 1999. As a result, the additional manufacturing
overhead contributed to higher cost of goods sold in 1999. In addition, we
expensed approximately $549,000 in 1999 associated with components that we
determined to be in excess of our needs due to design changes made to our
CleanSource DC product. We expect that as our production volumes increase over
time, unit production costs will tend to decrease as we achieve greater
economies of scale in production and in purchasing component parts.
Development funding. Development funding consists of funds received from
Caterpillar to support the development of the CleanSource UPS product. In 1999,
we received $5.0 million in development funding. We did not receive any
development funding in 1998 or in 1997. We do not currently have any other
development funding contracts.
Research and development. Research and development expense primarily
consists of compensation and related costs of employees engaged in research,
development and engineering activities, as well as an allocated portion of our
occupancy costs. Research and development expense increased $396,000, or 10%,
to $4.4 million in 1999 from $4.0 million in 1998. The increase
22
<PAGE>
in research and development expense was primarily due to the increased product
development of CleanSource UPS and other products. We believe that research and
development expense will continue to increase significantly in 2000 and
thereafter as we continue to develop new products and enhance existing product
lines.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense is primarily comprised of compensation and related costs for sales,
marketing and administrative personnel, an allocable portion of occupancy
costs, other promotional and marketing expenses, professional fees and reserves
for bad debt. Selling, general and administrative expense increased $719,000,
or 37%, to $2.6 million in 1999 from $1.9 million in 1998. The increase in
selling, general and administrative expense was principally due to an increase
in personnel in our sales organization we made in order to support our OEM
channel partners and to address opportunities for sales of our CleanSource UPS
product line. We believe that selling, general and administrative expense will
increase in future periods as we add sales, marketing and administrative
personnel to position us for future sales growth.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. Deferred stock compensation
reflects the difference between the exercise price of option grants to
employees and the subsequently deemed fair value of our common stock at the
date of grant. We are amortizing deferred stock compensation as an operating
expense over the vesting periods of the applicable options, which resulted in
amortization expense of $709,000 in 1999. No amortization of deferred stock
compensation occurred in 1998 as, prior to 1999, we believe that all options
were granted at exercise prices equal to the fair value of the underlying stock
on the date of grant. We expect that this amortization expense will increase in
2000 due to the vesting of options that were granted in 1999 and 2000. However,
we expect the amortization expense to decrease after 2000, as the options that
were granted at exercise prices less than the subsequently deemed fair value
become fully vested.
OTHER EXPENSE. Other expense in 1999 includes a $3.1 million charge for the
change in fair value of outstanding warrants with redemption rights. Because of
the redemption feature, we reflect these warrants as a liability and record
fair value changes in current period losses. In 1999, the fair value of the
underlying common stock increased substantially, resulting in an increase in
the warrant value and corresponding expense. Prior to 1999, the underlying
common stock value approximated the value at the date of issuance of the
warrants.
INCOME TAX EXPENSE. As of December 31, 1999, our accumulated net operating
loss carryforward was $5.7 million. We anticipate that all of this loss
carryforward amount will remain available for offset against any future tax
liabilities that we may incur; however, because of uncertainty regarding our
ability to use these carryforwards, we have established a valuation allowance
for the full amount of our deferred tax assets.
COMPARISON OF 1998 TO 1997
PRODUCT REVENUE. Product revenue increased $778,000, or 565%, to $915,000
in 1998 from $137,000 in 1997. The increase was attributable to greater market
acceptance of our first product, CleanSource DC. In 1998, we experienced
increases in sales to new customers for this product as well as to existing
customers.
COST OF GOODS SOLD. Cost of goods sold increased $1.1 million, or 687%, to
$1.2 million in 1998 from $157,000 in 1997. The increase in cost of goods sold
was primarily due to the expansion of our manufacturing infrastructure to
support the increase in the 1998 sales volume of the CleanSource DC product.
23
<PAGE>
Research and development. Research and development expense increased $1.4
million, or 56%, to $4.0 million in 1998 from $2.6 million in 1997. The
increase in research and development expense primarily was due to an increase
in our engineering staff from 17 employees at December 31, 1997 to 29 employees
at December 31, 1998, as well as increased product development expenses
associated with our CleanSource DC product.
Selling, general and administrative. Selling, general and administrative
expense increased $661,000, or 52%, to $1.9 million in 1998 from $1.3 million
in 1997. The increase in selling, general and administrative expense was
attributable to an increase in 1998 in the number of personnel within our
sales, marketing and administrative departments to support an anticipated
growth in sales volume.
Comparison of Three Months Ended March 31, 2000 to Three Months Ended March 31,
1999
Product Revenue. Product revenue decreased $21,000, or 11.5%, to $182,000
from $203,000 for the three months ended March 31, 2000 and 1999, respectively,
due to the shift in focus from our CleanSource DC product, which comprised the
majority of our first quarter 1999 sales, to CleanSource UPS beta units, which
made up the majority of our revenue for the three months ended March 31, 2000.
For the three months ended March 31, 2000, Caterpillar accounted for 99% of our
sales. We expect to continue to be dependent on a few OEM customers, in
particular Caterpillar, for the majority of our sales for the foreseeable
future.
Cost of Goods Sold. Cost of goods sold decreased $30,000, or 5.4%, to
$521,000 from $551,000 for the three months ended March 31, 2000 and 1999,
respectively. This decrease is related to the decrease in product revenue.
Research and Development. Research and development increased $506,000, or
53%, to $1.5 million from $957,000 for the three months ended March 31, 2000
and 1999, respectively. This increase was mainly due to an increase in staffing
to accelerate our product development efforts.
Other expense. Other expense in the three months ended March 31, 2000
includes a $1.6 million charge for the change in fair value of outstanding
warrants with redemption rights as a result of an increase in the fair value of
the underlying common stock.
Selling, general and administrative. Selling, general and administrative
expenses increased $628,000, or 134%, to $1.1 million from $470,000 for the
three months ended March 31, 2000 and 1999, respectively. This increase was due
to increasing our sales force to support our OEM channel partners, as well as
increasing our administrative staff in preparation for our anticipated sales
growth.
Liquidity and Capital Resources
Our principal sources of liquidity as of March 31, 2000 consisted of $23.4
million of cash, cash equivalents and short-term investments, as well as our
bank credit facility and an equipment financing line. Our bank credit facility
consists of a revolving line of credit with borrowing availability equal to the
lesser of $1 million or 80% of eligible accounts receivable. As of March 31,
2000, we had no amounts outstanding under this line of credit. Borrowings
outstanding under the credit line will bear interest at the bank's prime rate,
which was 9.0% at March 31, 2000. The equipment financing line was originated
in March 1997 and is comprised of seven separate schedules that are set to
mature at various times between April 2001 and December 2001. The aggregate
amount of equipment purchases that were financed under the equipment financing
line was $400,000 as of March 31, 2000.
To date, we have primarily funded our operations through sales of shares of
our preferred stock, which have resulted in gross proceeds of approximately
$42.8 million, as well as $5.0 million in
24
<PAGE>
development funding received from Caterpillar in 1999. During 1999, cash used
by operating activities was $2.6 million, which compares to $5.9 million and
$3.9 million in 1998 and 1997. For the three months ended March 31, 2000, cash
used by operating activities was $2.5 million. The cash usage in each of these
periods was primarily attributable to our focus on the development of products
and the expansion of our manufacturing operations and sales activities.
Capital expenditures were $437,000, $793,000 and $598,000 in 1997, 1998 and
1999. We made these expenditures to acquire engineering test equipment, to
develop market demonstration units, and to purchase manufacturing equipment for
the building and test of production units, as well as for general computer
equipment and software for administrative purposes. We expect to incur between
$1.0 and $2.0 million in expenses in 2000 in connection with the buildout of
additional office, engineering lab and manufacturing space. In addition, we
expect to purchase approximately $2.0 million of capital equipment in 2000 for
use in our research and development activities and to expand our manufacturing
capacity.
We believe the proceeds of this offering, together with our existing cash
balances, will be sufficient to meet our capital requirements through at least
the next 24 months, although we might elect to seek additional funding prior to
that time. Beyond the next 24 months, our capital requirements will depend on
many factors, including the rate of sales growth, the market acceptance of our
products, the rate of expansion of our sales and marketing activities, the rate
of expansion of our manufacturing facilities, and the timing and extent of
research and development projects. Although we are not a party to any agreement
or letter of intent with respect to a potential acquisition, we may enter into
acquisitions or strategic arrangements in the future which could also require
us to seek additional equity or debt financing.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of APB Opinion No. 25. Interpretation No. 44
has an effective date of July 1, 2000. We do not believe Interpretation No. 44
will affect our accounting for transactions involving stock-based compensation.
In December 1999, the staff of the Securities and Exchange Commission
released Staff Accounting Bulletin, or SAB, No. 101, entitled "Revenue
Recognition in Financial Statements", which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements.
SAB No. 101 did not have a material impact on our financial statements.
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in
short-term instruments. We believe that our investment policy is conservative,
both in terms of the average maturity of investments that we allow and in terms
of the credit quality of the investments we hold. Therefore, we have concluded
that we do not have a material market risk exposure.
25
<PAGE>
BUSINESS
The following description of our business should be read in conjunction
with the information included elsewhere in this prospectus. This description
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ significantly from the results discussed in these
forward-looking statements as a result of certain of the factors set forth
elsewhere in this prospectus, particularly under the heading "Risk Factors".
Please also see "Cautionary Note Regarding Forward-Looking Statements".
Overview
We design, manufacture and market power quality products that provide the
consistent, reliable electric power required by today's digital economy. We are
the first company to commercialize a flywheel energy storage system that
provides a highly reliable, low-cost and non-toxic replacement for lead-acid
batteries used in conventional power quality installations. Leveraging our
expertise in this technology and in conjunction with Caterpillar, the leading
maker of engine generators for the power reliability market, we have developed
a battery-free power quality system, which is marketed under the Caterpillar
brand name. As an extension of these existing product lines, we are developing
a fully integrated continuous power system. The initial target market for this
product is the rapidly growing telecommunications industry.
Industry Background
Power Requirements of the New Economy
The worldwide demand for high quality electricity has been increasing
rapidly in recent years, driven in large part by growth in the use of
computers, the Internet and telecommunications products. Industry sources have
estimated that the share of all U.S. electricity consumed by computer-based
microprocessors is 13% and that within the next decade 50% of the nation's
current electricity supply may be required to meet the direct and indirect
needs of the Internet.
As the influence of sophisticated digital electronics expands across all
industries, the need for very high levels of power reliability and quality also
increases. Most industries now rely on these highly sensitive electronics to
manage and control their manufacturing processes. However, despite this
increasingly dramatic change in the mix of electricity demand, the mechanisms
used to provide power have not changed. The power delivered over the
electricity grid today is subject to power disturbances, such as voltage sags
and surges, and power outages. These disturbances, while typically lasting less
than two seconds, can have significant detrimental effects on the devices of
the new economy.
[GRAPHIC]
[Description of Graphic: This graphic depicts sine waves representing both the
types of problems with power supplied from the electric utility grid and the
desired sine wave for "Reliable, Quality Electric Power". The first graphic on
the far left is titled "Reliability Problem" and shows a steady sine wave that
turns into a straight line. Above the straight line is the word "Outage" with
an arrow pointing at the straight line. In the middle of the graphic under
"Power Quality Problems" are two sine waves. The top sine wave has smaller
peaks and valleys in the middle of the sine wave. Above the middle of the sine
wave are the words "Voltage Sag" with an arrow pointing at the center of the
sine wave. The bottom sine wave has larger peaks and valleys in the middle of
the sine wave. Above the middle of the sine wave are the words "Voltage Surges"
with an arrow pointing at the center of the sine wave. On the right side of the
diagram is a smooth, continuous sine wave which is labeled "Reliable, Quality
Electric Power".]
The power outages in a number of major cities during the summers of 1998
and 1999 have highlighted the increasing likelihood of costly interruptions and
the need to seek reliability protection. Power disturbances are a significant
concern for everything from the computers used in modern commercial and
industrial processes to telecommunications equipment. Leaving these devices
unprotected from disturbances can have significant and negative impacts on the
power user. A 1999 study by the Electric Power Research Institute estimated
that electric power problems annually cost U.S. industry more than $30 billion
in lost data, material and productivity. Even the loss of quality
26
<PAGE>
power for one second at a semiconductor manufacturing plant can result in the
loss of millions of dollars. As the digital economy grows, avoiding network and
equipment downtime due to power-related problems will become even more
important.
Electric utilities are unable to provide high quality, uninterrupted power
due in large part to the inherent limitations of the existing transmission and
distribution system. The electric utility grid is naturally exposed to
reliability and quality problems caused by severe weather, animals, accidents
and other external events. While substantial upgrades and other investment
could improve overall reliability, the absolute level of power quality required
for these sophisticated electronic applications may still remain difficult to
achieve.
POWER QUALITY SYSTEMS: UNINTERRUPTIBLE POWER SUPPLIES AND CONTINUOUS POWER
SYSTEMS
Currently, there are a variety of approaches that attempt to address the
deficiencies of power delivered by the electric utility grid. Conventional
power quality systems have been constructed from an array of devices, including
batteries for short-term power disturbances, engine generators, commonly
referred to as "gensets", for longer-term outages, and control electronics to
bridge the two. A short-term (seconds to minutes) energy storage device with
control electronics is referred to as an uninterruptible power supply, or UPS.
A UPS coupled with a genset to protect against longer-term outages (minutes to
hours or days) is referred to as a continuous power system, or CPS.
A UPS protects sensitive systems from sags, surges and temporary
interruptions in utility-supplied power. A UPS consists of solid-state switches
and electronics that are connected to both the utility grid and a back-up power
source, typically lead-acid batteries. The UPS electronics monitor the power
from the grid. If the UPS determines that the power being supplied from the
grid is unacceptable or that insufficient power is being supplied, it will draw
power from the back-up power source to ensure uninterrupted, quality power.
These systems typically provide 5 to 15 minutes of back-up power before the
batteries are depleted.
A CPS provides back-up power indefinitely. As described above, if the UPS
determines that there is a power quality or power reliability problem, it
initially turns to the back-up power source. If, however, the disturbance lasts
for an extended period (typically, more than 5 to 10 seconds), the CPS genset
activates and begins to provide back-up power. Internet service providers, data
processing centers, semiconductor plants, cellular phone sites and fiber nodes
all use CPS to keep critical business equipment operating when electric utility
power falters.
The following diagrams depict a conventional UPS and CPS:
[GRAPHIC]
[Description of grahpic: The graphic on the left depicts a "Conventional UPS
System". From the left side of the graphic is an arrow pointed to the center of
the graphic with the caption "Electric Power from Utility" beneath the arrow.
The arrow points to a box in the center of the graphic with the caption
"Uninterruptable Power Supply Electronics" inside the box. Beneath the box and
connected to the box with a line is another box with the caption "Lead Acid
Battery for short term power (seconds to minutes)" inside the box. From the
center box is an arrow pointed to the right side of the graphic with the
caption "Uninterruptible Power to Customer" beneath the arrow. Beneath this
graphic is the following text "Electric power from the electric utility passes
through the UPS to the customer. If this power is interrupted or is disturbed,
the UPS immediately draws power from the battery to supply uninterrupted power
to customer".
The graphic on the right depicts a "Conventional CPS System". From the left
side of the graphic is an arrow pointed to the center of the graphic with the
caption "Electric Power from Utility" beneath the arrow. The arrow points to a
box in the center of the graphic with the caption "Uninterruptible Power Supply
Electronics" inside the box. Above the box and connected to the center box with
a line is an oval with the caption "Generator" inside the oval and the caption
"long term power (minutes to days)" to the left of the oval. Beneath the center
box and connected to the center box with a line is another box with the caption
"Lead Acid Battery for short term power (seconds to minutes)" inside the box.
From the center box is an arrow pointed to the right side of the graphic with
the caption "Uninterruptible Power to customer" beneath the arrow. Beneath this
graphic is the following text: "In a CPS configuration, if the power
disturbance lasts longer than a few seconds, the standy generator is started to
provide electric power for as long as required."]
Electric power from the electric In a CPS configuration, if the power
utility passes through the UPS to disturbance lasts longer than a few
the customer. If this power is seconds, the standby generator is
interrupted or is disturbed, the started to provide electric power for
UPS immediately draws power from as long as required.
the battery to supply
uninterrupted power to the
customer.
27
<PAGE>
Limitations of Conventional UPS and CPS
Conventional UPS and CPS devices have evolved out of a makeshift
combination of diesel engines, generators, automobile batteries and UPS
electronics. We believe that this patchwork approach to UPS and CPS has
resulted in systems that are less efficient, less reliable and more expensive
than they otherwise could be. The lead-acid batteries, which provide ride-
through, or temporary, power for the UPS and CPS, are viewed as the weakest
component of conventional power quality and reliability solutions. Lead-acid
batteries have numerous problems, including:
Reliability
. Relatively high failure rate--Batteries are prone to heat buildup and
acid leaks that lead to battery failure.
. Limited life based on usage--When batteries are repeatedly used at close
to their maximum power output, their power output capacity can rapidly
decrease, reducing the batteries' effectiveness over time.
Cost
. High maintenance--Batteries must be regularly inspected, generally every
three months, to detect problems. Batteries also require periodic
testing to determine their power output capacity, which degrades over
time.
. Bulky--Generally, multiple batteries forming banks or strings must be
used to support UPS functions. They also must be spaced apart to prevent
uncontrolled heating.
. Frequent replacement required--Regardless of usage, batteries have a
limited useful life and must be replaced every 2 to 6 years, depending
upon the type of use, environment and other factors.
. Temperature sensitivity--Unless cooled by costly air conditioning
systems, battery life will rapidly degrade.
Environmental
. Toxicity--Batteries contain toxic materials such as lead and sulfuric
acid.
. Disposal--State and federal environmental regulations governing battery
disposal are rigorous and costly.
Beyond the specific problems associated with lead-acid batteries, existing
UPS and CPS contain inefficiencies inherent in any system that was not designed
as an integrated solution. Specifically, the major components of these systems
do not come from a single reliable source. This lack of a single-source
supplier makes installation, maintenance and failure analysis more difficult,
costly and complex. Separate companies manufacture, market and service the
genset, UPS electronics and batteries. The end user must assume the
responsibility to integrate and monitor the system.
Active Power's Products
Rather than adopt conventional approaches to power quality systems, we
design new solutions specifically for the power quality market. As a result, we
believe that we create products that are less expensive, more efficient and
more reliable than other systems presently available.
CleanSource DC
CleanSource DC is the first commercially viable, non-chemical replacement
for lead-acid batteries used for short-term power in power quality
applications. As opposed to the chemical energy stored by batteries, our
patented flywheel energy storage system stores kinetic energy by spinning
constantly in a patented low-friction environment. When the UPS electronics
detect a power disturbance, CleanSource DC draws upon the power stored as
kinetic energy to eliminate the disturbance. Our CleanSource flywheel energy
storage system is compact, quiet and predictable.
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CleanSource DC can run in conjunction with battery strings used in UPS and
CPS systems or can replace the batteries now used in conjunction with fuel
cells and microturbines to meet peak power demands. This system is available in
a variety of delivered power ratings up to 480 kW per flywheel system. We also
can configure the units in parallel to achieve higher power. CleanSource DC has
been designed for much longer service intervals and more extreme environments
than typical lead-acid battery installations. Our first CleanSource DC unit was
placed in service in March 1997. Our installed CleanSource DC units have
accumulated over 235,000 hours of field operation without a loss of electric
power.
CleanSource UPS
Building on the technological success of CleanSource DC, we created a
battery-free UPS, CleanSource UPS, which is the primary focus of our current
sales efforts. Historically, a UPS is created by coupling together two
components--a string or strings of batteries and control electronics.
CleanSource UPS integrates UPS electronics and our flywheel energy storage
system into a single power quality solution. CleanSource UPS is contrasted with
a conventional battery-based system in the illustration below.
[GRAPHIC]
[Description of graphic: This graphic depicts a comparison of a "Conventional
Battery-Based UPS" and a "CleanSource UPS". The Traditional Battery-Based UPS
is pictured on the left side of the graphic. The left portion of the
Traditional Battery-Based UPS is labeled "battery cabinets" and the right side
of the Traditional Battery-Based UPS is labeled "UPS electronics". Beneath the
picture of the Traditional Battery-Based UPS is the following information: "240
KW UPS with minimum battery cabinet; Footprint - 37.5 sq. ft., Weight - 13,000
lbs., Electrical Efficiency - 92%". The CleanSource UPS is pictured on the
right side of the graphic. Beneath the picture of the CleanSource UPS is the
following information: "250 KW UPS with energy storage; Footprint - 10 sq. ft.,
Weight - 3,250 lbs., Electrical Efficiency - 98%".]
The CleanSource UPS design takes advantage of the many component
similarities between CleanSource DC and standard UPS electronics. Each system
requires power conversion electronics, fans for cooling, a frame for structural
support, a user display and data reporting, and other overlapping functions. By
combining these functions into a single system, as shown in the figure below,
we can provide a highly reliable power quality solution while achieving
significant cost savings.
[GRAPHIC]
[Description of graphic: This graphic depicts "CleanSource UPS System
Efficiencies". The graphic is a ven diagram consisting of two circles which
partially overlap in the middle of the graphic. The circle on the left side of
the graphic is labeled "Energy Storage" at the bottom left. Inside the left
circle on the left side of the circle are the words "flywheel puck". In the
middle of the left circle is the caption "Flywheel Electronics". In the middle
of the graphic where the circles overlap from top to bottom are the words "heat
sinks & fans", "cabinet frame & skins" and "monitoring & display". Above the
overlapping portion of the circles is the caption "System Efficiencies" with an
arrow pointed toward the overlapping portion of the diagram. The circle on the
right side of the graphic is labeled "UPS" at the bottom right. Inside the
right circle on the right side of the circle are the words "bypass switch
contactors". In the middle of the right circle is the caption "UPS
Electronics".]
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Due to its unique design, CleanSource UPS typically has a lower installed
cost than a conventional battery-based UPS. Due to its high efficiency and
battery-free energy storage design, the total cost of ownership of CleanSource
UPS is less than half of that of conventional systems. In conjunction with
Caterpillar, we designed CleanSource UPS to be compatible with new and
installed standby generators, extending their application to CPS. We are
currently delivering CleanSource UPS units and have plans to introduce higher
power, parallel systems by the end of 2000. Because of our product, Caterpillar
is the only company selling, installing and servicing a complete CPS under a
single brand name worldwide.
Future Products
Fully Integrated Continuous Power System. We are developing an advanced CPS
for the distributed telecommunications market that combines short and long term
energy storage and UPS functionality into one fully integrated system. We
believe that benefits of this fully integrated CPS product will include
increased reliability, lower cost and less maintenance relative to the
piecemeal systems in use today. We anticipate commercial availability of our
first CPS product in the second half of 2001.
Distributed Power Technology. Under an agreement with Caterpillar, the
world's leading producer of distributed power systems, we are studying the
potential benefits of a new type of electromechanical technology that can be
used in distributed power applications.
Our Business Strategy
Our goal is to become the leading supplier of power quality and reliability
equipment. Key elements of our strategy include:
Design, Manufacture And Market Optimal Solutions For Targeted Markets
We design products for specific markets. Our first product, CleanSource DC,
put this principle into practice. We created a flywheel product to meet the
specific needs of the UPS market. In so doing, we overcame the design
constraints that had hampered preceding flywheel programs and to produce the
first commercially viable alternative to lead-acid batteries. We intend to
continue to identify market needs for the power industry and design products to
address those specific needs.
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Leverage Our Core Technologies to Develop Next Generation Products
We intend to continue to use our expertise in advanced electromechanical
technologies combined with an integrated solutions approach to create
innovative products that lower the cost and increase the quality of electric
power. We are designing a fully integrated CPS with applications in the
distributed telecommunications power quality and reliability market.
Additionally, we have entered into an agreement with Caterpillar to study the
feasibility of a new type of electromechanical technology for use in
distributed power applications.
Distribute and Market our Products through Established OEM Channels
We believe that working with leading original equipment manufacturers, or
OEMs, enables us to rapidly introduce our products into established customer
and dealer networks and promote the adoption of new technologies. To date, our
most important OEM relationship is with Caterpillar, a worldwide distributor of
our CleanSource UPS products. Additionally, we have established distributor
relationships with leading UPS OEMs Powerware and MGE UPS Systems for our
CleanSource DC product. We intend to continue to use development and
distribution relationships for our future products to achieve rapid market
penetration.
Leverage Our Relationship with Caterpillar to Achieve Rapid Market Penetration
We believe that our distribution agreement with Caterpillar allows us to
rapidly penetrate the power quality and reliability market through
Caterpillar's worldwide network of over 200 dealers and over 1,500 branch
outlets. A portion of Caterpillar's large installed base of over 250,000
gensets also provides a significant retrofit opportunity by converting
installed standby systems to CPS with our CleanSource UPS. Our relationship
with Caterpillar should enhance our credibility among the generally
conservative customers within the power quality and reliability market. We will
continue to examine additional ways to leverage our relationship with
Caterpillar.
Outsource Components to Rapidly Scale Manufacturing
We intend to continue to outsource all non-proprietary hardware and
electronics by maintaining and building on multiple supplier relationships so
that we can respond quickly to significant quantity increases. We intend to
focus on the final assembly and testing of our products, decreasing production
cycle times and increasing volume production capability.
Aggressively Protect Our Intellectual Property
We seek to 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 to serve as a leading innovator in power quality technology and will
provide us with a long-term competitive advantage.
Market Opportunities
The Electric Power Research Institute estimates that power disturbances
cost U.S. businesses more than $30 billion each year. According to industry
sources, in 1999 businesses spent in excess of $10.0 billion globally on power
quality and reliability products in an attempt to reduce these losses. Our
current products, CleanSource DC and CleanSource UPS, are targeted at the $5.5
billion market for UPS, which is expected to grow at an annual rate of 10% to
15% over the next several years. We believe that our CleanSource products are
superior alternatives to conventional UPS and CPS products and should be able
to rapidly penetrate this growing segment of the power quality industry. With
future products, we anticipate that we will be able to compete in most segments
of this market.
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<PAGE>
We intend to focus on the following market opportunities:
Internet Market
A study conducted by the University of Texas and released by Cisco Systems,
Inc. found that the U.S. Internet economy grew at an estimated average annual
rate of 175% from 1995 to 1998. This study also projected that the Internet
economy would grow to $507 billion in 1999, up 68% from 1998. To support this
growth, internet service providers must construct new facilities to house the
computers and communications systems required to provide around-the-clock
service to their customers. To ensure continuous service, ISPs are adding power
quality equipment to protect these systems.
Telecommunications Market
To ensure uninterrupted service, wireless telecommunications providers must
have continuous power at each cellular and PCS station. The market for back-up
telecommunications power systems represents approximately $3.0 billion of the
$10.0 billion power quality market and is growing at approximately 10% to 15%
per year. Conventional CPS systems dominate this market using a patchwork of
gensets, lead-acid batteries and UPS electronics. We are designing our next
generation product, a fully integrated CPS, to service the specific needs of
this market, although we expect broader market applications in the future. We
believe that our fully integrated CPS will be well positioned to serve this
market.
Other Power Quality and Reliability Markets
Industrial. An Electric Power Research Institute study on recurring U.S.
power problems estimated that the average U.S. manufacturing facility
experienced in excess of 20 power disturbances annually. Exacerbating this
problem, manufacturing organizations are employing increasing levels of
automation, especially process and machine control, communications and
computerized optimization of material flow. Even brief power disturbances,
which result in lost material, lost data and worker and plant down time, can be
very expensive. Industries with the potential to suffer significant loss from
power disturbances include semiconductor and pharmaceutical manufacturing,
plastic and fiber extrusion, textiles, and precision machining.
Commercial Facilities. Many commercial facilities such as office buildings,
hotels and university facilities now have a large number of computers or
servers. Historically, these businesses and their personal computer networks
have been unprotected from power disturbances or have only been spot-protected
with a small PC UPS under each person's desk. A single CleanSource UPS system
can protect as few as 200 PCs more cost effectively than many small PC UPS
products.
Retrofit Market. Caterpillar has the largest installed base of standby
generators in the world. Due to the growing requirement for high quality power,
many of the customers that rely on standby generators for long-term power
outages can no longer afford the five to ten second outage while the generator
starts. We believe that upgrading, or retrofitting, a portion of Caterpillar's
approximately 250,000 installed gensets worldwide by adding our CleanSource
UPS, thereby creating a CPS, represents a significant market opportunity.
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Distributed Generation
Fuel cells and microturbines, which allow users to bypass the electric
utility grid by generating power locally, represent potential markets for our
CleanSource products. These distributed generation technologies currently
cannot respond effectively to rapid changes in electric power demands, or
loads, due to their slow response capability. CleanSource DC can absorb sharp
peaks in electrical demand, allowing a relatively expensive microturbine or
fuel cell to be sized for the average power requirement of the customer. This
combination provides a cost competitive alternative to sizing the fuel cell or
microturbine to handle both peak and average electrical demands. In addition,
CleanSource UPS can seamlessly transfer a customer load from utility power to
fuel cell or microturbine standby power in the event of a utility outage.
Our Relationship with Caterpillar
We have established a key, strategic relationship with Caterpillar.
Caterpillar is the market leader in new genset sales and has the largest
installed base of existing standby generators in the world. Through
Caterpillar's worldwide dealership and sales force network and its strong
market reputation, we believe that we will be able to rapidly penetrate the
market for our products.
After establishing an initial relationship with us for the distribution of
our CleanSource DC product, Caterpillar agreed to participate in the
development of CleanSource UPS and to become a worldwide distributor of
CleanSource UPS, which is marketed under the Caterpillar brand name. By
offering a Caterpillar UPS with a new standby genset, Caterpillar can transform
a standby power system into a CPS. The combined solution dramatically reduces
maintenance and increases reliability relative to traditional CPS products. By
providing this comprehensive solution, Caterpillar is the only power quality
supplier capable of delivering a CPS from a single supplier with worldwide
service and support. We believe that this total solution gives both Caterpillar
and us a significant competitive advantage in the power quality market.
Caterpillar provided $5.0 million in funding to support the development of
CleanSource UPS. In exchange, Caterpillar received co-ownership of the
intellectual property associated with the integration of UPS functionality with
CleanSource DC, while we retained sole ownership of the underlying flywheel
energy storage technology. Either Caterpillar or we may license to other
entities the intellectual property associated with the integration of UPS
functionality with CleanSource DC without further consent or accounting,
provided that we do not license such technologies to competitors of Caterpillar
for a period of five years.
Upon the completion of the development phase, we granted to Caterpillar
worldwide rights to distribute CleanSource UPS, supported by our sales and
marketing personnel. Caterpillar agreed to purchase 90% of its and its
affiliates' requirements for flywheel-based UPS products from us. We are
prohibited from selling CleanSource UPS to certain identified competitors of
Caterpillar for a period of five years if Caterpillar meets specific
contractual obligations over each year of the five-year term of the agreement.
Caterpillar has a right to terminate its CleanSource UPS distribution agreement
with us in the event we are acquired or undergo a change in control.
Under our agreement with Caterpillar, we also are studying the potential
benefits of a new type of electromechanical technology that can be used in
distributed power applications.
Sales, Marketing and Support
Sales and Marketing
In the power quality industry, we believe that partnering with established
companies with significant relationships and service capabilities enables us to
promote the adoption of new technology that otherwise would take significantly
longer for wide application. Our sales activity has
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<PAGE>
focused principally on OEM adoption of our products through extensive OEM
testing, product qualification and early product placement with select end
users. We intend to continue to sell through OEMs to gain acceptance of our
proprietary and innovative power technologies. We believe that focusing on
product acceptance and support from OEMs provides the greatest opportunity for
market penetration and sales growth with minimal resources. We are also
expanding our international sales activities through our multinational OEM
sales channels. We employ a small, geographically dispersed sales force to
develop leads and educate our OEM customers in their sales efforts.
Our marketing efforts are geared toward developing and sustaining key
relationships with OEMs, participating in tradeshows to promote and launch our
products, and training for the salespeople within the OEM channels. We also
work with OEM partners on promotional activities such as advertising
development, direct mail and telemarketing strategies. We use our marketing
resources to stimulate end user sales through trade press articles,
participation in industry conferences and limited direct mail to specific power
quality customers.
Service and Support
We are transitioning the service and maintenance of our products from our
own service personnel to the OEMs who sell our products. We believe that this
will reduce the need for a large end-user support organization by enabling our
OEMs to provide installation, service and primary support to their customers.
Our service personnel will remain as a back-up for difficult situations or
where no trained personnel are immediately available and will support initial
applications of the products. Our customer service and support organization
also provides comprehensive training programs to our OEM customers.
Our Customers
Our primary customers are OEMs. To date, our most significant OEM is
Caterpillar, which distributes CleanSource UPS under its brand name. We intend
to continue to use selected development and distribution partnerships to
develop and distribute our future products into selected markets and achieve
rapid market penetration.
End use industries for our products include Internet service providers,
semiconductor manufacturers, telecommunication providers, pharmaceutical
manufacturers, hospitals, electric utilities and broadcasters.
During 1999, Caterpillar accounted for 39% of our total revenue and our
largest UPS OEM, Powerware, accounted for 21% of our revenue. Sales to Micron
Technologies and Lee Technologies also accounted for 16% and for 13% of our
1999 revenue, respectively. No other customer accounted for more than 10% of
our revenue during 1999. Due to Caterpillar's exclusive CleanSource UPS
distribution rights, we anticipate that revenue from Caterpillar will comprise
a majority of our revenue in 2000. In the first quarter of 2000, Caterpillar
accounted for 99% of our revenue.
Technology
Flywheel Energy Storage System
Our patented flywheel energy storage system stores kinetic energy by
spinning constantly in a low-friction environment. When the user requires back-
up power, our system converts the kinetic energy of the spinning flywheel into
electricity. We believe that relative to other energy storage alternatives, our
system provides high quality, reliable power at the lowest cost.
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<PAGE>
Over the past 20 years, attempts at commercializing flywheel systems have
been based on technology used in aerospace applications, such as satellite
momentum control, that attempt to maximize the amount of stored energy with the
absolute minimum system weight. Cost has been a secondary concern for such
applications. As a result of these design goals, these flywheel designs require
extremely high rotational speeds in excess of 50,000 rotations per minute. In
order to achieve such high speeds, the flywheel must be made of expensive
materials, such as composite carbon fiber. As a result, high-speed flywheel
concepts require a number of expensive safety systems, including extensive
inertial containment and "active" magnetic bearing systems that use
sophisticated computer controls to continuously monitor the position and
balance of the flywheel.
Rather than rely on the flywheel concepts developed for other applications,
we focused our development efforts on providing products that meet the specific
needs of the power quality and reliability market. Users requiring back-up
power products want products that can deliver high quality, reliable power at
the lowest cost. As a result of these needs, we developed a flywheel system
that operates at significantly lower speeds, under 8,000 rotations per minute.
These speeds are comparable to those of automobile engines and industrial
machinery. This lower flywheel speed has allowed us to develop a lower cost
design by using an inexpensive bearing system and conventional steel in place
of expensive composite materials.
The design of our flywheel system, which is displayed below, integrates the
function of a motor (which provides the energy to rotate the flywheel),
flywheel rotor (which spins constantly to maintain a ready source of kinetic
energy) and generator (which converts the kinetic energy of the flywheel into
electricity) into a single integrated system. This integration further reduces
the cost of our product and increases its efficiency. The flywheel rotor is
designed to spin in a near frictionless environment by the use of a low-cost,
combination magnetic and mechanical bearing system. The friction in the
spinning chamber is further reduced by the creation of a partial vacuum, which
reduces the amount of air in the chamber that otherwise creates drag on the
flywheel rotor. As the flywheel rotor slows down when a user requires power,
the rotor's magnetism is increased as it rotates past copper coils contained in
the armature to generate constant output power.
[GRAPHIC]
[Description of graphic: This graphic depicts "The CleanSource Flywheel
Technology" and lists the patents we have obtained or filed for on the specific
parts of the flywheel system. From the top of the left side of the flywheel to
the bottom, we have listed the following patents: "Magnetic bearing integrated
into field circuit, Patent# US5920138", "Constant voltage regulation, Patent#
US5932935", "Smooth air-gap armature, Patent Pending", "High-power motor-
generator, Patent# US5905321". From the top of the right side of the flywheel
to the bottom, we have listed the following patents: "Ball bearing cartridge
for easy replacement, Patent# US6029538", High intertia motor-generator rotor,
Patent# US5929548" and "Slotless motor-generator stator, Patent# US5731654,
Patent# 5969457".]
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We have verified our flywheel design with both internal and external three-
dimensional finite element analysis, as well as tests designed to determine the
flywheel's safety at varying speeds. We test each flywheel rotor with stringent
quality control methods. These tests have demonstrated a factor of safety
consistent with common industrial machines such as large motors and generators.
The CleanSource Family of Products
Our unique flywheel energy storage system device is being used in our two
currently offered products: CleanSource DC and CleanSource UPS. The CleanSource
UPS design takes advantage of the many component similarities between the
CleanSource DC and a traditional UPS system. Both products require power
conversion electronics, fans for cooling, a frame for structural support,
telemetry, data reporting, a user display and other overlapping functions. By
combining these functions into a single system, we achieved significant cost
efficiencies.
The UPS electronics we use in our CleanSource UPS product are the latest in
power semiconductor devices using highly reliable and efficient insulated gate
bipolar transistors. This results in an efficient, highly responsive power
conditioning system that can protect sensitive customer power requirements from
even the briefest of electric power anomalies. Tightly integrating these power
electronics with our flywheel energy storage system results in an efficient,
compact and cost effective UPS system.
Generator Start Enhancement
To enhance the overall system reliability of CleanSource UPS, we have
patented a method to draw power from the flywheel to supply 24 volts of
starting power to a genset to augment or replace the typical starter battery,
which is the cause of most generator start failures. When taking advantage of
this flywheel-sourced starting power, the reliability of the entire CPS
solution is significantly enhanced.
Research and Development
We believe that our research and development efforts are essential to our
ability to successfully deliver innovative products that address the needs of
our customers as the market for power quality products evolves. Our research
and development team works closely with our marketing and sales team and OEMs
to define product features and performance to address the specific needs. Our
research and development expenses were $2.6 million, $4.0 million and $4.4
million in 1997, 1998 and 1999, respectively. We anticipate maintaining
significant levels of research and development expenditures in the future. At
March 31, 2000, our research and development efforts employed 45 engineers and
technicians.
Manufacturing
We source many of our components from contract manufacturers to enhance our
ability to scale our operations and minimize cost. This approach allows us to
respond quickly to customer orders while maintaining high quality standards.
Our internal manufacturing process consists of assembly, functional testing
and quality control of our products. We also test components, parts and
subassemblies obtained from suppliers for quality control purposes.
We purchase our components on a purchase order basis. We do not have long-
term agreements with any of our suppliers. However, we intend to seek long-term
agreements with key suppliers to ensure the adequate supply of components.
Although we use standard parts and components for our products where possible,
we purchase a particular type of power module and a
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microprocessor from single source suppliers. If we were unable to obtain these
components, we believe it would take approximately six months to develop a
substitute power module and approximately four months to develop a substitute
microprocessor. We have an agreement with the power module supplier to maintain
at least three months inventory, and we plan to maintain an additional three
months of inventory. We maintain approximately six months of inventory of the
microprocessor.
We plan to substantially expand our manufacturing facilities and capacity
in order to support projected volume demand for our products.
Proprietary Rights
We rely on a combination of patents and trademarks, as well as
confidentiality agreements and other contractual restrictions with employees
and third parties, to establish and protect our proprietary rights. We
currently have filed thirty-two patents before the United States' Patent and
Trademark Office, twenty-one of which have issued, nine of which are pending,
three of which have been allowed, and two of which we abandoned. Additionally,
we have made twenty-five filings under the Patent Cooperation Treaty, and
before the European Patent Office and the Japanese Patent Office. Of those
patents prosecuted before the United States' Patent and Trademark Office,
seventeen claim inventions related to our CleanSource product line, eight of
which have issued. Six of these issued patents protect inventions related to a
motor/generator for flywheel use, a central component of our CleanSource
product. Our patent strategy is critical for preserving our rights in and to
the intellectual property embodied in our CleanSource product line. As a
manufactured, tangible device that is sold rather than licensed, the
CleanSource product line does not qualify for copyright or trade secret
protection. To enforce our ownership of such technology, we principally rely on
the protection obtained through the patents we own, as well as state unfair
competition laws. We intend to aggressively protect our patents, including by
bringing legal actions if we deem it necessary.
We own the registered trademark CLEANSOURCE in the United States and have
applied for a trademark on our logo. All other trademarks, service marks or
trade names referred to in this prospectus are the property of their respective
owners.
Competition
The power quality and power reliability markets are intensely competitive,
with the principal bases for competition being system reliability and cost,
including initial cost and total cost of ownership, and OEM endorsement and
brand recognition. Our battery-free power quality and reliability products
compete directly with the flywheel-based products of Piller, Hitec and
EuroDiesel. In addition, our current CleanSource UPS product competes with
battery-based UPS manufacturers, Powerware, MGE UPS Systems and Liebert. Our
future CPS product will compete with manufacturers of CPS equipment for the
telecommunications market, including Alpha Technologies and the Lectro division
of Invensys. We also compete, directly or indirectly, with a number of other
companies and competing technologies in these markets. Our products have been
designed to replace a number of existing technologies, primarily lead-acid
batteries and related UPS electronics. Therefore, we compete indirectly with
manufacturers of these products. Moreover, a number of other companies are
developing flywheel-based technologies which could compete with our
technologies.
Two of our CleanSource DC distributors, Powerware and MGE UPS Systems,
market products which compete with CleanSource UPS.
Employees
At March 31, 2000, we had 98 employees, with 45 engaged in research and
development; 27 in manufacturing; 8 in sales; 6 in marketing and customer
support; and 12 in administration, information
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technology and finance. None of our employees is represented by a labor union.
We have not experienced any work stoppages and consider our relations with our
employees to be good.
Facilities
Our corporate headquarters facility, which houses our administrative,
advanced development, engineering, information systems, marketing, sales and
service and support groups, consists of approximately 23,500 square feet in
Austin, Texas. We lease our corporate headquarters facility pursuant to a lease
agreement that expires in March 2003. Our manufacturing facility of
approximately 15,000 square feet is also located in Austin, Texas. The lease on
this facility also expires in March 2003.
Legal Proceedings
We are not party to any legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information concerning our executive
officers and directors and certain of our key employees:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Eric L. Jones....................... 65 Chairman of the Board of Directors
Joseph F. Pinkerton, III............ 36 President, Chief Executive Officer and
Director
David S. Gino....................... 42 Vice President of Finance and Chief
Financial Officer
James A. Balthazar.................. 46 Vice President of Marketing
William E. Ott, II.................. 44 Vice President of Sales and Service
Richard E. Anderson................. 35 Director (1)
Rodney S. Bond...................... 55 Director (2)
Lindsay R. Jones.................... 39 Director
Jan H. Lindelow..................... 54 Director (1)(2)
Terrence L. Rock.................... 53 Director (1)(2)
OTHER KEY EMPLOYEES:
Mark Ascolese....................... 49 Senior Vice President
Daniel R. Brent..................... 53 Vice President of Manufacturing
David B. Clifton.................... 52 Vice President of Advanced Development
William C. Kainer................... 48 Vice President of Business Development
Travis R. Williams.................. 55 Vice President of Engineering
</TABLE>
- --------
(1)Member of the compensation committee
(2)Member of the audit committee
EXECUTIVE OFFICERS AND DIRECTORS
ERIC L. JONES has served as the Chairman of our Board of Directors since
March 1995. Since April 1994, he has been a partner with SSM Venture Partners,
L.P., an Austin, Texas-based venture capital firm. Mr. Jones is currently a
director/chairman of several private companies including 360 Commerce and
Motive Communications. He is also the past chairman of the board of directors
of VTEL Corporation and Tivoli Systems. During a twenty-five year career at
Texas Instruments, Mr. Jones held various positions, including as a corporate
vice president and as president of TI's Data Systems Group. Mr. Jones holds a
Ph.D. in mechanical engineering from the University of Texas at Austin.
JOSEPH F. PINKERTON, III, our founder, has served as our Chief Executive
Officer, President and director since August 1992. From June 1989 to June 1992,
Mr. Pinkerton was a principal with FRC, a private research and development
company. Mr. Pinkerton holds numerous U.S. and foreign patents. Mr. Pinkerton
holds a B.A. in physics from Albion College, in association with Columbia
University.
DAVID S. GINO has served as our Chief Financial Officer and Vice President
of Finance since December 1999. From August 1995 to November 1999, Mr. Gino was
the Chief Financial Officer and
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Executive Vice President of Finance of DuPont Photomasks, a public
semiconductor component manufacturer. From October 1987 to August 1995, Mr.
Gino held a number of financial and business management positions with The
DuPont Company. Mr. Gino holds a B.A. in economics from the University of
California and an MBA from the University of Phoenix.
JAMES A. BALTHAZAR has served as our Vice President of Marketing since
October 1996. From March 1984 to August 1996, Mr. Balthazar held various
management positions, including Vice President of Marketing, at Convex Computer
Corporation, a public supercomputer manufacturer. Mr. Balthazar holds a B.S.
from the University of Maryland, College Park and an M.S. in engineering from
Cornell University.
WILLIAM E. OTT, II has served as our Vice President of Sales and Service
since September 1997. From July 1996 to September 1997, Mr. Ott served as
General Manager for Eastern United States, Canada and Latin America at US Data
Corp, a public manufacturer of automation software. From August 1995 to July
1996, he was the Southeastern Sales Director for Pyramid Technology Corp., a
public high performance UNIX server manufacturer, and from July 1994 to June
1995, he was the Southeastern United States Sales Manager for Sybase, Inc. Mr.
Ott holds a B.S. in electrical engineering and an M.B.A. from the University of
Missouri at Columbia.
RICHARD E. ANDERSON has served on our Board of Directors since 1992. In
1992, Mr. Anderson founded Hill Partners, Inc., a real estate development and
investment company, where he currently serves as a partner. Mr. Anderson holds
a B.A. in economics from Southern Methodist University.
RODNEY S. BOND has served on our Board of Directors since September 1994.
Since May 1990, Mr. Bond has served in various capacities, including as Vice
President, Chief Strategic Officer and Vice President, Chief Financial Officer
with VTEL Corporation, a public digital video communications company. Mr. Bond
holds a B.S. in metalurgical engineering from the University of Illinois and an
M.B.A. from Northwestern University.
LINDSAY R. JONES has served on our Board of Directors since December 1996.
Ms. Jones is a Vice President of Advent International Corp., a private equity
firm, which she joined in September 1990. Ms. Jones holds a B.A. in economics
from Middlebury College.
JAN H. LINDELOW has served on our Board of Directors since February 1998.
Since May 1997 to the present, Mr. Lindelow has served as Chairman and CEO of
Tivoli Systems, Inc. From January 1995 to April 1997, he was a self-employed
management consultant. From 1988 to June 1994, Mr. Lindelow worked in various
management capacities at Asea Brown Boveri AG. Mr. Lindelow holds an M.S. in
electrical engineering from the Royal Institute of Technology in Stockholm,
Sweden.
TERRENCE L. ROCK has served on our Board of Directors since 1997. Since
1996, Mr. Rock has served as a partner with CenterPoint Venture Partners. From
1983 to 1996, Mr. Rock worked for Convex Computer Corporation holding various
positions, including President and Vice President of Operations. Mr. Rock also
serves on the board at several private companies. Mr. Rock holds a B.S. in
mechanical engineering from South Dakota School of Mines and Technology.
OTHER KEY EMPLOYEES
MARK ASCOLESE has served as our Senior Vice President since March 2000.
From 1985 to March 2000, Mr. Ascolese served as President, Global Accounts, as
well as various other executive level positions at Invensys PLC's Powerware
subsidiary. Mr. Ascolese holds a B.S. in commerce from the University of
Louisville.
DANIEL R. BRENT has served as our Vice President of Manufacturing since
July 1996. From June 1984 until July 1996, Mr. Brent held various manufacturing
management positions, including manager and director of technical support in
the Austin, Texas and Fremont, California divisions of Tandem Computers. Mr.
Brent holds a B.S. in chemistry from Wichita State University.
40
<PAGE>
DAVID B. CLIFTON has served as our Vice President of Advanced Development
since 1997. From 1994 to 1997, Mr. Clifton served as our Vice President of
Engineering. Prior to joining Active Power, Mr. Clifton was a founder and Vice
President of Engineering at Asoma Instruments. Mr. Clifton attended Texas Tech
University, Oklahoma University and the University of Texas at Austin.
WILLIAM C. KAINER has served as our Vice President of Business Development
since January 1999. From October 1997 to January 1999, Mr. Kainer served as our
Vice President of Service. From January 1997 to October 1997, he served as Vice
President of Sales for Haystack Labs, a private security software company. From
November 1995 to September 1996, Mr. Kainer was the Vice President of Sales and
Marketing of General Computer Systems, a private pharmaceutical software
company. From July 1994 to October 1995, he was General Manager of the Americas
at Convex Computer Corporation. Mr. Kainer holds a B.A. in history from the
University of Houston.
TRAVIS R. WILLIAMS has served as our Vice President of Engineering since
October 1997. Prior to this, Mr. Williams held various positions, including the
Manager of Development Engineering at the Wayne Division of Dresser Industries,
Inc., a public manufacturer of retail petroleum marketing systems, from
February 1988 to September 1997. Mr. Williams holds a B.S. in mechanical
engineering from Texas A&M University and an M.S. in electrical engineering
from the University of California at Los Angeles.
Our officers serve at the discretion of the board of directors. All of our
current directors were elected pursuant to the Fourth Amended and Restated
Voting Agreement dated November 23, 1999 by and between us and certain of our
stockholders. The voting provisions of this agreement will automatically
terminate upon the closing of this offering. There are no family relationships
among any of our executive officers or directors.
CLASSIFIED BOARD OF DIRECTORS
Prior to the closing of this offering, we intend to file an amended
certificate of incorporation pursuant to which our board of directors will be
divided into three classes effective upon the closing of this offering. The
members of each class will serve for a staggered, three year term. Upon the
expiration of the term of a class of directors, directors in that class will be
elected for three-year terms at the annual meeting of stockholders in the year
in which their term expires. The classes will be comprised as follows:
. Class I Directors. Richard E. Anderson, Rodney S. Bond and Lindsay R.
Jones will be Class I Directors whose terms will expire at the 2001
annual meeting of stockholders;
. Class II Directors. Jan H. Lindelow and Terrence L. Rock will be Class
II Directors whose terms will expire at the 2002 annual meeting of
stockholders; and
. Class III Directors. Eric L. Jones and Joseph F. Pinkerton, III will be
Class III Directors whose terms will expire at the 2003 annual meeting
of stockholders.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has established an audit committee and a
compensation committee.
AUDIT COMMITTEE. The audit committee reports to the board of directors with
regard to the selection of our independent auditors, the scope of our annual
audits, fees to be paid to the auditors,
41
<PAGE>
the performance of our independent auditors, compliance with our accounting and
financial policies, and management's procedures and policies relative to the
adequacy of our internal accounting controls. The members of the audit
committee are Messrs. Bond, Lindelow and Rock.
COMPENSATION COMMITTEE. The compensation committee reviews and makes
recommendations to the board regarding our compensation policies and all forms
of compensation to be provided to our directors, executive officers and certain
other employees. In addition, the compensation committee reviews bonus and
stock compensation arrangements for all of our other employees. The
compensation committee also administers our stock option and stock purchase
plans. The members of the compensation committee are Messrs. Anderson, Lindelow
and Rock.
DIRECTOR COMPENSATION
Each of our non-employee directors receives a fee of $5,000 per quarter for
his or her service as a director. In addition, non-employee directors will
receive stock option grants at periodic intervals under the automatic option
grant program of our 2000 Stock Incentive Plan. Non-employee and employee
directors will also be eligible to receive option grants under the
discretionary option grant program of the 2000 plan. Under the automatic option
grant program, each individual who first becomes a non-employee board member at
any time after this offering will receive an option grant to purchase 20,000
shares of common stock on the date such individual joins the board. In
addition, on the date of each annual stockholders meeting held after this
offering, each non-employee board member who continues to serve as a non-
employee board member will automatically be granted an option to purchase 5,000
shares of common stock, provided such individual has served on the board for at
least six months.
In May 1996, we entered into a consulting services agreement with Eric L.
Jones, the chairman of our board of directors. Mr. Jones receives a fee of
$6,250 per month for providing consulting services to us. This agreement is
terminable by either party with 30 days advance written notice.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our board's compensation committee consists of Messrs. Anderson, Lindelow
and Rock. To date, no member of our compensation committee has served as an
officer or employee of Active Power. No member of the compensation committee
serves as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving as a member of our board
of directors or its compensation committee.
EMPLOYMENT AGREEMENTS AND SEVERANCE ARRANGEMENTS
We have severance arrangements in place with the following employees:
. JOSEPH F. PINKERTON, III. Pursuant to a resolution by our board of
directors, Mr. Pinkerton will receive six months of severance pay if he
is terminated without cause. Additionally, if after six months of an
inability to perform his duties due to a permanent disability Mr.
Pinkerton is terminated, he will receive three months of severance pay.
. DAVID S. GINO. Upon a change in corporate control that results in a
significant reduction in his role and/or responsibility within 12 months
of the change in corporate control, Mr. Gino will receive up to six
months of severance pay. Additionally, 75% of his then unvested options
will accelerate and vest immediately.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our certificate of incorporation limits the liability of our directors to
us or our stockholders for breaches of the directors' fiduciary duties to the
fullest extent permitted by Delaware law. In addition, our certificate of
incorporation and bylaws provide for mandatory indemnification of directors and
officers to the fullest extent permitted by Delaware law. We also maintain
directors' and officers' liability insurance and enter into indemnification
agreements with all of our directors and executive officers.
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<PAGE>
EXECUTIVE COMPENSATION
The following table provides the total compensation paid to our chief
executive officer and the next highest paid executive officers whose
compensation (salary and bonus) exceeded $100,000 in 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#)
--------------------------- ---------- --------- ---------------- ------------
<S> <C> <C> <C> <C>
Joseph F. Pinkerton, III.... $157,308 $50,000 -- --
President and Chief Execu-
tive Officer
James A. Balthazar.......... 128,750 254 -- 7,000
Vice President of Marketing
William E. Ott.............. 123,600 25,499 -- 13,000
Vice President of Sales and
Service
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information concerning individual grants of
stock options made during 1999 to each of our executive officers named in the
summary compensation table. We have never granted any stock appreciation
rights.
The exercise prices represent our board's estimate of the fair market value
of the common stock on the grant date. In establishing these prices, our board
considered many factors, including the book value of our common stock, the
price of the most recent sales of our preferred stock, the preferences given to
our preferred stock and the lack of marketability of our common stock.
The amounts shown as potential realizable value represent hypothetical
gains that could be achieved for the respective options if exercised at the end
of the option term. These amounts represent certain assumed rates of
appreciation in the value of our common stock. The 5% and 10% assumed annual
rates of compounded stock price appreciation are mandated by rules of the
Securities and Exchange Commission and do not represent our estimate or
projection of the future price of our common stock. The potential realizable
value is calculated based on the ten-year term of the option at its time of
grant. It is calculated based on the assumption that our initial public
offering price per share appreciates at the indicated annual rate compounded
annually for the entire term of the option and that the option is exercised and
sold on the last day of its term for the appreciated stock price. Actual gains,
if any, on stock option exercises depend on the future performance of our
common stock. The amounts reflected in the table may not necessarily be
achieved.
We granted these options under our 1993 Stock Option Plan. Each option has
a maximum term of ten years, subject to earlier termination if the optionee's
services are terminated. Except as otherwise noted, these options are
immediately exercisable, but we have the right to repurchase, at the exercise
price, any shares that have not vested at the time the optionee terminates
employment with us. The percentage of total options granted to our employees in
the last fiscal year is based on options to purchase an aggregate of 591,000
shares of common stock granted in 1999. The following table sets forth
information concerning the individual grants of stock options to each of our
named executive officers in the year ended 1999.
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<PAGE>
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE OF ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
------------------------------ ----------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES IN EXERCISE
OPTIONS THE YEAR ENDED PRICE PER EXPIRATION
NAME GRANTED(#)(1) 1999(%) SHARE DATE 5%($) 10%($)
- ---- ------------- ---------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Joseph F. Pinkerton,
III.................... -- -- -- -- -- --
James A. Balthazar(2)... 7,000 1.2% $2.25 12/9/09 $ $
William E. Ott(3)....... 13,000 2.2 2.25 12/9/09
</TABLE>
- --------
(1)These options are fully exercisable but if the employee leaves us before he
has vested in his option shares, we have the right to repurchase, at the
exercise price, any shares that have not vested.
(2)These options vested as to 6.25% on March 9, 2000 and vest as to the
remaining 93.75% in equal quarterly installments over the following 15
quarters.
(3)These options vested as to 6.25% on March 9, 2000 and vest as to the
remaining 93.75% in equal quarterly installments over the following 15
quarters.
FISCAL YEAR-END OPTION VALUES
The following table provides information about stock options held as of
December 31, 1999 by each of our executive officers named in the Summary
Compensation Table. Actual gains on exercise, if any, will depend on the value
of our common stock on the date on which the shares are sold.
YEAR END 1999 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1999(#) DECEMBER 31, 1999($)(1)
------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Joseph F. Pinkerton, III... -- -- -- --
James A. Balthazar......... 172,000 -- $ $
William E. Ott............. 111,500 --
</TABLE>
- --------
(1)There was no public trading market for our common stock as of December 31,
1999. Accordingly, we have based the value of unexercised in-the-money
options at December 31, 1999 on our initial public offering price of $
per share, less the applicable exercise price per share, multiplied by the
number of shares underlying the options. Actual gains on exercise, if any,
will depend on the value of our common stock on the date on which the
shares are sold.
2000 STOCK INCENTIVE PLAN
INTRODUCTION. The 2000 Stock Incentive Plan is the successor program to our
1993 Stock Option Plan. The 2000 plan was adopted by our board of directors and
has been approved by our stockholders. The 2000 plan will become effective
immediately upon the signing of the underwriting agreement for this offering.
At that time, all outstanding options under the 1993 plan will be transferred
to the 2000 plan, and no further option grants will be made under the 1993
plan. The transferred options will continue to be governed by their existing
terms, unless our compensation committee decides to extend one or more features
of the 2000 plan to those options. Except as otherwise noted below, the
transferred options will have substantially the same terms as will be in effect
for grants made under the discretionary option grant program of our 2000 plan.
44
<PAGE>
SHARE RESERVE. shares of our common stock have been authorized for
issuance under the 2000 plan. This share reserve consists of the number of
shares carried over from the 1993 plan plus an additional increase of
shares. The share reserve under our 2000 plan will automatically increase on
the first trading day in January of each calendar year, beginning with calendar
year 2001, by an amount equal to percent ( %) of the total number of shares
of our common stock outstanding on the last trading day of December in the
prior calendar year, but in no event will this annual increase exceed
shares. In addition, no participant in the 2000 plan may be granted stock
options, separately exercisable stock appreciation rights or direct stock
issuances for more than shares of common stock in total in any calendar
year.
PROGRAMS. Our 2000 plan has three separate programs:
. the discretionary option grant program, under which eligible employees
may be granted options to purchase shares of our common stock at an
exercise price not less than the fair market value of those shares on
the grant date;
. the stock issuance program, under which eligible individuals may be
issued shares of common stock directly, upon the attainment of
performance milestones, the completion of a specified period of service
or as a bonus for past services; and
. the automatic option grant program, under which option grants will
automatically be made at periodic intervals to eligible non-employee
board members to purchase shares of common stock at an exercise price
equal to the fair market value of those shares on the grant date.
ELIGIBILITY. The individuals eligible to participate in our 2000 plan
include our officers and other employees, our non-employee board members and
any consultants we hire.
ADMINISTRATION. The discretionary option grant and stock issuance programs
will be administered by our compensation committee. This committee will
determine which eligible individuals are to receive option grants or stock
issuances under those programs, the time or times when the grants or issuances
are to be made, the number of shares subject to each grant or issuance, the
status of any granted option as either an incentive stock option or a
nonstatutory stock option under the federal tax laws, the vesting schedule to
be in effect for the option grant or stock issuance and the maximum term for
which any granted option is to remain outstanding.
PLAN FEATURES. Our 2000 plan includes the following features:
. The exercise price for any options granted under the plan may be paid in
cash or in shares of our common stock valued at the fair market value on
the exercise date. The option may also be exercised through a same-day
sale program through an independent brokerage firm without any cash
outlay by the optionee.
. The compensation committee has the authority to cancel outstanding
options under the discretionary option grant program, including any
transferred options from our 1993 plan, in return for the grant of new
options for the same or different number of option shares with an
exercise price per share based upon the fair market value of our common
stock on the new grant date.
CHANGE IN CONTROL. The 2000 plan includes the following change in control
provisions which may result in the accelerated vesting of outstanding option
grants and stock issuances:
. In the event that we are acquired by merger or asset sale or board-
approved sale by the stockholders of more than 50% of our outstanding
voting stock, each outstanding option under the discretionary option
grant program which is not to be assumed by the successor corporation or
otherwise continued in effect will immediately become exercisable for
all the option shares, and all outstanding unvested shares will
immediately vest, except to the extent our repurchase rights with
respect to those shares are to be assigned to the successor corporation
or otherwise continued in effect.
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<PAGE>
. The compensation committee will have complete discretion to grant one or
more options which will become exercisable for all the option shares in
the event those options are assumed in the acquisition but the
optionee's service with us or the acquiring entity is subsequently
involuntarily terminated. The vesting of any outstanding shares under
our 2000 plan may be accelerated upon similar terms and conditions.
. The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a hostile takeover effected
through a successful tender offer for more than 50% of our outstanding
voting stock or a change in the majority of our board through one or
more contested elections. Such accelerated vesting may occur either at
the time of such transaction or upon the subsequent termination of the
optionee's services.
. The options currently outstanding under our 1993 plan will immediately
vest in the event we are acquired by merger or asset sale, unless those
options are assumed by the acquiring entity or our repurchase rights
with respect to any unvested shares subject to those options are
assigned to such entity. If the options are so assumed by the acquiring
entity and our repurchase rights are so assigned to such entity, then no
accelerated vesting will occur at the time of the acquisition but, at
the discretion of our board of directors at the time of the option grant
or any time when the option is outstanding, the options will accelerate
and vest in full upon an involuntary termination of the optionee's
employment within a period no later than 18 months following the
acquisition.
AUTOMATIC OPTION GRANT PROGRAM. Each individual who first becomes a non-
employee board member at any time after the effective date of this offering
will receive an option grant to purchase 20,000 shares of common stock on the
date such individual joins the board. In addition, on the date of each annual
stockholders meeting held after the effective date of this offering, each non-
employee board member who is to continue to serve as a non-employee board
member, including each of our current non-employee board members, will
automatically be granted an option to purchase 5,000 shares of common stock,
provided such individual has served on the board for at least six months.
Each automatic grant will have an exercise price per share equal to the
fair market value per share of our common stock on the grant date and will have
a term of 10 years, subject to earlier termination following the optionee's
cessation of board service. The option will be immediately exercisable for all
of the option shares; however, we may repurchase, at the exercise price paid
per share, any shares purchased under the option which are not vested at the
time of the optionee's cessation of board service. The shares subject to each
initial 20,000-share automatic option grant will vest in a series of three
successive annual installments upon the optionee's completion of each year of
board service over the three-year period measured from the grant date. The
shares subject to each annual 5,000 share automatic grant will vest upon the
optionee's completion of one year of service measured from the grant date.
However, the shares will immediately vest in full upon certain changes in
control or ownership or upon the optionee's death or disability while then
serving as a board member.
The board may amend or modify the 2000 plan at any time, subject to any
required stockholder approval. The 2000 plan will terminate no later than ,
2010.
CHANGE IN CONTROL ARRANGEMENTS UNDER 1993 STOCK OPTION PLAN
If we are acquired in a stockholder-approved transaction, whether by merger
or asset sale, then all of the outstanding options granted under our 1993 plan,
including those held by our executive officers, will accelerate in full, unless
those options are assumed by the successor company and our repurchase rights
with respect to unvested option shares are assigned to that company. At the
46
<PAGE>
discretion of our board of directors, at the time of the option grant or at any
time when the option remains outstanding, if the optionee's employment is
terminated other than for cause within a period not to exceed 18 months after
the acquisition, the options will accelerate and become fully vested, and such
options may be exercised at any time prior to the earlier of the expiration
date of the option or the earlier termination of the option.
EMPLOYEE STOCK PURCHASE PLAN
INTRODUCTION. Our Employee Stock Purchase Plan was adopted by our board of
directors and has been approved by our stockholders. The plan will become
effective immediately upon the signing of the underwriting agreement for this
offering. The plan is designed to allow our eligible employees to purchase
shares of common stock, at semi-annual intervals, with their accumulated
payroll deductions.
SHARE RESERVE. shares of our common stock initially have been reserved
for issuance. The reserve will automatically increase on the first trading day
of January in each calendar year, beginning in calendar year 2001, by an amount
equal to percent ( %) of the total number of outstanding shares of our common
stock on the last trading day of December in the prior calendar year. In no
event will any such annual increase exceed shares.
OFFERING PERIODS. The plan has a series of successive offering periods,
each with a maximum duration of 24 months. The initial offering period began on
the date of the signing of the underwriting agreement for this offering and
ends on the last business day in 2001. The next offering period will start
on the first business day in 2001, and subsequent offering periods will be
set by our compensation committee.
ELIGIBLE EMPLOYEES. Individuals scheduled to work more than 20 hours per
week for more than five calendar months per year may join an offering period on
their start date or any semi-annual entry date within that period. Semi-annual
entry dates will occur on the first business day of June and December each
year. Individuals who become eligible employees after the start date of an
offering period may join the plan on any subsequent semi-annual entry date
within that offering period.
PAYROLL DEDUCTIONS. A participant may contribute up to 15% of his or her
base salary through payroll deductions, and the accumulated deductions will be
applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per
share on the participant's entry date into the offering period or, if lower,
85% of the fair market value per share on the semi-annual purchase date. Semi-
annual purchase dates will occur on the last business day of and each
year. However, a participant may not purchase more than shares on any one
semi-annual purchase date, and no more than 75,000 shares may be purchased in
total by all participants on any one semi-annual purchase date. Our
compensation committee will have the authority to change these limitations for
any subsequent offering period.
RESET FEATURE. If the fair market value per share of our common stock on
any purchase date is less than the fair market value per share on the start
date of the two-year offering period, then that offering period will
automatically terminate, and a new two-year offering period will begin on the
next business day. All participants in the terminated offering will be
transferred to the new offering period.
CHANGE IN CONTROL. Should we be acquired by merger or sale of substantially
all of our assets or more than fifty percent of our voting securities, then all
outstanding purchase rights will automatically be exercised immediately prior
to the effective date of the acquisition. The purchase price will be equal to
85% of the market value per share on the participant's entry date into the
offering period in which an acquisition occurs or, if lower, 85% of the fair
market value per share immediately prior to the acquisition.
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<PAGE>
TERMINATION AND AMENDMENT OF PLAN. The plan will terminate no later than
the last business day of 2010. The board may at any time amend, suspend or
discontinue the plan. However, certain amendments may require stockholder
approval.
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<PAGE>
CERTAIN TRANSACTIONS
Private Placements of Equity
5% Stockholders, Directors and Executive Officers. Since our inception in
August 1992, we have raised capital primarily through the sale of our preferred
stock, including the following sales to holders of more than 5% of our
outstanding common stock and to directors and executive officers:
. In August 1992, we sold 100,000 shares of our non-voting 1992
preferred stock at a price of $0.50 per share to Richard E. Anderson.
Concurrently with this financing, Mr. Anderson became a director.
. In March 1995, we sold to SSM Venture Partners 263,158 shares of our
Series A preferred stock at a price of $1.52 per share and a warrant
to purchase 200,000 shares of common stock at an exercise price of
$0.15 per share. Concurrently with the closing of the financing, SSM
Venture Partners became a 5% stockholder and Eric L. Jones became the
chairman of our board of directors. Prior to this offering, we
anticipate that SSM will exercise this warrant.
. In May 1996, we sold an aggregate of 1,847,292 shares of our Series B
preferred stock at a price of $2.03 per share to funds affiliated with
Advent International, funds affiliated with Austin Ventures and SSM
Venture Partners. Concurrently with the closing of the financing,
investment funds affiliated with Advent International Corp. and
investment funds affiliated with Austin Ventures became 5%
stockholders.
In connection with our Series C preferred stock financing in July
1997, the terms of the Series B preferred stock were modified to
provide that the Series B preferred stock would be convertible into
common stock at a rate of approximately 1.19:1.
. In July 1997, we sold an aggregate of 1,726,620 shares of our Series C
preferred stock at a price of $3.475 per share to funds affiliated
with Austin Ventures, CenterPoint Venture Fund, funds affiliated with
Advent International Corp. and SSM Venture Partners. Concurrently with
the closing of the financing, CenterPoint Venture Fund I, became a 5%
stockholder and Terrence L. Rock became a director.
. In June 1998, we sold an aggregate of 1,454,552 shares of our Series D
preferred stock at a price of $6.05 per share to Rho Management Trust
I, CenterPoint Venture Fund I, SSM Venture Partners, funds affiliated
with Austin Ventures, funds affiliated with Advent International Corp.
and Jan H. Lindelow. Concurrently with the closing of the financing,
Rho Management Trust I became a 5% stockholder.
. In November 1999, we sold an aggregate of 1,830,302 shares of our
Series E preferred stock at a price of $11.34 per share to Rho
Management Trust I, funds affiliated with SSM Venture Partners, funds
affiliated with Austin Ventures, CenterPoint Venture Fund II, L.P.,
funds affiliated with Advent International Corp., our director Richard
E. Anderson and his brother Charles A. Anderson, and Eric L. Jones.
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<PAGE>
The following table summarizes the shares of our preferred stock purchased
by our 5% stockholders, directors and executive officers since our inception
and the aggregate number of shares of common stock into which those shares of
preferred stock will be converted upon the consummation of this offering:
<TABLE>
<CAPTION>
AGGREGATE NUMBER OF
SERIES A SERIES B SERIES C SERIES D SERIES E SHARES OF COMMON STOCK
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED ISSUABLE UPON CONVERSION
INVESTOR STOCK STOCK STOCK STOCK STOCK OF PREFERRED STOCK
- -------- --------- --------- --------- --------- --------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
SSM Venture Partners
Funds.................. 263,158 615,764 287,770 117,356 246,916 1,648,338
Advent International
Funds.................. -- 615,764 287,770 57,520 17,636 1,096,063
Austin Ventures Funds... -- 615,764 575,540 99,174 176,366 1,584,218
CenterPoint Venture
Partners Funds......... -- -- 575,540 330,578 176,366 1,082,484
Rho Management Trust I.. -- -- -- 809,924 264,550 1,074,474
Richard E. Anderson
(1).................... -- -- -- -- 49,312 49,312
Eric L. Jones (2)....... -- -- -- -- 17,320 17,320
Jan H. Lindelow......... -- -- -- 40,000 -- 40,000
</TABLE>
- --------
(1)Includes shares purchased by his brother.
(2)Excludes shares purchased by funds affiliated with SSM Venture Partners,
with which Mr. Jones is affiliated.
OTHER TRANSACTIONS
CONSULTING AGREEMENT WITH ERIC L. JONES. In May 1996, we entered into a
consulting services agreement with Eric Jones, the chairman of our board of
directors. In exchange for providing consulting services to us, Mr. Jones
receives a fee of $6,250 per month. This agreement is terminable by either
party with 30 days advance written notice.
REGISTRATION RIGHTS. For more information on registration rights we have
granted to our 5% stockholders, other stockholders and some of our directors,
please see "Description of Capital Stock--Registration Rights".
STOCK OPTIONS AND CHANGE IN CONTROL ARRANGEMENTS. For more information
regarding the grant of stock options and the change in control arrangements
which may be available to directors and executive officers, please see
"Management--Director Compensation", "--Employment Agreements, and Severance
Arrangements" and "--Executive Compensation".
INDEMNIFICATION AND INSURANCE. Our bylaws require us to indemnify our
directors and executive officers to the fullest extent permitted by Delaware
law. We have entered into indemnification agreements with all of our directors
and executive officers and have purchased directors' and officers' liability
insurance. In addition, our certificate of incorporation limits the personal
liability of our board members for breaches of their fiduciary duties.
50
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
This table sets forth information regarding the beneficial ownership of our
common stock as of April 30, 2000, as adjusted to reflect the sale of common
stock in this offering for:
. each person known by us to own beneficially more than 5% of our common
stock;
. each executive officer named in the summary compensation table on page
43;
. each of our directors; and
. all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power
with respect to the securities. Except as indicated in the notes following the
table, and subject to applicable community property laws, the persons named in
the table have sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them. The number of shares of
common stock used to calculate the percentage ownership of each listed person
includes the shares of common stock underlying options or warrants held by such
persons that are exercisable within 60 days of this offering. The percentage of
beneficial ownership before the offering is based on 13,501,793 shares,
consisting of 5,417,585 shares of common stock outstanding as of April 30,
2000, and 8,084,208 shares issuable upon the conversion of the convertible
preferred stock. Percentage of beneficial ownership after the offering is based
on shares, including the shares to be sold in this offering.
Active Power and our founder and chief executive officer, Joseph F.
Pinkerton, III, may sell shares in connection with the exercise of the
underwriters' over-allotment option. Active Power may sell up to shares and
Mr. Pinkerton may sell up to shares. To the extent the underwriters' over-
allotment option is exercised for less than shares, the shares to be sold
will be allocated pro rata between Active Power and Mr. Pinkerton. The post-
offering ownership percentages in the table do not take into account any
exercise of the underwriters' over-allotment option.
Unless otherwise indicated in the notes to the table below, the address for
each person set forth below is c/o Active Power, Inc., 11525 Stonehollow Drive,
Suite 110, Austin, Texas 78758.
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON STOCK
SHARES OF BENEFICIALLY OWNED (%)
COMMON STOCK --------------------------
BENEFICIALLY BEFORE THE AFTER THE
NAME OWNED (#) OFFERING OFFERING
- ---- ------------ ----------- ----------
<S> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Eric L. Jones.................... 1,965,658 14.4% %
Joseph F. Pinkerton, III......... 2,953,982 21.9
James A. Balthazar............... 172,000 1.3
William E. Ott, II............... 151,500 1.1
Richard E. Anderson.............. 127,014 *
Rodney S. Bond................... 38,750 *
Lindsay R. Jones................. 1,096,063 8.1
Jan H. Lindelow.................. 60,000 *
Terrence L. Rock................. 1,082,484 8.0
All directors and executive
officers as a group (10
persons)........................ 7,758,559 56.1
OTHER 5% STOCKHOLDERS..............
Funds affiliated with Austin
Ventures........................ 1,584,218 11.7
Funds affiliated with Advent
International Corp. ............ 1,096,063 8.1
Funds affiliated with CenterPoint
Venture Partners................ 1,082,484 8.0
Funds affiliated with SSM Venture
Partners........................ 1,848,338 13.5
Rho Management Trust I........... 1,074,474 8.0
</TABLE>
- --------
* Indicates beneficial ownership of less than 1% of the total outstanding
common stock.
51
<PAGE>
. Eric L. Jones. 1,848,338 shares indicated as owned by Mr. Jones are
included because of his association with funds affiliated with SSM
Venture Partners. Mr. Jones is a shareholder of SSM Corporation, the
general partner of SSM I, L.P., the general partner of (a) SSM Venture
Partners, L.P., (b) SSM Partners II, L.P. and (c) SSM Venture
Associates, L.P. Mr. Jones disclaims beneficial ownership of the shares
held by SSM Venture Partners, L.P., SSM Venture Partners II, L.P. and
SSM Venture Associates, L.P., except to the extent of his interest in
SSM Corporation. Mr. Jones' address is c/o SSM Corporation, 110 Wild
Basin Rd., Suite 280, Austin, Texas 78734.
. Joseph F. Pinkerton, III. Includes 300,000 shares held by
Mr. Pinkerton's minor children. Mr. Pinkerton disclaims beneficial
ownership of these shares.
. James A. Balthazar. These shares include options to purchase 32,000
shares of common stock that are immediately exercisable. 17,500 shares
of common stock are currently unvested and are subject to our right to
repurchase them if Mr. Balthazar's services are terminated prior to
vesting.
. William E. Ott, II. These shares include options to purchase 71,500
shares of common stock that are immediately exercisable.
. Richard E. Anderson. Mr. Anderson also holds 100,000 shares, or 23.8%,
of our non-voting 1992 preferred stock, which is not convertible into
shares of our common stock. These shares of 1992 preferred stock have
not been excluded from the foregoing table. Mr. Anderson's address is
c/o Hill Partners, 2800 Industrial Terrace, Austin, Texas 78758.
. Rodney S. Bond. These shares include options to purchase 12,500 shares
of common stock that are immediately exercisable. Mr. Bond's address is
c/o VTEL Corporation, 108 Wild Basin Road, Austin, Texas 78746.
. Lindsay R. Jones. All shares indicated as owned by Ms. Jones are
included because of her association with funds affiliated with Advent
International Corp. Ms. Jones is a Vice President of Advent
International Corporation, the general partner of (a) Advent
International Investors II Limited Partnership, (b) Advent International
Limited Partnership, the general partner of Envirotech Investment Fund I
Limited Partnership and (c) Advent International Partnership, the
general partner of Adwest Limited Partnership. Ms. Jones disclaims
beneficial ownership of the shares held by Advent International
Investors II Limited Partnership, Envirotech Investment Fund I Limited
Partnership and Adwest Limited Partnership. Ms. Jones' address is c/o
Advent International Corporation, 75 State Street, 29th Floor, Boston
Massachusetts 02109.
. Jan H. Lindelow. These shares include options to purchase 20,000 shares
of common stock that are immediately exercisable. Mr. Lindelow's address
is c/o Tivoli Systems, 9442 Capital of Texas Highway North, Austin,
Texas 78759.
. Terrence L. Rock. All shares indicated as owned by Mr. Rock are included
because of his association with funds affiliated with CenterPoint
Venture Partners. Mr. Rock is (a) a limited partner of CenterPoint
Venture Partners, L.P. and CenterPoint Venture Fund II, L.P., (b) a
limited partner of Paluck Associates, L.P., the general partner of
CenterPoint Venture Partners, L.P., and (c) a general partner of
CenterPoint Associates II, L.P., the general partner of CenterPoint
Venture Fund II, L.P. Mr. Rock disclaims beneficial ownership of the
shares held by CenterPoint Venture Partners, L.P. and CenterPoint
Venture Fund II, L.P., except to the extent of his pecuniary interest in
these funds. Mr. Rock's address is c/o CenterPoint Venture Partners,
13455 Noel Road, Suite 1670, Two Galleria Tower, Dallas, Texas 75240.
. All directors and executive officers as a group. Includes 111,108 shares
owned by David S. Gino, our chief financial officer, who is not named in
the summary compensation table because he joined us in December 1999 and
therefore did not have in excess of $100,000 in annual compensation.
52
<PAGE>
. FUNDS AFFILIATED WITH AUSTIN VENTURES. Includes:
. 511,369 shares held by Austin Ventures IV-A, L.P.; and
. 1,072,849 shares held by Austin Ventures IV-B, L.P.
These funds may be deemed to beneficially own each other's shares
because the general partners of each partnership are affiliated. Each
partnership, however, disclaims beneficial ownership of the other's
shares, and each general partner of the funds or the general partners of
the funds disclaims beneficial ownership of the shares held by the
partnership except to the extent of his pecuniary interest. The address
of the investment funds affiliated with Austin Ventures is 114 West
Seventh Street, Suite 1300, Austin, Texas 78701.
. FUNDS AFFILIATED WITH ADVENT INTERNATIONAL CORP. Includes:
. 876,853 shares held by Envirotech Investment Fund I Limited
Partnership;
. 214,829 shares held by Adwest Limited Partnership; and
. 4,381 shares held by Advent International Investors II Limited
Partnership.
Each of these partnerships is managed by Advent International
Corporation. Advent International Corporation exercises sole voting and
investment power with respect to all shares held by these funds. The
address of the investment funds affiliated with Advent International
Corporation is 75 State Street, Boston, Massachusetts 02109.
. FUNDS AFFILIATED WITH CENTERPOINT VENTURE PARTNERS. Includes:
. 906,118 shares held by CenterPoint Venture Partners, L.P. and
. 176,366 shares held by CenterPoint Venture Fund II, L.P.
These funds may be deemed to beneficially own each other's shares
because the general partners of each partnership are affiliated. Each
partnership, however, disclaims beneficial ownership of the other's
shares, and each general partner of the funds or the general partners of
the funds disclaims beneficial ownership of the shares held by the
partnerships except to the extent of his pecuniary interest. The address
of the investment funds affiliated with CenterPoint Venture Partners is
13455 Noel Road, Suite 1670, Two Galleria Tower, Dallas, Texas 75240.
. FUNDS AFFILIATED WITH SSM VENTURE PARTNERS. Includes:
. 1,471,970 shares held by SSM Venture Partners, L.P.;
. 200,000 shares issuable upon the exercise of a warrant held by SSM
Venture Partners, L.P.;
. 147,548 shares held by SSM Venture Partners II, L.P.; and
. 28,820 shares held by SSM Venture Associates, L.P.
These funds may be deemed to beneficially own each other's shares because
they are controlled by affiliated entities. Each partnership, however,
disclaims beneficial ownership of the others' shares. The address of the
investment funds affiliated with SSM Ventures Partners is 845 Crossover
Lane, Suite 140, Memphis, Tennessee 38117.
. RHO MANAGEMENT TRUST I's address is 888 7th Avenue, Suite 4500, New
York, New York 10106.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, our authorized capital stock will consist
of 175,000,000 shares of common stock, par value $0.001 per share, and
25,420,000 shares of preferred stock, par value $0.001 per share. The rights
and preferences of the authorized preferred stock may be designated from time
to time by our board of directors. The following summary is qualified by
reference to our certificate of incorporation and our bylaws, forms of which
have been filed as exhibits to the registration statement of which this
prospectus is a part.
Common Stock
As of April 30, 2000, there were 5,417,585 shares of common stock
outstanding that were held of record by 117 stockholders. Holders of our common
stock are entitled to one vote per share on all matters to be voted upon by the
stockholders. The holders of common stock are not entitled to cumulate voting
rights with respect to the election of directors, and as a result, minority
stockholders will not be able to elect directors on the basis of their votes
alone. Subject to limitations under Delaware law and preferences that may apply
to any outstanding shares of preferred stock, holders of common stock are
entitled to receive ratably such dividends or other distribution, if any, as
may be declared by our board of directors out of funds legally available
therefor. In the event of our liquidation, dissolution or winding up, holders
of common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to the liquidation preference of any
outstanding preferred stock. The common stock has no preemptive, conversion or
other rights to subscribe for additional securities of Active Power. There are
no redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are, and all shares of common stock to be
outstanding upon completion of the offering will be, validly issued, fully paid
and nonassessable. The rights, preferences and privileges of holders of common
stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock that we may designate and
issue in the future.
Preferred Stock
As of April 30, 2000, there were 7,732,084 shares of convertible preferred
stock and 420,000 shares of 1992 preferred stock outstanding. Upon the closing
of this offering, each share of our convertible preferred stock, other than our
Series B preferred stock, will automatically convert into one share of common
stock. Our 1,847,292 shares of Series B preferred stock will convert into
approximately 2,199,418 shares of common stock. The 420,000 shares of 1992
preferred stock outstanding are not convertible into our common stock and is
redeemable at a price of $0.50 per share at such time as our board of directors
determines that we have available funds in excess of anticipated needs. Our
board of directors will determine whether to redeem the 1992 preferred stock
following this offering. Upon the completion of this offering, our board of
directors will have the authority, without further action by the stockholders,
to issue up to 25,000,000 shares of preferred stock in one or more series, to
fix the rights, preferences, privileges and restrictions of the authorized
preferred stock and to issue shares of each such series. The issuance of
preferred stock could have the effect of restricting dividends on the common
stock, diluting the voting power for the common stock, impairing the
liquidation rights of the common stock or delaying or preventing our change in
control without further action by the stockholders. At present, we have no
plans to issue any shares of preferred stock.
Registration Rights
According to the terms of an investors' rights agreement, beginning 180
days after the closing of this offering, some of our stockholders, who will
hold in the aggregate 8,084,208 shares of
54
<PAGE>
common stock, may require us to file a registration statement under the
Securities Act of 1933 with respect to the resale of their shares. To demand
such registration, stockholders' holding an aggregate of at least a majority of
these shares that are then outstanding for the first demand registration, and
stockholders holding an aggregate of at least 25% of these shares that are then
outstanding for the second demand registration, must request that the
registration statement register the resale of at least 20% of these shares that
are then outstanding. We are not required to effect more than two demand
registrations.
At any time after we become eligible to file a registration statement on
Form S-3 under the Securities Act, holders of demand registration rights may
require us to file up to six registration statements on Form S-3 with respect
to their shares of common stock, resulting in an aggregate offering of at least
$500,000 on each registration statement on Form S-3. We are not required to
file more than one registration statement on Form S-3 in any six month period.
These registration rights are subject to conditions and limitations,
including the right of the underwriters of an offering to limit the number of
shares of common stock to be included in the registration. We are generally
required to bear all of the expenses of all registrations under the investors'
rights agreement, except underwriting discounts and commissions. The investors'
rights agreement also contains our commitment to indemnify the holders of
registration rights for losses they incur in connection with registrations
under the agreement. Registration of any of the shares of common stock held by
security holders with registration rights would result in those shares becoming
freely tradeable without restriction under the Securities Act.
ANTI-TAKEOVER EFFECTS
Provisions of Delaware law, our certificate of incorporation, our bylaws
and certain contracts to which we are a party could have the effect of delaying
or preventing a third party from acquiring us, even if the acquisition would
benefit our stockholders. The provisions of Delaware law and in our certificate
of incorporation and bylaws are intended to enhance the likelihood of
continuity and stability in the composition of our board of directors and in
the policies formulated by the board of directors and to discourage certain
types of transactions that may involve an actual or threatened change of
control of Active Power. These provisions are designed to reduce our
vulnerability to an unsolicited proposal for a takeover that does not
contemplate the acquisition of all of our outstanding shares, or an unsolicited
proposal for the restructuring or sale of all or part of Active Power.
DELAWARE ANTI-TAKEOVER STATUTE. We are subject to the provisions of Section
203 of the Delaware General Corporation Law, an anti-takeover law. Subject to
certain exceptions, the statute prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
became an interested stockholder, unless:
. prior to such date, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder's becoming an interested stockholder;
. upon consummation of the transaction which resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding, for purposes of determining the
number of shares outstanding, those shares owned (1) by persons who are
directors and also officers and (2) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
. on or after such date, the business combination is approved by the board
of directors and
55
<PAGE>
authorized at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least 66- 2/3% of the
outstanding voting stock which is not owned by the interested
stockholder.
For purposes of Section 203, a "business combination" includes a merger,
asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years prior to
the date of determination whether the person is an "interested stockholder",
did own, 15% or more of the corporation's voting stock.
In addition, provisions of our certificate of incorporation and bylaws may
also have an anti-takeover effect. These provisions may delay, defer or
prevent a tender offer or takeover attempt of our company that a stockholder
might consider in his or her best interest, including attempts that might
result in a premium over the market price for the shares held by our
stockholders. The following summarizes these provisions.
CLASSIFIED BOARD OF DIRECTORS. Our certificate of incorporation provides
that, effective immediately upon the closing of this offering, our board of
directors will be divided into three classes of directors, as nearly equal in
size as is practicable, serving staggered three-year terms. As a result,
approximately one-third of the board of directors will be elected each year.
These provisions, when coupled with the provisions of our certificate of
incorporation and bylaws authorizing our board of directors to fill vacant
directorships or increase the size of our board, may deter a stockholder from
removing incumbent directors and simultaneously gaining control of the board
of directors.
STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS. Our certificate of
incorporation eliminates the ability of stockholders to act by written
consent. Our bylaws provide that special meetings of our stockholders may be
called only by a majority of our board of directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. Our bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual meeting of stockholders, must provide us
with timely written notice of their proposal. To be timely, a stockholder's
notice must be delivered to or mailed and received at our principal executive
offices not less than 120 days before the first anniversary of the date we
released the notice of annual meeting to stockholders in connection with the
previous year's annual meeting. If, however, no meeting was held in the prior
year or the date of the annual meeting has been changed by more than 30 days
from the date contemplated in the notice of annual meeting, notice by the
stockholder, in order to be timely, must be received a reasonable time before
we release the notice of annual meeting to stockholders. Our bylaws also
specify certain requirements as to the form and content of a stockholder's
notice. These provisions may make it more difficult for stockholders to bring
matters before an annual meeting of stockholders or to make nominations for
directors at an annual meeting of stockholders.
AUTHORIZED BUT UNISSUED SHARES. Our authorized but unissued shares of
common stock and preferred stock are available for our board to issue without
stockholder approval. We may use these additional shares for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
our authorized but unissued shares of common stock and preferred stock could
render it more difficult or discourage an attempt to obtain control of our
company by means of a proxy context, tender offer, merger or other
transaction.
SUPERMAJORITY VOTE PROVISIONS. The Delaware General Corporation Law
provides generally that the affirmative vote of a majority of the shares
entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or bylaws, unless a corporation's certificate of
56
<PAGE>
incorporation or bylaws, as the case may be, requires a greater percentage. Our
certificate of incorporation imposes supermajority vote requirements (two-
thirds) in connection with the amendment of certain provisions of our
certificate of incorporation, including the provisions relating to the
classified board of directors and action by written consent of stockholders.
INDEMNIFICATION. Our certificate of incorporation and bylaws require us to
indemnify our directors and officers to the fullest extent permitted by
Delaware law. In addition, our charter limits the personal liability of our
board members for breaches by the directors of their fiduciary duties to the
fullest extent permitted under Delaware law.
CATERPILLAR TERMINATION RIGHT. Caterpillar, our most significant customer,
has a right to terminate its CleanSource UPS distribution agreement with us in
the event we are acquired or undergo a change in control.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is EquiServe Trust
Company and its address is 150 Royall Street, Canton, MA 02021.
NASDAQ NATIONAL MARKET LISTING
We have applied to have our common stock listed for quotation on the Nasdaq
National Market under the trading symbol "ACPW".
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the prevailing market price of our
common stock could decline. Furthermore, because we do not expect that any of
these shares will be available for sale for at least 90 days following this
offering as a result of the contractual and legal restrictions on resale
described below, sales of substantial amounts of our common stock in the public
market after these restrictions lapse could adversely affect the prevailing
market price of the common stock and our ability to raise equity capital in the
future.
Upon the closing of this offering, we will have outstanding an aggregate
of shares of our common stock, based upon the number of shares
outstanding as of April 30, 2000 and assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options and warrants. Of
these shares, all shares sold in this offering will be freely tradeable without
restriction or further registration under the Securities Act unless they are
purchased by our "affiliates", as that term is defined in Rule 144 under the
Securities Act. Our outstanding shares will be eligible for sale in the public
market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
---------------- ----
<S> <C>
After the date of this prospectus, freely
tradeable shares sold in this offering.
2,278,424 After 90 days from the date of this prospectus,
20% of the shares subject to lock-up agreements
with the underwriters will be released if the
conditions described below under "--Lock-up
Agreements" are satisfied and will be eligible
for sale in the public market under Rule 144
(subject, in some cases, to volume limitations),
Rule 144(k) or Rule 701.
2,278,949 After 120 days from the date of this prospectus,
an additional 20% of the shares subject to lock-
up agreements with the underwriters will be
released if the conditions described below under
"--Lock-up Agreements" are satisfied and will be
eligible for sale in the public market under
Rule 144 (subject, in some cases, to volume
limitations), Rule 144(k) or Rule 701.
6,879,682 After 180 days from the date of this prospectus,
the lock-up agreements are released and these
shares are eligible for sale in the public
market under Rule 144 (subject, in some cases,
to volume limitations), Rule 144(k) or Rule 701.
1,935,872 After 180 days from the date of this prospectus,
restricted securities that are held for less
than one year and are not eligible for sale in
the public market under Rule 144.
</TABLE>
LOCK-UP AGREEMENTS. All of our directors and officers and all of our
stockholders and option holders have signed or are otherwise subject to lock-up
agreements under which they have agreed not to transfer or dispose of, directly
or indirectly, any shares of our common stock or any securities convertible
into or exercisable or exchangeable for shares of our common stock for 180 days
after the date of this prospectus. However, if the last reported sale price of
our common stock is greater than two times the initial public offering price
per share for a specified period of time ending on the 90th day after the date
of this prospectus, then 20% of the shares, and shares underlying options, held
by each stockholder or option holder on the date of this prospectus shall be
released from the 180-day restriction, subject to delays as a result of the
timing of our earnings release and compliance
58
<PAGE>
with insider trading policies. In addition, if the last reported sale price of
our common stock is greater than two times the initial public offering price
per share for a specified period of time ending on the 120th day after the date
of this prospectus, then an additional 20% of the shares, and shares underlying
options, held by each stockholder or option holder on the date of this
prospectus shall be released from the 180-day restriction, subject to delays as
a result of the timing of our earnings release and compliance with insider
trading policies. Transfers or dispositions can be made sooner with the prior
written consent of Goldman, Sachs & Co. or, if the transferee agrees to sign an
identical lock-up agreement and other conditions are met: (a) if the transfer
is a bona fide gift, (b) if the transfer is to a trust for the benefit of the
stockholder or option holder, or (c) if the transfer is to certain other
affiliates of the stockholder or option holder. Goldman, Sachs & Co. may, in
its sole discretion, at any time and without prior notice, release all or any
portion of the shares subject to the lock-up agreements.
RULE 144. In general, under Rule 144 as currently in effect, beginning 90
days after the date of this prospectus, a person who has beneficially owned
shares of our common stock for at least one year, including the holding period
of certain prior owners other than affiliates, is entitled to sell within any
three-month period a number of shares that does not exceed the greater of (a)
1% of the number of shares of our common stock then outstanding, which will
equal approximately shares immediately after the offering, or (b) the
average weekly trading volume of our common stock on the Nasdaq National Market
during the four calendar weeks preceding the filing of a notice on Form 144
with respect to that sale. Sales under Rule 144 are also subject to certain
manner-of-sale provisions, notice requirements and the availability of current
public information about us.
RULE 144(K). Under Rule 144(k), a person who is not deemed to have been one
of our affiliates at any time during the three months preceding a sale and who
has beneficially owned shares for at least two years, including the holding
period of certain prior owners other than affiliates, is entitled to sell those
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, Rule 144(k) shares may be sold immediately upon the closing of this
offering.
RULE 701. In general, under Rule 701 of the Securities Act as currently in
effect, each of our directors, officers, employees, consultants or advisors who
purchased shares from us before the date of this prospectus in connection with
a compensatory stock plan or other written compensatory agreement is eligible
to resell such shares 90 days after the effective date of this offering in
reliance on Rule 144, but without compliance with certain restrictions,
including the holding period, contained in Rule 144.
REGISTRATION RIGHTS. After this offering, the holders of 8,361,035 shares
of our common stock and warrants to purchase 200,000 shares of our common stock
will be entitled to certain rights with respect to the registration of their
shares under the Securities Act. See "Description of Capital Stock-Registration
Rights". After any sale of shares pursuant to a registration statement, such
shares will be freely tradable without restriction under the Securities Act.
These sales could cause the market price of our common stock to decline.
STOCK PLANS. As of April 30, 2000, options to purchase 1,565,814 shares of
common stock were outstanding under our 1993 plan. After this offering, we
intend to file a registration statement on Form S-8 under the Securities Act of
1933 covering shares of common stock reserved for issuance under our 2000 stock
incentive plan and our employee stock purchase plan. Based on the number of
options outstanding and shares reserved for issuance under our 2000 plan and
our employee stock purchase plan, the Form S-8 registration statement would
cover shares. The Form S-8 registration statement will become effective
immediately upon filing, whereupon, subject to the satisfaction of applicable
exercisability periods, Rule 144 limitations applicable to affiliates and the
lock-up agreements with the underwriters referred to above, shares of common
stock to be issued upon exercise of outstanding options granted pursuant to our
2000 stock incentive plan and shares of common stock issued pursuant to our
employee stock purchase plan (to the extent that such shares were not held by
affiliates) will be available for immediate resale in the public market.
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<PAGE>
UNDERWRITING
Active Power, the selling stockholder and the underwriters named below have
entered into an underwriting agreement with respect to the shares being
offered. Subject to certain 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, Morgan Stanley
& Co. Incorporated and CIBC World Markets Corp. are the representatives of the
underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co. .......................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
Morgan Stanley & Co. Incorporated...........................
CIBC World Markets Corp.....................................
-----
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 Active Power and up to an additional shares from the selling
stockholder 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 Active Power and by the
selling stockholder. Such amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional shares from
Active Power and additional shares from the selling stockholder.
<TABLE>
<CAPTION>
Paid by Active Power No Exercise Full Exercise
-------------------- ----------- -------------
<S> <C> <C>
Per Share.......................................... $ $
Total.............................................. $ $
<CAPTION>
Paid by the Selling Stockholder 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 public offering price. If all the shares are not sold at the
initial public offering price, the representatives may change the offering
price and the other selling terms.
Active Power, its officers, directors, stockholders and option holders 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 Goldman Sachs & Co. on behalf of the representatives; provided,
however, that this restriction shall terminate as to 20% of the shares held by
officers, directors, stockholders and option holders after 90 days and an
additional 20% of the shares held by officers, directors, stockholders and
option holders after 120 days after the prospectus, subject to delays as a
result of
60
<PAGE>
the timing of Active Power's earnings releases and compliance with insider
trading policies, in the event that, as of such dates, the reported last sale
price of common stock on the Nasdaq National Market is greater than twice the
initial public offering price specified in this prospectus for a certain period
of time ending on such dates. Further, the restrictions do not apply to shares
of common stock purchased on the open market by stockholders or optionholders
who are not subject to the reporting requirements of Section 16 of the
Securities Exchange Act of 1934. This agreement does not apply to any existing
employee benefit plans. See "Shares Eligible for Future Sale" for a discussion
of certain transfer restrictions.
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among Active Power and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be Active Power's historical performance, estimates of the
business potential and earnings prospects of Active Power, an assessment of
Active Power's management and the consideration of the above factors in
relation to market valuation of companies in related businesses.
Active Power intends to apply to have its common stock approved for
quotation on the Nasdaq National Market under the symbol "ACPW".
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 may also 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 to discretionary accounts to exceed
five percent of the total number of shares offered.
Active Power estimates that its share of the total expenses of the
offering, excluding underwriting discounts and commissions, will be
approximately $ .
Active Power and the selling stockholder have agreed to indemnify the
several underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.
61
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Brobeck, Phleger & Harrison LLP, Austin, Texas. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Vinson & Elkins L.L.P., Austin, Texas.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1998 and 1999 and for the three years in the period
ended December 31, 1999, as set forth in their report. We have included our
financial statements 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.
WHERE YOU CAN FIND ADDITIONAL INFORMATION ABOUT ACTIVE POWER
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits, schedules and amendments, under the
Securities Act of 1933 with respect to the shares of common stock to be sold in
this offering. This prospectus does not contain all the information included in
the registration statement. For further information about us and the shares of
our common stock to be sold in this offering, please refer to this registration
statement. Complete exhibits have been filed with our registration statement on
Form S-1.
You may read and copy any contract, agreement or other document referred to
in this prospectus and any portion of our registration statement or any other
information from our filings at the Securities and Exchange Commission's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by
writing to the Securities and Exchange Commission. Please call the Securities
and Exchange Commission at 1-800-SEC-0330 for further information about the
public reference rooms. Our filings with the Securities and Exchange
Commission, including our registration statement, are also available to you on
the Securities and Exchange Commission's Website, http://www.sec.gov.
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934 and will file and
furnish to our stockholders annual reports containing financial statements
audited by our independent auditors, make available to our stockholders
quarterly reports containing unaudited financial data for the first three
quarters of each fiscal year, proxy statements and other information filed with
the Securities and Exchange Commission.
You may read and copy any reports, statements or other information on file
at the public reference rooms or at the Securities and Exchange Commission's
Website referenced above. You can also request copies of these documents, for a
copying fee, by writing to the Commission.
62
<PAGE>
ACTIVE POWER, INC.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1999
AND THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED AND PRO FORMA)
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. F-2
AUDITED FINANCIAL STATEMENTS:
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Stockholders' Deficit......................................... F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Active Power, Inc.
We have audited the accompanying balance sheets of Active Power, Inc. (the
Company) as of December 31, 1998 and 1999, and the related statements of
operations, stockholders' deficit and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Active Power, Inc. at
December 31, 1998 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Austin, Texas
February 26, 2000, except for
Note 12, as to which the date is
March 31, 2000
F-2
<PAGE>
ACTIVE POWER, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31 MARCH 31 MARCH 31
--------------------------- ------------ ------------
1998 1999 2000 2000
--------------------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 2,800,145 $ 24,856,497 $ 18,605,977 $ 18,635,977
Short-term
investments........... 4,735,815 1,408,822 4,754,002 4,754,002
Accounts receivable,
net of allowance for
doubtful accounts of
$5,040 and $25,976.... 219,186 37,758 196,029 196,029
Inventories, net....... 807,273 933,692 1,231,321 1,231,321
Prepaid expenses and
other................. 16,184 5,331 30,895 30,895
------------- ------------ ------------ ------------
Total current as-
sets................ 8,578,603 27,242,100 24,818,224 24,848,224
Property and equipment,
net..................... 1,155,829 1,123,723 1,559,137 1,559,137
------------- ------------ ------------ ------------
Total assets......... $ 9,734,432 $ 28,365,823 $ 26,377,361 $ 26,407,361
============= ============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable....... $ 252,888 $ 195,680 $ 659,632 $ 659,632
Accrued expenses....... 203,091 597,002 497,501 497,501
Current portion of
notes payable......... 114,203 55,324 -- --
------------- ------------ ------------ ------------
Total current
liabilities......... 570,182 848,006 1,157,133 1,157,133
Note payable, net of cur-
rent portion............ 55,324 -- -- --
Other non-current liabil-
ities................... 57,593 6,843 -- --
Warrants with redemption
rights.................. -- 3,094,000 4,656,000 --
------------- ------------ ------------ ------------
Total liabilities........ 683,099 3,948,849 5,813,133 1,157,133
Redeemable convertible
preferred stock......... 24,574,843 51,841,224 54,961,737 --
Stockholders' deficit:
1992 Preferred Stock--
$.001 par value, $.50
redemption value:
420,000 shares
designated, issued and
outstanding; $210,000
liquidation value..... 420 420 420 $ 420
Common Stock--$.001 par
value; 30,000,000
shares authorized;
4,651,570 and
4,994,040 shares
issued and
outstanding, in 1998
and 1999, respectively
(13,517,250 shares on
a pro forma basis,
unaudited)............ 4,651 4,993 5,248 13,517
Treasury stock, at
cost; 16,018 shares... (2,403) (2,403) (2,403) (2,403)
Deferred stock
compensation.......... -- (3,411,593) (8,925,868) (8,925,868)
Additional paid-in
capital............... -- -- 3,648,417 63,287,885
Accumulated deficit.... (15,526,178) (24,015,667) (29,123,323) (29,123,323)
------------- ------------ ------------ ------------
Total stockholders'
(deficit) equity.... (15,523,510) (27,424,250) $(34,397,509) $ 25,250,228
------------- ------------ ------------ ------------
Total liabilities and
stockholders'
deficit............. $ 9,734,432 $ 28,365,823 $ 26,377,361 $ 26,407,361
============= ============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
ACTIVE POWER, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
-------------------------------------- -----------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Product revenue......... $ 137,590 $ 915,318 $ 1,046,811 $ 202,951 $ 181,836
Cost of goods sold...... 157,363 1,238,456 3,006,174 550,846 521,055
----------- ----------- ------------ ---------- -----------
Product margin........ (19,773) (323,138) (1,959,363) (347,895) (339,219)
Development funding..... -- -- 5,000,000 3,000,000 --
Operating expenses:
Selling, general and
administrative........ 1,264,277 1,925,288 2,643,503 469,998 1,097,758
Research and
development........... 2,597,520 4,045,103 4,440,983 957,411 1,462,927
Amortization of de-
ferred
stock compensation.... -- -- 709,477 -- 1,011,690
----------- ----------- ------------ ---------- -----------
Total operating ex-
penses................ 3,861,797 5,970,391 7,793,963 1,427,409 3,572,375
----------- ----------- ------------ ---------- -----------
Operating income
(loss)............... (3,881,570) (6,293,529) (4,753,326) 1,224,696 (3,911,594)
Interest income......... 174,969 338,753 438,964 86,223 372,011
Interest expense........ (31,817) (33,892) (17,947) (7,940) (4,372)
Change in fair value of
warrants with redemp-
tion rights............ -- -- (3,094,000) (150,000) (1,562,000)
Other income............ -- 9,890 7,556 -- (1,701)
----------- ----------- ------------ ---------- -----------
Net income (loss)..... $(3,738,418) $(5,978,778) $ (7,418,753) $1,152,979 $(5,107,656)
Dividends on preferred
stock--all in arrears.. (573,076) (1,283,213) (1,820,421) (412,310) (849,033)
Accretion of redeemable
convertible preferred
stock to redemption
amounts................ (252,707) (1,505,400) (3,493,195) (590,062) (2,271,480)
----------- ----------- ------------ ---------- -----------
Net income (loss) to
common stockholders.. $(4,564,201) $(8,767,391) $(12,732,369) $ 150,607 $(8,228,169)
=========== =========== ============ ========== ===========
Net income (loss) per
share, basic and dilut-
ed..................... $ (1.03) $ (1.93) $ (2.75) $ .03 $ (1.68)
Shares used in computing
net income (loss) per
share, basic........... 4,439,566 4,532,133 4,634,053 4,575,693 4,886,942
diluted................ 4,439,566 4,532,133 4,634,053 5,346,406 4,886,942
Pro forma loss per
share, basic and
diluted, assuming
conversion of preferred
stock to common stock
(unaudited)............ $ (1.16) $ (0.63)
Shares used in computing
pro forma loss per
share, basic and
diluted, assuming
conversion of preferred
stock to common stock
(unaudited)............ 10,975,343 12,971,150
</TABLE>
See accompanying notes.
F-4
<PAGE>
ACTIVE POWER, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
1992
PREFERRED
STOCK COMMON STOCK TREASURY STOCK
------------- ------------------ -----------------
NUMBER UNEARNED ADDITIONAL TOTAL
OF PAR NUMBER OF PAR NUMBER OF STOCK PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES VALUE SHARES VALUE SHARES AT COST COMPENSATION CAPITAL DEFICIT (DEFICIT) EQUITY
------- ----- ---------- ------- --------- ------- ------------ ----------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31,
1996............ 420,000 $420 4,498,120 $ 4,498 16,018 $(2,403) $ -- $ 722,517 $ (2,892,273) $ (2,167,241)
Exercise of
stock options... -- -- 100,250 100 -- -- -- 18,950 -- 19,050
Preferred stock
issuance costs.. -- -- -- -- -- -- -- (30,000) -- (30,000)
Accretion of re-
deemable con-
vertible pre-
ferred stock to
redemption
amount.......... -- -- -- -- -- -- (252,706) -- (252,706)
Cumulative divi-
dends on redeem-
able convertible
preferred
stock........... -- -- -- -- -- -- -- (458,761) (114,315) (573,076)
Net loss........ -- -- -- -- -- -- -- -- (3,738,418) (3,738,418)
------- ---- ---------- ------- ------ ------- ----------- ----------- ------------ ------------
BALANCE AT
DECEMBER 31,
1997............ 420,000 420 4,598,370 4,598 16,018 (2,403) -- -- (6,745,006) (6,742,391)
Exercise of
stock options... -- -- 53,200 53 -- -- -- 11,219 -- 11,272
Preferred stock
issuance costs.. -- -- -- -- -- -- -- (11,219) (13,781) (25,000)
Accretion of re-
deemable con-
vertible pre-
ferred stock to
redemption
amount.......... -- -- -- -- -- -- -- (1,505,400) (1,505,400)
Cumulative divi-
dends on redeem-
able convertible
preferred
stock........... -- -- -- -- -- -- -- -- (1,283,213) (1,283,213)
Net loss........ -- -- -- -- -- -- -- -- (5,978,778) (5,978,778)
------- ---- ---------- ------- ------ ------- ----------- ----------- ------------ ------------
BALANCE AT
DECEMBER 31,
1998............ 420,000 420 4,651,570 4,651 16,018 (2,403) -- -- (15,526,178) (15,523,510)
Exercise of
stock options... -- -- 342,470 342 -- -- -- 135,990 -- 136,332
Warrants issued
for services.... -- -- -- -- -- -- -- 52,000 -- 52,000
Preferred stock
issuance costs.. -- -- -- -- -- -- -- (66,180) -- (66,180)
Deferred stock
compensation.... -- -- -- -- -- -- (4,121,070) 4,121,070 -- --
Amortization of
deferred stock
compensation.... -- -- -- -- -- 709,477 -- -- 709,477
Accretion of re-
deemable con-
vertible pre-
ferred stock to
redemption
amount.......... -- -- -- -- -- -- -- (3,493,195) -- (3,493,195)
Cumulative divi-
dends on redeem-
able convertible
preferred
stock........... -- -- -- -- -- -- -- (749,685) (1,070,736) (1,820,421)
Net loss........ -- -- -- -- -- -- -- -- (7,418,753) (7,418,753)
------- ---- ---------- ------- ------ ------- ----------- ----------- ------------ ------------
BALANCE AT
DECEMBER 31,
1999............ 420,000 420 4,994,040 4,993 16,018 (2,403) (3,411,593) -- (24,015,667) (27,424,250)
(UNAUDITED)
Exercise of
stock options... -- -- 255,020 255 -- -- -- 242,965 -- 243,220
Deferred stock
compensation.... -- -- -- -- -- -- (6,525,965) 6,525,965 -- --
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- 1,011,690 -- -- 1,011,690
Accretion of re-
deemable con-
vertible pre-
ferred stock to
redemption
amount.......... -- -- -- -- -- -- -- (2,271,480) -- (2,271,480)
Cumulative divi-
dends on redeem-
able convertible
preferred
stock........... -- -- -- -- -- -- -- (849,033) -- (849,033)
Net loss........ -- -- -- -- -- -- -- -- (5,107,656) (5,107,656)
------- ---- ---------- ------- ------ ------- ----------- ----------- ------------ ------------
BALANCE AT MARCH
31, 2000........ 420,000 $420 5,249,060 $ 5,248 16,018 $(2,403) $(8,925,868) $ 3,648,417 $(29,123,323) $(34,397,509)
======= ==== ========== ======= ====== ======= =========== =========== ============ ============
Pro forma at
March 31, 2000.. 420,000 $420 13,533,268 $13,732 16,018 $(2,403) $(8,925,868) $63,287,670 $(29,123,323) $ 25,250,228
======= ==== ========== ======= ====== ======= =========== =========== ============ ============
</TABLE>
F-5
<PAGE>
ACTIVE POWER, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
Year ended December 31 March 31
------------------------------------- -----------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss................ $(3,738,418) $(5,978,778) $(7,418,753) $1,152,979 $(5,107,656)
Adjustment to reconcile
net loss to cash used
in operating
activities:
Depreciation expense.. 111,877 342,476 629,288 137,802 153,942
Loss on disposal of
assets............... -- -- 903 -- --
Warrants issued for
services............. -- -- 52,000 -- --
Amortization of
deferred stock
compensation......... -- -- 709,477 -- 1,011,690
Changes in fair value
of warrants with
redemption rights.... -- -- 3,094,000 150,000 1,562,000
Changes in operating
assets and
liabilities:
Accounts receivable,
net................ (26,600) (192,586) 181,428 (2,485,853) (158,271)
Inventories, net.... (658,283) 18,204 (126,419) 137,183 (297,629)
Prepaid expenses and
other assets....... (2,727) 7,149 10,853 16,184 (25,564)
Accounts payable.... 353,878 (252,665) (57,208) (36,752) 463,952
Accrued expenses.... 46,172 156,919 393,911 (31,601) (99,501)
Other non-current
liabilities........ -- -- (50,750) (12,687) (6,843)
----------- ----------- ----------- ---------- -----------
Net cash used in
operating activities... (3,914,101) (5,899,281) (2,581,270) (972,745) (2,503,880)
Investing activities
Net maturity (purchase)
of short-term
investments............ (2,341,468) (965,471) 3,326,993 2,945,135 (3,345,180)
Purchases of property
and equipment.......... (436,580) (792,580) (598,085) (52,132) (589,356)
----------- ----------- ----------- ---------- -----------
Net cash provided by
(used in) investing
activities............. (2,778,048) (1,758,051) 2,728,908 2,893,003 (3,934,536)
Financing activities
Proceeds from issuance
of notes payable....... 350,000 -- -- -- --
Payments on notes
payable................ (82,215) (98,258) (114,203) (36,176) (55,324)
Proceeds from issuance
of Common Stock........ 19,050 11,272 136,332 4,637 243,220
Proceeds from issuance
of Convertible
Preferred Stock, net of
issuance costs......... 5,970,004 9,975,008 21,886,585 -- --
----------- ----------- ----------- ---------- -----------
Net cash provided by
(used in) activities... 6,256,839 9,888,022 21,908,714 (31,539) 187,896
----------- ----------- ----------- ---------- -----------
Increase (decrease) in
cash and cash
equivalents............ (435,310) 2,230,690 22,056,352 1,888,719 (6,250,520)
Cash and cash
equivalents, beginning
of period.............. 1,004,765 569,455 2,800,145 2,800,145 24,856,497
----------- ----------- ----------- ---------- -----------
Cash and cash
equivalents, end of
period................. $ 569,455 $ 2,800,145 $24,856,497 $4,688,864 $18,605,977
=========== =========== =========== ========== ===========
Supplemental disclosure
of cash flow
information:
Interest paid......... $ 31,817 $ 32,653 $ 17,947 $ 7,940 $ 4,372
=========== =========== =========== ========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
ACTIVE POWER, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION
Active Power, Inc. was founded in 1992 for the purpose of developing and
commercializing advances in the field of electromechanics. Since inception,
Active Power has devoted its efforts principally to research and development
and marketing of flywheel-based power-quality and storage products that provide
consistent, reliable electric power required by today's digital economy. These
efforts have included pursuing patent protection for intellectual property,
successful production of initial prototypes and limited production volumes,
development of manufacturing processes, raising capital and pursuing markets
for Active Power's products.
2. SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM INFORMATION AND PRO FORMA INFORMATION
The financial information as of March 31, 2000 and for the three month
periods ended March 31, 1999 and 2000 is unaudited, but reflects all
adjustments, consisting of normal recurring accruals which are, in the opinion
of management, necessary to fairly present such information in accordance with
generally accepted accounting principles.
Active Power's historical capital structure is not indicative of its
prospective structure due to the automatic conversion of all shares of
redeemable convertible preferred stock into common stock concurrent with the
closing of the anticipated initial public offering of its common stock and the
likely exercise by a stockholder of 200,000 warrants with redemption rights
prior to the anticipated initial public offering. Accordingly, Active Power has
presented pro forma stockholders' equity as if all outstanding shares of
redeemable convertible preferred stock had converted into common stock and the
warrants with redemption rights had been exercised as of March 31, 2000.
Additionally, Active Power has presented pro forma basic and diluted loss per
share assuming the conversion of all outstanding shares of redeemable
convertible preferred stock into common stock from their respective dates of
issuance.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Active Power generally recognizes revenue at the date a unit is shipped.
Active Power recognizes revenue related to units shipped for evaluation by the
customer at the point of customer acceptance of the unit.
CASH EQUIVALENTS
Active Power considers liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
SHORT-TERM INVESTMENTS
Short-term investments consist of debt securities with readily determinable
fair values. Active Power accounts for highly liquid investments with
maturities greater than three months but less than one year at date of
acquisition as short-term investments. Active Power classifies short-term
investments as held-to-maturity (due primarily to the limited time to maturity)
and accordingly reports them at adjusted cost basis, which approximates fair
value, using the specific identification method for securities sold.
F-7
<PAGE>
ACTIVE POWER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INVENTORIES
Active Power states inventories at the lower of cost or replacement cost,
with cost being determined on a standard cost basis which does not differ
materially from actual cost.
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Raw materials.......................................... $ 662,436 $1,287,031
Work in process........................................ 197,607 135,324
Finished goods......................................... 26,381 295,315
Evaluation units....................................... 183,323 27,771
---------- ----------
$1,069,747 $1,745,441
========== ==========
</TABLE>
The following table summarizes the changes in inventory reserves:
<TABLE>
<S> <C>
Balance at December 31, 1996....................................... $ --
Additions charged to costs and expenses.......................... 198,475
Write-off of inventory........................................... --
--------
Balance at December 31, 1997....................................... 198,475
Additions charged to costs and expenses.......................... 105,000
Write-off of inventory........................................... 41,001
--------
Balance at December 31, 1998....................................... 262,474
Additions charged to costs and expenses.......................... 549,275
Write-off of inventory........................................... --
--------
Balance at December 31, 1999....................................... $811,749
========
</TABLE>
PROPERTY AND EQUIPMENT
Active Power carries property and equipment at cost, less accumulated
depreciation. Active Power depreciates property and equipment using the
straight-line method over the estimated useful lives of the assets (generally
three to seven years).
PATENT APPLICATION COSTS
Active Power has not capitalized patent appreciation fees and related costs
because of uncertainties regarding net realizable value of the technology
represented by the existing patent applications and ultimate recoverability.
All patent costs have been expensed through December 31, 1999.
ACCOUNTING FOR STOCK-BASED COMPENSATION
As allowed by the Financial Accounting Standards Board's ("FASB") Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, Active Power accounts for its stock compensation arrangements
with employees under the provisions of the Accounting Principles Board's
Opinion No. 25, Accounting for Stock Issued to Employees.
F-8
<PAGE>
ACTIVE POWER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES
Active Power accounts for income taxes in accordance with the FASB's
Statement No. 109, Accounting for Income Taxes. Statement No. 109 prescribes
the use of the liability method whereby deferred tax asset and liability
account balances are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
SEGMENT REPORTING
Active Power's chief operating decision maker allocates resources and
assesses the performance of its power management product development and sales
activities as one segment.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject Active Power to
concentrations of credit risk consist of short-term investments and trade
receivables. Active Power's short-term investments are placed with high credit
quality financial institutions and issuers. Active Power performs limited
credit evaluations of its customers' financial condition and generally does
not require collateral. Active Power estimates an allowance for doubtful
accounts based on factors related to the credit risk of each customer. Credit
losses have not been significant to date.
The following table summarizes the changes in the allowance for doubtful
accounts receivable:
<TABLE>
<S> <C>
Balance at December 31, 1996........................................ $ --
Additions charged to costs and expenses........................... 463
Write-off of uncollectible accounts............................... --
-------
Balance at December 31, 1997........................................ 463
Additions charged to costs and expenses........................... 4,577
Write-off of uncollectible accounts............................... --
-------
Balance at December 31, 1998........................................ 5,040
Additions charged to costs and expenses........................... 20,936
Write-off of uncollectible accounts............................... --
-------
Balance at December 31, 1999........................................ $25,976
=======
</TABLE>
The following customers accounted for a significant percentage of Active
Power's total revenue as follows (customer H is a stockholder):
<TABLE>
<CAPTION>
CUSTOMER 1997 1998 1999
-------- ---- ---- ----
<S> <C> <C> <C>
A............................................................ -- 17% 39%
B............................................................ -- -- 21%
C............................................................ -- -- 16%
D............................................................ 23% -- 13%
E............................................................ -- 24% --
F............................................................ 36% 20% --
G............................................................ 23% -- --
H............................................................ 18% -- --
</TABLE>
F-9
<PAGE>
ACTIVE POWER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
ADVERTISING COSTS
Active Power expenses advertising costs as incurred. These expenses were
not material in 1997, 1998 or 1999.
NET LOSS PER SHARE
Active Power computes loss per share in accordance with the FASB's
Statement No. 128, Earnings Per Share, and SEC Staff Accounting Bulletin No. 98
("SAB 98"). Under Statement No. 128 and SAB 98, basic loss per share is
computed by dividing net loss by the weighted average number of shares
outstanding. Diluted loss per share is computed by dividing net loss by the
weighted average number of common shares and dilutive common share equivalents
outstanding. Except for the three months ended March 31, 2000, Active Power's
calculation of diluted loss per share excludes shares of common stock issuable
upon exercise of warrants and employee stock options because inclusion would be
antidilutive.
Under SAB 98, all options, warrants or other potentially dilutive
instruments issued for nominal consideration prior to the anticipated effective
date of an initial public offering are required to be included in the
calculation of basic and diluted loss per share as if they were outstanding for
all periods presented. Active Power has not issued any such securities for
nominal consideration.
The following table sets forth the computation of basic and diluted net
loss per share:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31,
-------------------------------------- ---------------
1997 1998 1999 2000
----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C>
Net loss to common
stockholders........... $(4,564,201) $(8,767,391) $(12,732,369) (8,228,169)
=========== =========== ============ ==========
Basic and diluted:
Weighted-average
shares of common
stock outstanding.... 4,536,128 4,619,813 4,699,138 5,036,874
Weighted-average
shares of common
stock subject to
repurchase........... (96,562) (87,680) (65,085) (149,932)
----------- ----------- ------------ ----------
Shares used in
computing basic and
diluted net loss per
share................ 4,439,566 4,532,133 4,634,053 4,886,942
=========== =========== ============ ==========
Basic and diluted net
loss per share......... $ (1.03) $ (1.93) $ (2.75) $ (1.68)
=========== =========== ============ ==========
Pro forma (unaudited):
Shares used above... 4,634,053 4,886,942
Pro forma adjustment
to reflect assumed
conversion of
convertible
preferred stock.... 6,341,290 8,084,208
------------ ----------
Shares used in
computing pro forma
basic and diluted
net loss per
share.............. 10,975,343 12,971,150
============ ==========
Pro forma basic and
diluted net loss per
share.................. $ (1.16) $ (0.63)
============ ==========
</TABLE>
F-10
<PAGE>
ACTIVE POWER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Equipment........................................... $1,036,883 $ 1,391,233
Demonstration units................................. 107,321 107,321
Computers and purchased software.................... 319,131 424,525
Furniture and fixtures.............................. 63,037 63,037
Leasehold improvements.............................. 179,825 316,541
---------- -----------
1,706,197 2,302,657
Accumulated depreciation............................ (550,368) (1,178,934)
---------- -----------
$1,155,829 $ 1,123,723
========== ===========
</TABLE>
4. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCKS
At December 31, 1999, Active Power has authorized 10,420,000 shares of
$.001 par value preferred stock as follows (shares designated are the same as
shares issued except for Series E for which 2,730,954 are designated):
<TABLE>
<CAPTION>
CONVERTIBLE
TO NUMBER CUMULATIVE
SHARES CARRYING LIQUIDATION OF COMMON DIVIDENDS
ISSUED VALUE VALUE SHARES IN ARREARS
--------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
1992 Preferred Stock.... 420,000 $ 2,100 $ 210,000 -- $ --
Series A................ 569,406 2,015,081 1,194,955 569,406 329,457
Series B................ 1,847,292 7,273,475 4,246,072 2,199,418 1,096,438
Series C................ 1,726,620 8,818,251 7,163,841 1,726,620 1,163,836
Series D................ 1,652,894 11,610,472 11,233,982 1,652,894 1,233,974
Series E................ 1,935,870 22,123,945 22,123,945 1,935,870 171,180
--------- ----------- ----------- --------- ----------
8,152,082 $51,843,324 $46,172,795 8,084,208 $3,994,885
========= =========== =========== ========= ==========
</TABLE>
1992 PREFERRED STOCK
Holders of the 1992 Preferred Stock are not entitled to dividends. The 1992
Preferred Stock shall be redeemed by Active Power at such time as the Board of
Directors determines, in its sole discretion, that Active Power has available
funds in excess of anticipated needs. No dividends may be declared or paid on
Common Stock so long as any shares of 1992 Preferred Stock are issued and
outstanding. The redemption price per share of 1992 Preferred Stock is $.50.
Subject to the rights of the Series A, Series B, Series C, Series D and Series
E Convertible Preferred Stock, in the event of involuntary liquidation, holders
of the 1992 Preferred Stock shall be entitled to receive $.50 per share, before
any distribution of assets is made to holders of Common Stock.
REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Series A, Series B, Series C, Series D, and Series E Redeemable
Convertible Preferred Stock is convertible into Common Stock at the option of
the holder at any time based upon the conversion price defined in the related
Preferred Stock agreements. Each share of Convertible
F-11
<PAGE>
ACTIVE POWER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Preferred Stock shall automatically be converted into shares of Common Stock in
the event of a public offering whose offering price and whose gross proceeds
equals or exceeds $17.01 per share and $20.0 million.
REDEMPTION RIGHTS
Beginning in August 2002, the holders of the Series A, Series B, Series C,
Series D and Series E Convertible Preferred Stock, upon proper election by the
holders and notification to Active Power, may require Active Power to redeem
such preferred stock in the following amounts:
<TABLE>
<CAPTION>
REDEMPTION PERIOD NUMBER OF SHARES
----------------- ----------------
<S> <C>
60 days after the date of the Redemption One-third of the shares outstanding
Notice (the "First Mandatory Redemption
Date")
First anniversary of the First Mandatory One-half of the shares outstanding
Redemption Date
Second anniversary of the First All remaining shares outstanding
Mandatory Redemption Date
</TABLE>
Upon redemption, the holders of the Series A, Series B, Series C, Series D
and Series E Convertible Preferred Stock shall be entitled to receive the
greater of (i) the fair market value of the shares or (ii) $1.52, $2.03, $3.48,
$6.05 and $11.34, respectively, plus any accrued or declared but unpaid
dividends as of the redemption date. The redemption price shall be adjusted for
all redemptions of shares made subsequent to the initial Redemption Date to
include accrued interest at the prime rate published in The Wall Street
Journal. The carrying value of redeemable convertible preferred stock is
accreted to the estimated fair value using the interest method to the
redemption date. The accretion is reflected as a charge to loss to common
stockholders.
In the event of voluntary or involuntary liquidation of Active Power, the
holders of the Series A, Series B, Series C, Series D and Series E Convertible
Preferred Stock shall be entitled to receive, prior and in preference to any
distributions of any of the assets of the Company to the holders of the 1992
Preferred Stock and Common Stock, an amount for each share of $1.52, $2.03,
$3.48, $6.05, and $11.34, respectively, plus accrued or declared but unpaid
dividends.
VOTING RIGHTS AND DIVIDENDS
The holders of Series A, Series B, Series C, Series D and Series E
Convertible Preferred Stock are entitled to voting rights equal to Common Stock
and shall accrue annual cumulative cash dividends of $0.1216, $0.1624, $0.278,
$0.484 and $0.9072 per share, respectively, payable prior and in preference to
any dividends on Common Stock out of funds legally available. Cumulative
dividends with respect to the Series A, Series B, Series C, Series D and Series
E Preferred Stock shall cease to be payable if the Series A, Series B, Series
C, Series D and Series E Convertible Preferred Stock are converted to Common
Stock prior to August 2002 in connection with the Company's sale of shares of
Common Stock in a firm commitment underwritten initial public offering
F-12
<PAGE>
ACTIVE POWER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
or upon approval of a sufficient number of Series A, Series B, Series C, Series
D and Series E Convertible Preferred stockholders as determined in Active
Power's Certificate of Incorporation.
Changes in redeemable stocks are as follows:
<TABLE>
<CAPTION>
NUMBER OF CARRYING
SHARES VALUE
--------- -----------
<S> <C> <C>
Balance at December 31, 1996......................... 2,416,698 $ 4,960,436
Stock issued for cash.............................. 1,726,620 6,000,004
Accretion of redeemable convertible preferred stock
to redemption amount.............................. -- 252,706
Cumulative dividends............................... -- 573,076
--------- -----------
Balance at December 31, 1997......................... 4,143,318 11,786,222
Stock issued for cash.............................. 1,652,894 10,000,008
Accretion of redeemable convertible preferred stock
to redemption amount.............................. -- 1,505,400
Cumulative dividends............................... -- 1,283,213
--------- -----------
Balance at December 31, 1998......................... 5,796,212 24,574,843
Stock issued for cash.............................. 1,935,870 21,952,765
Accretion of redeemable convertible preferred stock
to redemption amount.............................. -- 3,493,195
Cumulative dividends............................... -- 1,820,421
--------- -----------
Balance at December 31, 1999......................... 7,732,082 $51,841,224
========= ===========
</TABLE>
WARRANTS
In March 1995, the Company issued a warrant for the purchase of 200,000
shares of Common Stock at a strike price of $.15 per share. The warrant is
exercisable from the date of issuance until the earlier of the consummation of
a public offering of Common Stock or March 2002. In the event the holders of
the Series A Convertible Preferred Stock have elected to require the Company to
redeem the outstanding Series A Convertible Preferred Stock, then the holders
of Common Stock purchased under this warrant may require the Company to
repurchase such Common Stock at the greater of the exercise price plus any
declared and unpaid dividends or the fair market value of the Common Stock at
the Redemption Date. Because of this redemption provision, Active Power has
classified these warrants as a liability at their estimated fair value and
recorded the changes in fair value against income.
In November 1999, the Company issued warrants to purchase up to 200,000
shares of Common Stock to two purchasers of the Series E Preferred Stock in
conjunction with the placement of the preferred stock and strategic alliance
agreements with those stockholders. The warrants have a strike price of $11.34
per share. The warrants were fully vested, non-forfeitable and exercisable upon
issuance and expire in November 2006. Active Power expensed the estimated fair
value of these warrants of approximately $50,000 in 1999.
CAPITAL AND WARRANTS
At December 31, 1998 and 1999, 200,000 and 400,000 warrants to purchase
shares of common stock were outstanding and exercisable, respectively.
F-13
<PAGE>
ACTIVE POWER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The exercise prices of the warrants is to be adjusted only for capital
restructures and stock splits, and not for subsequent sales of Common Stock.
The weighted average exercise price of warrants outstanding at December 31,
1999 was $5.76. The weighted average fair value of warrants granted during the
year ended December 31, 1999 was $.26.
STOCK OPTION AGREEMENTS
Active Power has reserved approximately 2,520,000 shares of its Common
Stock for issuance under its 1993 Stock Option Plan. The options are
immediately exercisable upon grant and vest over periods ranging from
immediate to four years. certain events, Active Power has repurchase rights
for unvested shares purchased by optionees. At December 31, 1998 and 1999,
69,012 and 100,906 shares, respectively, that were purchased by optionees
remained unvested and subject to repurchase.
A summary of Common Stock option activity during the years ended December
31, 1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
NUMBER OF RANGE OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICES EXERCISE PRICES
--------- --------------- ----------------
<S> <C> <C> <C>
Outstanding at December 31,
1996......................... 526,000 $.15 - $4.25 $ .33
Granted..................... 672,250 .20 - .35 .32
Exercised................... (100,250) .15 - .20 .19
Canceled.................... -- -- --
--------- ------------ -----
Outstanding at December 31,
1997......................... 1,098,000 .15 - 4.25 .33
Granted..................... 324,000 .35 - .60 .49
Exercised................... (53,200) .15 - .60 .21
Canceled.................... (26,000) .20 - .35 .35
--------- ------------ -----
Outstanding at December 31,
1998......................... 1,342,800 .15 - 4.25 .38
Granted..................... 591,000 .90 - 2.25 1.41
Exercised................... (342,470) .15 - 1.80 .40
Canceled.................... (41,364) .20 - 4.25 .62
--------- ------------ -----
Outstanding at December 31,
1999......................... 1,549,966 $.15 - 4.25 $ .76
========= ============ =====
</TABLE>
At December 31, 1999, 346,314 shares were available for future grants.
The following is a summary of options outstanding and exercisable as of
December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING WEIGHTED
RANGE OF CONTRACTUAL AVERAGE
EXERCISE LIFE (IN EXERCISE
PRICES NUMBER YEARS) PRICE
-------- --------- ----------- --------
<S> <C> <C> <C>
$4.00 - $4.25................................ 14,000 3.9 $4.11
$0.15 - $ .20................................ 395,000 6.5 .19
$0.35 - $ .90................................ 777,966 8.4 .53
$1.20 - $2.25................................ 363,000 9.9 1.71
--------- --- -----
1,549,966 8.2 $ .76
========= === =====
</TABLE>
F-14
<PAGE>
ACTIVE POWER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Stock options vested as of December 31, 1998 and 1999 were 710,916 and
1,191,866, respectively.
Of the stock options granted to employees during the year ended December
31, 1999, 917,000 had exercise prices below the subsequently deemed fair market
value of the underlying shares of Common Stock on the date of grant. As a
result, Active Power recorded unearned stock compensation of $4,121,070 of
which $709,477 was amortized to non-cash compensation during the year ended
December 31, 1999. The remaining unearned compensation will be recognized as
non-cash compensation over the remaining vesting period of the options of
approximately 3 years.
Pro forma information regarding net loss is required by Statement No. 123,
and has been determined as if Active Power had accounted for its employee stock
options under the fair value method of Statement No. 123. The fair value for
these options was estimated at the date of grant using a minimum value option
pricing model with the following assumptions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate......................... 6.5% 6.5% 6.5%
Weighted-average expected life of the options... 7 years 7 years 7 years
Dividend rate................................... 0% 0% 0%
Assumed volatility.............................. 0% 0% 0%
Weighted average fair value of options granted:
Exercise price equal to fair value of stock on
date of grant................................ $ .13 $ .13 $ .17
Exercise price less than fair value of stock
on date of grant............................. $ -- $ -- $ 4.88
</TABLE>
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. Active
Power's pro forma information under Statement No. 123 follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Pro forma stock-based compensation
expense........................... $ 15,977 $ 35,726 $ 768,004
Pro forma net loss................. $(3,754,395) $(6,014,504) $(7,477,280)
Pro forma basic and diluted loss
per share......................... $ (1.03) $ (1.94) $ (2.76)
</TABLE>
Option valuation models incorporate highly subjective assumptions. Because
changes in the subjective assumptions can materially affect the fair value
estimate, the existing models do not necessarily provide a reliable single
measure of the fair value of Active Power's employee stock options. Because the
determination of fair value of all employee stock options granted after such
time as Active Power becomes a public entity will include an expected
volatility factor and because, for pro forma disclosure purposes, the estimated
fair value of Active Power's employee stock options is treated as if amortized
to expense over the options' vesting period, the effects of applying Statement
No. 123 for pro forma disclosures are not necessarily indicative of future
amounts.
F-15
<PAGE>
ACTIVE POWER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Common stock reserved at December 31, 1999 consists of the following:
<TABLE>
<S> <C>
For conversion of Convertible Preferred Stock...................... 8,529,290
For exercise of Common Stock Warrants.............................. 400,000
For issuance under the 1993 Stock Option Plan...................... 2,520,000
</TABLE>
5. INCOME TAXES
At December 31, 1999, Active Power has net operating loss carryforwards of
approximately $14,432,000 for federal tax reporting purposes and research and
development credit carryforwards of approximately $391,000. The net operating
loss and research and development credit carryforwards begin to expire in 2007.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of
the Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
Significant components of Active Power's deferred tax liabilities and
assets as of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Capital expenses............................... $ 35,000 $ --
Deferred tax assets:
Capital expenses............................... -- 71,000
Deferred compensation.......................... 19,000 19,000
Reserves and allowances........................ 128,000 461,000
Put warrants................................... -- 1,145,000
Net operating loss and tax credit
carryforwards................................. 4,787,000 5,730,000
Other.......................................... 3,000 34,000
----------- -----------
Total deferred tax assets........................ 4,937,000 7,460,000
Valuation allowance for net deferred tax assets.. (4,902,000) (7,460,000)
----------- -----------
Net deferred taxes............................... $ -- $ --
=========== ===========
</TABLE>
Active Power has established a valuation allowance equal to the net
deferred tax assets because of uncertainties regarding its ability to generate
sufficient taxable income during the carryforward period to utilize the net
operating loss carryforwards.
Active Power's benefit for income taxes differs from the expected benefit
amount computed by applying the statutory federal income tax rate of 34% to
loss before taxes due to the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
---------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate.. (34.0)% (34.0)% (34.0)%
Non-cash compensation
expense................ -- -- 9.6
State taxes, net of fed-
eral benefit........... (3.0) (3.0) (3.0)
Permanent items and oth-
er..................... (1.3) (1.8) (2.1)
Change in valuation al-
lowance................ 38.3 38.8 29.5
----- ----- -----
0.0% 0.0% 0.0%
===== ===== =====
</TABLE>
F-16
<PAGE>
ACTIVE POWER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. NOTE PAYABLE
On March 21, 1997, Active Power entered into a $350,000 note payable
agreement with a financial institution. This note bears interest at 15.132%, is
secured by furniture and equipment and is payable in monthly installments of
principal and interest of $11,013 maturing March 1, 2000 with a final payment
of $35,000.
7. COMMITMENTS
Active Power leases its office facility under an operating lease agreement.
Certain stockholders of Active Power have an ownership interest in the building
which Active Power leases. The office space and manufacturing facilities lease
is noncancelable and obligates Active Power to pay taxes and maintenance costs.
In addition Active Power leases certain equipment under a noncancelable lease.
Future minimum payments under these leases at December 31, 1999 are as
follows:
<TABLE>
<S> <C>
2000............................................................. $ 341,393
2001............................................................. 380,817
2002............................................................. 392,777
2003............................................................. 98,194
----------
Total future minimum lease payments.............................. $1,213,181
==========
</TABLE>
Related party rent expense for the years ended December 31, 1997, 1998, and
1999, was $213,246 and $236,151, and $226,445, respectively. Other rent expense
for the years ended December 31, 1997, 1998, and 1999 was $170,320, $252,670,
and $40,352, respectively.
8. EMPLOYEE BENEFIT PLAN
In 1996, Active Power established a 401(k) Plan that covers substantially
all full-time employees. Company contributions to the plan are determined at
the discretion of the Board of Directors and vest ratably over five years of
service starting after the first year of employment. Active Power did not
contribute to this plan in 1997, 1998, and 1999.
9. LINE OF CREDIT
On August 3, 1999, Active Power entered into a line of credit agreement
with a financial institution in the amount of $1,000,000. There are no amounts
outstanding under this line of credit at December 31, 1999. The line of credit
bears interest at the lender's prime rate and matures on August 2, 2000. The
line of credit is secured by Active Power's tangible property.
10. DEVELOPMENT FUNDING
During January 1999, Active Power entered into a contract development
agreement with a third party. In accordance with the agreement, the third party
provided funding to allow Active Power to accelerate development of its
products in a certain market application in exchange for the third party
obtaining exclusive marketing rights for the product in that application. The
exclusive marketing
F-17
<PAGE>
ACTIVE POWER, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
rights are subject to the third party meeting specified minimum orders of the
product. The two companies share ownership of the resulting intellectual
property. Active Power completed the contract in 1999 and collected the full
$5,000,000 development funding specified in the contract, which it recognized
as it achieved the product performance milestones specified in the agreement.
Active Power does not separately account for efforts spent by its engineers on
research and development by the various project. Because this project involved
development of Active Power's product already contemplated by management and
for which Active Power co-owns the resulting intellectual property, all of the
costs associated with this contract are classified in research and development
expense.
11. GEOGRAPHIC INFORMATION
Revenues for the year ended December 31 were as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- ----------
<S> <C> <C> <C>
United States................................... $137,590 $867,775 $6,014,411
Foreign countries............................... -- 47,543 32,400
-------- -------- ----------
Total......................................... $137,590 $915,318 $6,046,811
======== ======== ==========
</TABLE>
Revenues from foreign countries above represent shipments to customers
located primarily in Europe. Active Power has no property, plant or equipment
located outside the United States.
12. SUBSEQUENT EVENTS
In March 2000, Active Power reincorporated in Delaware. In conjunction with
the reincorporation, all of the $0.01 par value shares held by the common and
preferred stockholders were automatically converted into two $0.001 par value
shares of the corresponding common or preferred stock of the Delaware
corporation. All share and per share amounts in the financial statements and
accompanying notes have been restated to reflect this reincorporation as if it
had taken place at the inception of Active Power.
During the three months ended March 31, 2000, Active Power granted 346,400
stock options to employees with exercise prices below the subsequently deemed
fair value of the underlying shares and, accordingly, recorded $6,525,965
additional unearned stock compensation which will be recognized as non-cash
compensation over the options' vesting period of four years.
F-18
<PAGE>
[INSIDE BACK COVER]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 date.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 7
Cautionary Note Regarding Forward-Looking
Statements.............................................................. 16
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 26
Management............................................................... 39
Certain Transactions..................................................... 49
Principal and Selling Stockholders....................................... 51
Description of Capital Stock............................................. 54
Shares Eligible for Future Sale.......................................... 58
Underwriting............................................................. 60
Legal Matters............................................................ 62
Experts.................................................................. 62
Where You Can Find Additional Information About Active Power............. 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
ACTIVE POWER, INC.
Common Stock
---------------
[ACTIVE POWER LOGO]
---------------
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
CIBC WORLD MARKETS
Representatives of the Underwriters
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by us in connection with the sale of common
stock being registered. All amounts are estimates except the SEC registration
fee and the NASD filing fee. No portion of the costs and expenses is being
borne by the selling stockholder.
<TABLE>
<S> <C>
SEC registration fee................................................ $26,400
NASD fee............................................................ 10,500
Nasdaq National Market listing fee.................................. *
Printing and engraving expenses..................................... *
Legal fees and expenses............................................. *
Accounting fees and expenses........................................ *
Blue sky fees and expenses.......................................... *
Transfer agent fees................................................. *
Miscellaneous....................................................... *
-------
Total............................................................. $ *
=======
</TABLE>
- --------
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law (the "DGCL") provides,
in effect, that any person made a party to any action by reason of the fact
that he is or was our director, officer, employee or agent may and, in certain
cases, must be indemnified by us against, in the case of a non-derivative
action, judgments, fines, amounts paid in settlement and reasonable expenses
(including attorneys' fees) incurred by him as a result of such action, and in
the case of a derivative action, against reasonable expenses (including
attorneys' fees), if in either type of action he acted in good faith and in a
manner he reasonably believed to be in or not opposed to our best interests.
This indemnification does not apply, in a derivative action, to matters as to
which it is adjudged that the director, officer, employee or agent is liable
to us, unless upon court order it is determined that, despite such
adjudication of liability but in view of all the circumstances of the case, he
is fairly and reasonably entitled to indemnity for expenses, and, in a non-
derivative action, to any criminal proceeding in which such person had
reasonable cause to believe his conduct was unlawful.
Article V of our certificate of incorporation, as amended, provides that
no director shall be liable to us or our stockholders for monetary damages for
breach of fiduciary duty as a director to the fullest extent permitted by the
DGCL.
Reference is made to Section 8 of the underwriting agreement, the form of
which is to be filed as Exhibit 1.1 hereto, pursuant to which the underwriters
have agreed to indemnify our officers and directors against certain
liabilities under the Securities Act.
We have entered into Indemnification Agreements with each director, a form
of which is filed as Exhibit 10.1 to this Registration Statement. Pursuant to
such agreements, we will be obligated, to the extent permitted by applicable
law, to indemnify such directors against all expenses, judgments, fines and
penalties incurred in connection with the defense or settlement of any actions
brought against them by reason of the fact that they were our directors or
assumed certain responsibilities at the direction of us. We also intend to
purchase additional directors and officers liability insurance in order to
limit our exposure to liability for indemnification of directors and officers.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since April 1, 1997, we have issued unregistered securities to a number of
people as described below. None of these transactions involved any
underwriters, underwriting discounts or commissions, or any public offering,
and Registrant believes that each transaction was exempt from the registration
requirements of the Securities Act in reliance on Section 4(2) thereof,
Regulation D promulgated thereunder or Rule 701 in accordance with compensatory
benefit plans and contracts relating to compensation as provided under Rule
701. The recipients of securities in each transaction represented their
intention to acquire the securities for investment purposes only and not with a
view to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates and instruments
issued in the transactions. All recipients had adequate access, through their
relationship with us, to information about us. The following common stock share
amounts, the weighted average exercise price and the exercise price per share
of the shares of common stock issued under our 1993 Stock Option Plan, as
amended, are adjusted to reflect the exchange of each share of common stock and
preferred stock issued by our predecessor Texas corporation for two shares of a
similar series of common stock or preferred stock in the successor Delaware
corporation.
1. In July 1997, we issued 1,726,620 shares of Series C Convertible
Preferred Stock for $3.475 per share, for an aggregate purchase price
of $6,000,004.50. The following stockholders purchased our Series C
Convertible Preferred Stock: CenterPoint Venture Partners, L.P.; funds
affiliated with Advent International Corporation; SSM Venture
Partners, L.P.; and funds affiliated with Austin Ventures.
2. In June 1998, we issued 1,652,894 shares of Series D Convertible
Preferred Stock for $6.05 per share, for an aggregate purchase price
of $10,000,008.70. The following stockholders purchased our Series D
Convertible Preferred Stock: Rho Management Trust I; CenterPoint
Venture Partners, L.P.; funds affiliated with Advent International
Corporation; SSM Venture Partners, L.P.; funds affiliated with Austin
Ventures; Sevin Rosen Management Company; and several accredited
investors.
3. In November 1999, we issued 1,935,870 shares of Series E Convertible
Preferred Stock for $11.34 per share, for an aggregate purchase price
of $21,952,765. The following stockholders purchased our Series E
Convertible Preferred Stock: Stephens-Active Power, LLC; ECT Merchant
Investments Corp.; Rho Management Trust I; CenterPoint Venture Fund
II, L.P.; funds affiliated with SSM Venture Partners; funds affiliated
with Austin Ventures; funds affiliated with Advent International
Corporation; and a number of accredited investors.
4. In November 1999, in connection with the sale of Series E preferred
stock, we issued warrants to purchase an aggregate of 200,000 shares
of Common Stock at an exercise price of $11.34 per share to Enron
North America Corp. and Stephens Group, Inc.
5. Through April 30, 2000, we have issued and sold 1,057,284 shares of
our Common Stock to directors, employees and consultants upon the
exercise of options granted under our 1993 Stock Option Plan at a
weighted average exercise price of $0.50.
II-2
<PAGE>
6. From time to time during the past three years, we have granted options
to purchase common stock to employees, directors and consultants. The
following table sets forth information regarding these grants.
<TABLE>
<CAPTION>
Number of Exercise Price
Shares Per Share
--------- --------------
<S> <C> <C>
September 17, 1997 to April 30, 1998............ 679,000 $0.35
June 11, 1998 to December 10, 1998.............. 182,000 0.60
March 1, 1999 to June 17, 1999.................. 217,000 0.90
September 9, 1999............................... 89,000 1.20
November 11, 1999............................... 240,000 1.80
December 9, 1999 through February 29, 2000...... 347,400 2.25
March 9, 2000................................... 54,000 3.00
April 13, 2000.................................. 109,000 9.00
</TABLE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Form of Amended and Restated Certificate of Incorporation
3.2 Form of Amended and Restated Bylaws
4.1* Specimen certificate for shares of Common Stock
4.2 Warrant to Purchase Common Stock issued to Enron North America Corp.
4.3 Warrant to Purchase Common Stock issued to Stephens Group, Inc.
5.1* Opinion of Brobeck, Phleger & Harrison LLP
10.1 Form of Indemnity Agreement
10.2* Active Power, Inc. 2000 Stock Incentive Plan
10.3* Active Power, Inc. 2000 Employee Stock Purchase Plan
10.4 Second Amended and Restated Investors' Rights Agreement by and between
Active Power, Inc. and certain of its stockholders
10.5 Consulting Services Agreement by and between Active Power and Eric L.
Jones
10.6+ Phase II Development and Phase III Feasibility Agreement by and between
Active Power, Inc. and Caterpillar Inc.
10.7 Credit Terms and Conditions by and between Active Power, Inc. and
Imperial Bank
10.8 Security and Loan Agreement by and between Active Power, Inc. and
Imperial Bank
10.9 Lease Agreement by and between Active Power, Inc. and Braker Phase III,
Ltd.
10.10 First Amendment to Lease Agreement by and between Active Power, Inc. and
Braker Phase III, Ltd.
10.11 Second Amendment to Lease Agreement by and between Active Power, Inc.
and Braker Phase III, Ltd.
10.12 Third Amendment to Lease Agreement by and between Active Power, Inc. and
Braker Phase III, Ltd.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.13 Fourth Amendment to Lease Agreement by and between Active Power, Inc.
and Metropolitan Life Insurance Company
10.14 Fifth Amendment to Lease Agreement by and between Active Power, Inc. and
Metropolitan Life Insurance Company
10.15 Sublease Agreement by and between Active Power, Inc. and Video
Associates Laboratories, Inc.
10.16 Employee offer letter (including severance arrangements) from Active
Power, Inc. to David S. Gino
23.1 Consent of Ernst & Young LLP
23.2* Consent of Brobeck, Phleger & Harrison LLP (Reference is made to Exhibit
5.1)
24.1 Power of Attorney (see page II-5)
27.1 Financial Data Schedule
</TABLE>
- --------
* To be included by amendment.
+ Application has been made to the Commission to seek confidential treatment of
certain provisions of this exhibit. Omitted material for which confidential
treatment has been requested has been filed separately with the Commission.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to our directors,
officers and controlling persons pursuant to the DGCL, our Certificate of
Incorporation or our Bylaws, the underwriting agreement or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act,
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by us of expenses incurred or
paid by one of our directors, officers, or controlling persons 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 hereunder, we will, unless in the opinion of our counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by us is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
We hereby undertake that:
1. For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by us 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,
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>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, we
have duly caused this registration statement to be signed on our behalf by the
undersigned, thereunto duly authorized, in the city of Austin, state of Texas,
on May 12, 2000.
ACTIVE POWER, INC.
By: /s/ Joseph F. Pinkerton, III
__________________________________
Joseph F. Pinkerton, III
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Joseph F. Pinkerton, III and David S.
Gino, and each of them, his true and lawful attorneys-in-fact and agents, with
full power of substitution, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement, and to sign any registration
statement for the same offering covered by this registration statement that is
to be effective upon filing pursuant to Rule 462(b) promulgated under the
Securities Act of 1933, and all post-effective amendments thereto, and to file
the same, with all exhibits thereto and all documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents full power and authority to do and perform each and every act
and thing requisite and necessary 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 his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Joseph F. Pinkerton, III President, Chief Executive May 12, 2000
______________________________________ Officer and Director
Joseph F. Pinkerton, III (Principal Executive
Officer)
/s/ David S. Gino Chief Financial Officer May 12, 2000
______________________________________ (Principal Financial and
David S. Gino Accounting Officer)
/s/ Eric L. Jones Chairman of the Board May 12, 2000
______________________________________
Eric L. Jones
/s/ Richard E. Anderson Director May 12, 2000
______________________________________
Richard E. Anderson
/s/ Rodney S. Bond Director May 12, 2000
______________________________________
Rodney S. Bond
/s/ Lindsay R. Jones Director May 12, 2000
______________________________________
Lindsay R. Jones
Director May , 2000
______________________________________
Jan H. Lindelow
/s/ Terrence L. Rock Director May 12, 2000
______________________________________
Terrence L. Rock
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Form of Amended and Restated Certificate of Incorporation
3.2 Form of Amended and Restated Bylaws
4.1* Specimen certificate for shares of Common Stock
4.2 Warrant to Purchase Common Stock issued to Enron North America Corp.
4.3 Warrant to Purchase Common Stock issued to Stephens Group, Inc.
5.1* Opinion of Brobeck, Phleger & Harrison LLP
10.1 Form of Indemnity Agreement
10.2* Active Power, Inc. 2000 Stock Incentive Plan
10.3* Active Power, Inc. 2000 Employee Stock Purchase Plan
10.4 Second Amended and Restated Investors' Rights Agreement by and between
Active Power, Inc. and certain of its stockholders
10.5 Consulting Services Agreement by and between Active Power and Eric L.
Jones
10.6+ Phase II Development and Phase III Feasibility Agreement by and
between Active Power, Inc. and Caterpillar Inc.
10.7 Credit Terms and Conditions by and between Active Power, Inc. and
Imperial Bank
10.8 Security and Loan Agreement by and between Active Power, Inc. and
Imperial Bank
10.9 Lease Agreement by and between Active Power, Inc. and Braker Phase
III, Ltd.
10.10 First Amendment to Lease Agreement by and between Active Power, Inc.
and Braker Phase III, Ltd.
10.11 Second Amendment to Lease Agreement by and between Active Power, Inc.
and Braker Phase III, Ltd.
10.12 Third Amendment to Lease Agreement by and between Active Power, Inc.
and Braker Phase III, Ltd.
10.13 Fourth Amendment to Lease Agreement by and between Active Power, Inc.
and Metropolitan Life Insurance Company
10.14 Fifth Amendment to Lease Agreement by and between Active Power, Inc.
and Metropolitan Life Insurance Company
10.15 Sublease Agreement by and between Active Power, Inc. and Video
Associates Laboratories, Inc.
10.16 Employee offer letter (including severance arrangements) from Active
Power, Inc. to David S. Gino
23.1 Consent of Ernst & Young LLP
23.2* Consent of Brobeck, Phleger & Harrison LLP (Reference is made to
Exhibit 5.1)
24.1 Power of Attorney (see page II-5)
27.1 Financial Data Schedule
</TABLE>
- --------
* To be included by amendment.
+ Application has been made to the Commission to seek confidential treatment of
certain provisions of this exhibit. Omitted material for which confidential
treatment has been requested has been filed separately with the Commission.
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ACTIVE POWER, INC.
Active Power, Inc., a corporation organized and existing under the
Delaware General Corporation Law (the "DGCL"), Does Hereby Certify:
----
First: The original Certificate of Incorporation of this corporation
was filed with the Secretary of State of Delaware on March 29, 2000 under the
name "Active Power, Inc."
Second: The Amended and Restated Certificate of Incorporation of
Active Power, Inc. in the form attached hereto as Annex A has been duly adopted
-------
in accordance with the provisions of Sections 228, 245 and 242 of the DGCL by
the directors and stockholders of this corporation.
Third: The Amended and Restated Certificate of Incorporation so
adopted reads in full as set forth in Annex A attached hereto and is
-------
incorporated herein by this reference.
In Witness Whereof, Active Power, Inc. has caused this Amended and
Restated Certificate of Incorporation to be signed by its duly authorized and
elected President this ___ day of ________, 2000.
ACTIVE POWER, INC.
By: /s/ Joseph F. Pinkerton, III
---------------------------------------
Joseph F. Pinkerton, III
President and Chief Executive Officer
<PAGE>
ANNEX A
-------
AMENDED AND RESTATED
CERTCIFICATE OF INCORPORATION
OF
ACTIVE POWER, INC.
ARTICLE I
The name of this corporation shall be Active Power, Inc. (the
"Company").
-------
ARTICLE II
The address of the registered office of the Company in the State of
Delaware is 1209 Orange Street, City of Wilmington, County of New Castle, State
of Delaware. The name of the registered agent at that address is The
Corporation Trust Company.
ARTICLE III
The purpose of the Company is to engage in any lawful act or activity
for which corporations may be organized under the Delaware General Corporation
Law.
ARTICLE IV
4.1 Prior to a Qualified Public Offering (as defined in section 5B of this
Section 4.1 of Article IV), the Company's capital stock shall be comprised as
set forth in this Section 4.1 as follows:
A. The aggregate number of shares that the Company shall have authority
to issue is Forty Million Four Hundred Twenty Thousand (40,420,000) shares, (i)
Thirty Million (30,000,000) shares of which shall be Common Stock with a par
value of $0.001 per share, and (ii) Ten Million Four Hundred Twenty Thousand
(10,420,000) shares of which shall be Preferred Stock with a par value of $0.001
per share. Of such Preferred Stock, (1) Four Hundred Twenty Thousand (420,000)
shall be designated as the "1992 Preferred Stock" (the "1992 Preferred Stock"),
--------------------
(2) Five Hundred Sixty-Nine Thousand Four Hundred Six (569,406) shares shall be
designated as "Series A Convertible Preferred Stock" (the "Series A Preferred
------------------
Stock"), (3) One Million Eight Hundred Forty-Seven Thousand Two Hundred Ninety-
- -----
Two (1,847,292) shares shall be designated as "Series B Convertible Preferred
Stock" (the "Series B Preferred Stock"), (4) One Million Seven Hundred Twenty-
------------------------
Six Thousand Six Hundred Twenty
1
<PAGE>
(1,726,620) shares shall be designated as "Series C Convertible Preferred Stock"
(the "Series C Preferred Stock"), (5) One Million Six Hundred Fifty-Two Thousand
------------------------
Eight Hundred Ninety-Four (1,652,894) shares shall be designated as "Series D
Convertible Preferred Stock" (the "Series D Preferred Stock"), (6) One Million
------------------------
Nine Hundred Thirty-Five Thousand Eight Hundred Seventy (1,935,870) shares shall
be designated as "Series E Convertible Preferred Stock" (the "Series E Preferred
------------------
Stock") and (7) the balance may be divided into and issued in series as
- -----
described herein.
B. The Board of Directors of the Company is authorized subject to
limitations prescribed by the General Corporation Law and the provisions of this
Section 4.1 of Article IV, to provide for the issuance of the shares of
Preferred Stock in series, and by filing a statement of designation pursuant to
the General Corporation Law, to establish from time to time the number of shares
to be included in each such series, and to fix the designation, powers,
preferences and rights of the shares of each such series and the qualifications,
limitations or restrictions thereof.
The authority of the Board of Directors with respect to each series of
Preferred Stock shall include, but not be limited to, determination of the
following:
(1) the number of shares constituting that series and the distinctive
designation of that series;
(2) the dividend rate on the shares of that series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the relative
rights of priority, if any, of payment of dividends on shares of that
series;
(3) whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights;
(4) whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the Board of Directors
shall determine;
(5) whether or not the shares of that series be redeemable, and, if
so, the terms and conditions of such redemption, including the date or date
upon or after which they shall be redeemable, and the amount per share
payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
(6) whether that series shall have a sinking fund for the redemption
or purchase of shares of that series, and, if so, the terms and amount of
such sinking fund;
(7) the rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the Company, and
the relative rights of priority, if any, of payment of shares of that
series; and
(8) any other relative rights, preferences and limitations of that
series.
2
<PAGE>
The powers, preferences and rights of each series of Preferred Stock,
and the qualifications, limitations or restrictions thereof, if any, may differ
from those of any and all other series at any time outstanding. All shares of
any one series of Preferred Stock shall be identical in all respects with all
other shares of such series, except that shares of any one series issued at
different times may differ as to the date from which dividends thereof shall be
cumulative. The Board of Directors may increase the number of shares of the
Preferred Stock designated for any existing series by a resolution adding to
such series authorized and unissued shares of the Preferred Stock not designated
for any other series. The Board of Directors may decrease the number of shares
of Preferred Stock designated for any existing series by a resolution,
subtracting from such series unissued shares of the Preferred Stock designated
for such series, and the shares so subtracted shall become authorized, unissued
and undesignated shares of the Preferred Stock.
C. The 1992 Preferred Stock shall have the preferences, limitations and
relative rights set forth below:
(1) Dividends. Holders of the 1992 Preferred Stock shall not be
---------
entitled to receive dividends, payable in cash, stock or otherwise, with respect
to such 1992 Preferred Stock at any time while such 1992 Preferred Stock is
outstanding.
(2) Redemption. The 1992 Preferred Stock shall be redeemable by the
----------
Company. Such redemption shall be effected by the Company at such time as the
Board of Directors of the Company determines, in its sole discretion, that the
Company has available funds in excess of the anticipated needs of the Company,
including reasonable reserves for future expenses or capital costs. No dividends
shall be declared or paid with respect to the Common Stock so long as any shares
of 1992 Preferred Stock are issued and outstanding. The redemption price per
share of 1992 Preferred Stock shall be $0.50.
At such time or times as the Board of Directors determines that funds
are available for the redemption of all or a portion of the 1992 Preferred
Stock, the Company shall provide each holder of 1992 Preferred Stock with
written notice of its election to redeem all or a portion of such 1992 Preferred
Stock. If only a portion of the total outstanding shares of 1992 Preferred
Stock is to be redeemed, a pro rata portion of each holder's shares of 1992
Preferred Stock shall be redeemed, provided that such redemption shall be
adjusted to preclude the creation of fractional shares pursuant to such
redemption.
Any shares of 1992 Preferred Stock which are redeemed by the Company
will be cancelled and will not be reissued, sold or transferred. If fewer than
the total number of shares of 1992 Preferred Stock represented by any
certificate are redeemed, a new certificate representing the number of
unredeemed shares of 1992 Preferred Stock will be issued to the holder thereof
without cost to such holder within twenty days after surrender of the
certificate representing the redeemed shares.
The Company will not redeem, repurchase or otherwise acquire any
shares of 1992 Preferred Stock except as expressly authorized herein or pursuant
to a purchase offer made pro rata to all holders of shares of 1992 Preferred
Stock on the basis of the number of shares of 1992 Preferred Stock owned by each
such holder.
3
<PAGE>
(3) Liquidation. Subject to the rights of any series of Preferred
-----------
Stock which may from time to time come into existence, in the event of a
voluntary or involuntary liquidation, dissolution or winding up of the Company,
holders of the then outstanding shares of 1992 Preferred Stock shall be entitled
to receive for each such share of 1992 Preferred Stock payment in cash equal to
$0.50, before any distribution of assets is made to holders of the Common Stock
or any other class or series of capital stock of the Company ranking junior to
the 1992 Preferred Stock as to distribution on liquidation, dissolution or
winding up. Subject to the rights of any series of Preferred Stock which may
from time to time come into existence, if, upon any such liquidation,
dissolution or winding up of the Company, the assets of the Company available
for distribution to holders of 1992 Preferred Stock shall be insufficient to
permit payment in full of the aforesaid preferential amounts, then all such
assets of the Company shall be distributed ratably among the holders of the 1992
Preferred Stock in proportion to the full preferential amounts to which they
shall be entitled respectively.
After distribution in full of the preferential amounts to be
distributed to the holders of any outstanding shares of 1992 Preferred Stock,
and to the holders of any outstanding securities of the Company having a
preference to distributions of assets of the Company upon liquidation,
dissolution or winding up of the Company, the holders of the shares of Common
Stock shall be entitled to receive all remaining assets of the Company available
for distributions to its stockholders, ratably in proportion to the number of
shares of the Common Stock held by them, and the holders of the 1992 Preferred
Stock shall have no right to participate in such remaining assets.
Neither the merger nor consolidation of the Company into or with any
other entity, nor the merger or consolidation of any other entity into or with
the Company, nor a sale, transfer, lease or other disposition of all or any part
of the assets of the Company shall be deemed to be a liquidation, dissolution or
winding up of the Company within the meaning of this Part C of Section 4.1 of
Article IV.
(4) Voting Rights. The holders of shares of 1992 Preferred Stock
-------------
shall not be entitled to vote upon any matter submitted to a vote of the
stockholders of the Company except to the extent required by law.
D. The description of the preferences, limitations and relative rights of
the Company's Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock is set
forth below:
(1) Dividends.
---------
1A. Subject to the restrictions contained herein, 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 entitled to
receive cash dividends at the rate of $0.1216, $0.1624, $0.278, $0.484 and
$0.9072 per share per annum, respectively (as adjusted for any stock dividends,
combinations, splits or reclassifications with respect to such shares), payable
out of funds legally available therefor, prior and in preference to any
declaration or payment of any cash dividend on the Common Stock or the 1992
Preferred Stock of the Company. Such dividends shall be payable with respect to
the Series A Preferred Stock at the beginning of each
4
<PAGE>
calendar quarter beginning April 1, 1995, with respect to the Series B Preferred
Stock at the beginning of each calendar quarter beginning July 1, 1996, with
respect to the Series C Preferred Stock at the beginning of each calendar
quarter beginning October 1, 1997, with respect to the Series D Preferred Stock
at the beginning of each calendar quarter beginning July 1, 1998 and with
respect to the Series E Preferred Stock at the beginning of each calendar
quarter beginning January 1, 2000. Such dividends shall accrue on each share of
Series A Preferred Stock from the date that such share was issued by the Company
(the "Series A Issue Date"), on each share of Series B Preferred Stock from May
-------------------
6, 1996 (the "Series B Issue Date"), on each share of Series C Preferred Stock
-------------------
from July 29, 1997 (the "Series C Issue Date"), on each share of Series D
-------------------
Preferred Stock from June 16, 1998 (the "Series D Issue Date"), and on each
-------------------
share of Series E Preferred Stock from the date that such share was issued by
the Company (the "Series E Issue Date") and shall accrue from day to day,
whether or not earned or declared. Such dividends shall be cumulative so that,
except as provided below, if such dividends in respect of any previous or
current dividend period shall not have been paid, the deficiency shall first be
fully paid before any dividend or other distribution shall be paid on or
declared and set apart for the 1992 Preferred Stock or the Common Stock. Any
accumulation of dividends on the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock or Series E Preferred
Stock shall not bear interest. Cumulative dividends with respect to a share of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock or Series E Preferred Stock which are accrued, payable
and/or in arrears shall not then or thereafter be paid and shall cease to be
accrued, payable and/or in arrears if such share of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or
Series E Preferred Stock, as the case may be, has been converted to Common Stock
prior to July 29, 2002; provided that if any such shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock or Series E Preferred Stock shall not have been converted into Common
Stock prior to July 29, 2002, dividends with respect to any such unconverted
shares shall continue to accumulate and shall be paid to the extent assets are
legally available therefor as required under this paragraph 1A, when, as and if
declared by the Board of Directors.
1B. Except as provided elsewhere herein, with respect to the
1992 Preferred Stock, no dividends (other than those payable solely in shares of
Common Stock of the Company) shall be paid on or declared and set apart for any
Common Stock or any other class or series of stock of the Company during any
fiscal year of the Company until dividends for all past dividend periods and the
then current dividend period shall have been paid, or a sum sufficient for the
payment therefor set apart, with respect to the Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series
E Preferred Stock, and no dividends shall be paid on any share of Common Stock
unless a dividend (including the amount of any dividends paid pursuant to the
above provisions of this paragraph 1B) is paid with respect to all outstanding
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock in an amount for
each such share of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock equal to
or greater than the aggregate amount of such dividends for the number of shares
of Common Stock into which each share of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock could then be converted.
5
<PAGE>
1C. In the event the Company shall declare a distribution (other
than any distribution described in paragraph 1A or 1B) payable in securities of
any other Person (as defined in part (8)), evidences of indebtedness issued by
the Company 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 and Series E 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 and Series E Preferred Stock
were the holders of the number of shares of Common Stock of the Company into
which their shares of Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
Common Stock of the Company entitled to receive such distribution.
(2) Liquidation Preference.
----------------------
2A. In the event of any sale, liquidation, dissolution or
winding up of the Company, either voluntary or involuntary:
(i) The holders of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Company to the holders
of the 1992 Preferred Stock and Common Stock by reason of their ownership
thereof, an amount for each share of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock then held by them equal to $1.52, $2.03, $3.475, $6.05 and
$11.34, respectively (as adjusted for any stock dividends, combinations, splits
or reclassifications with respect to such shares), plus accrued or declared but
unpaid dividends on the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock
as the case may be. If upon the occurrence of such event, the assets and funds
thus distributed among the holders of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock shall be insufficient to permit the payment to such holders of
such full preferential amount, then the entire assets and funds of the Company
legally available for distribution shall be distributed ratably among the
holders of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock in
proportion to the relative liquidation preferences (as provided in this
subparagraph (i)) of the shares of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred
Stock then held by them.
(ii) Subject to payment in full of the liquidation
preference with respect to the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred
Stock as provided in subparagraph (i) above, the holders of the 1992 Preferred
Stock shall be entitled to payments upon the liquidation of the Company as
provided in the Certificate of Incorporation.
6
<PAGE>
(iii) Subject to the payment in full of the liquidation
preferences with respect to the Series A Preferred Stock, the Series B Preferred
Stock, the Series C Preferred Stock, the Series D Preferred Stock and the Series
E Preferred Stock as provided in subparagraph (i) above and the 1992 Preferred
Stock (if any) as provided in subparagraph (ii) above, the entire remaining
assets and funds of the Company legally available for distribution, if any,
shall be distributed among the holders of the Common Stock, the Series A
Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the
Series D Preferred Stock and the Series E Preferred Stock ratably in proportion
to the shares of Common Stock then held by them and the shares of Common Stock
which they have the right to acquire upon conversion of the shares of the Series
A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock,
the Series D Preferred Stock and the Series E Preferred Stock then held by them,
provided, however, that, including the amounts paid pursuant to subparagraph (i)
- --------- -------
above, in no event shall (A) the Series A Preferred Stock receive greater than
$4.50 per share plus accrued or declared but unpaid dividends (as adjusted for
any stock dividends, combinations or splits with respect to such shares), (B)
the Series B Preferred Stock receive greater than $6.09 per share plus accrued
or declared but unpaid dividends (as adjusted for any stock dividends,
combinations or splits with respect to such shares), (C) the Series C Preferred
Stock receive greater than $10.425 per share plus accrued or declared but unpaid
dividends (as adjusted for any stock dividends, combinations or splits with
respect to such shares), (D) the Series D Preferred Stock receive greater than
$18.15 per share plus accrued or declared but unpaid dividends (as adjusted for
any stock dividends, combinations or splits with respect to such shares), or (E)
the Series E Preferred Stock receive greater than $17.01 per share plus accrued
or declared but unpaid dividends (as adjusted for any stock dividends,
combinations or splits with respect to such shares).
2B. For the purposes of this part (2), unless otherwise
determined as to a particular transaction by the vote or written consent of a
Sufficient Vote (as defined in subparagraph (v) below) of the holders of the
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock then outstanding
and except as provided in the Certificate of Incorporation with respect to the
1992 Preferred Stock, a "liquidation" shall include:
(i) a reorganization, consolidation or merger of the
Company with or into any other Company, or any other Person, other than a
wholly-owned Subsidiary (as defined in part (8) below) of the Company in which
the holders of the Company's securities prior to the transaction or series of
transactions would beneficially own less than 50% of the outstanding voting
securities of the surviving entity after the transaction or series of
transactions, excluding any transaction in which stockholders of the Company
prior to the transaction will maintain voting control of the resulting entity
after the transaction;
(ii) any corporate reorganization in which the Company
shall not be the continuing or surviving entity resulting from such
reorganization;
(iii) a sale of all or substantially all of the assets of
the Company; or
(iv) any transaction approved by the stockholders of the
Company in which more than fifty percent (50%) of the outstanding stock of the
Company (on
7
<PAGE>
an as-if converted basis) is redeemed or repurchased in any 90-day period; such
that in each case 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 in cash or in securities received from the acquiring
company, or in a combination thereof, at the closing of any such transaction, an
amount equal to the amount per share which would be payable 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 pursuant to this part (2)
in a liquidation of the Company; and
(v) For purposes of this Certificate of Incorporation, a
"Sufficient Vote" of the holders of the Series A Preferred Stock, Series B
---------------
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock shall mean the approval, either by vote or written consent, of
the holders of at least fifty percent (50%) of all shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock then outstanding, voting together as a single
class and without regard to the number of shares issuable upon the conversion of
such Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock.
2C. Any securities to be delivered 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 pursuant to paragraph 2B above
shall be valued as follows:
(i) If such securities are not subject to restriction on
free marketability, then:
(a) if traded on a securities exchange, the value of
such securities shall be deemed to be the average of the security's closing
prices on such exchange over the 30-day period ending three days prior to the
closing;
(b) if actively traded over-the-counter, the value of
such securities shall be deemed to be the average of the closing bid prices over
the 30-day period ending three days prior to the closing; and
(c) if there is no active public market, the value of
such securities shall be the fair market value thereof, as mutually determined
by a majority of the members of the Board of Directors of the Company who are
not then representatives of or otherwise affiliates of any holders of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock (collectively, the "Disinterested
-------------
Directors") and a Sufficient Vote of the holders of Series A Preferred Stock,
- ---------
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock, voting together as a single class, or, in the absence
of such agreement, by an appraisal conducted by an independent appraiser jointly
selected by the Disinterested Directors and the holders of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock then outstanding (an "Independent
-----------
Appraisal") paid for by the Company; and
- ---------
8
<PAGE>
(ii) Securities subject to investment letter or other
restrictions on free marketability shall be valued at an appropriate discount
from the value determined as provided in subparagraphs (i)(a), (i)(b) or (i)(c)
above to reflect the approximate fair market value thereof, as mutually
determined by a majority of the Disinterested Directors and a Sufficient Vote of
the holders of the outstanding Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred
Stock, voting together as a single class, or, in the absence of such agreement,
by an Independent Appraisal paid for by the Company.
2D. The Company shall give each holder of record of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock written notice of such impending
transaction not later than 20 days prior to the stockholders meeting called to
approve such transaction or 20 days prior to the closing of such transaction,
whichever is earlier, and shall also notify such holders in writing of the final
approval of such transaction. The first of such notices shall describe the
material terms and conditions of the contemplated transaction, and the Company
shall thereafter give such holders prompt notice of any material changes. The
transaction shall in no event take place sooner than 20 days after the mailing
by the Company of the first notice provided for herein or sooner than 20 days
after the mailing by the Company of any notice of material changes provided for
herein; provided, however, that such periods may be shortened upon the written
consent of the holders of a Sufficient Vote of the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock, voting together as a single class.
(3) Redemptions.
-----------
3A. The holders of sixty-seven percent (67%) of the shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock then outstanding, at any
time after July 29, 2002 and upon sixty (60) days prior written notice to the
Company of such election (the "Redemption Notice"), may require the Company to
-----------------
redeem (and require each holder of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred
Stock to participate in such redemption) (each, a "Mandatory Redemption") on the
--------------------
dates referenced below (each, a "Mandatory Redemption Date") the number of
-------------------------
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock set forth opposite
such Mandatory Redemption Date below at a price per share equal to the
respective Series A Redemption Price, Series B Redemption Price, Series C
Redemption Price, Series D Redemption Price or Series E Redemption Price (as
defined in paragraph 3B), as the case may be:
9
<PAGE>
<TABLE>
<CAPTION>
Mandatory Redemption Date Number of Shares
------------------------- ----------------
<S> <C>
The date which is 60 days after the date of Up to one-third (1/3) of the
the Redemption Notice (the "First Mandatory shares of Series A Preferred
Redemption Date") Stock, Series B Preferred Stock,
Series C Preferred Stock, Series
D Preferred Stock and Series E
Preferred Stock then outstanding
First Anniversary Up to one-half (1/2) of the
of the First Mandatory Redemption Date shares of Series A Preferred
Stock, Series B Preferred Stock,
Series C Preferred Stock, Series
D Preferred Stock and Series E
Preferred Stock then outstanding
Second Anniversary of the First Mandatory All remaining shares of Series A
Redemption Date Preferred Stock, Series B
Preferred Stock, Series C
Preferred Stock, Series D
Preferred Stock and Series E
Preferred Stock then outstanding
</TABLE>
3B. The holders of Series A Preferred Stock shall be entitled to receive
from the Company on any Mandatory Redemption Date an amount in cash for each
share of Series A Preferred Stock to be redeemed on such Mandatory Redemption
Date (the "Series A Redemption Price") equal to the greater of (i) the fair
- --------------------------
market value of a share of Series A Preferred Stock on such Mandatory Redemption
Date, or (ii) $1.52 (as adjusted for stock dividends, combinations, splits or
reclassifications with respect to such shares) plus any accrued, or declared but
unpaid, dividends on the Series A Preferred Stock as of the First Mandatory
Redemption Date. The holders of Series B Preferred Stock shall be entitled to
receive from the Company on any Mandatory Redemption Date an amount in cash for
each share of Series B Preferred Stock to be redeemed on such Mandatory
Redemption Date (the "Series B Redemption Price") equal to the greater of (i)
-------------------------
the fair market value of a share of Series B Preferred Stock on such Mandatory
Redemption Date, or (ii) $2.03 (as adjusted for stock dividends, combinations,
splits or reclassifications with respect to such shares) plus any accrued, or
declared but unpaid, dividends on the Series B Preferred Stock as of the First
Mandatory Redemption Date. The holders of Series C Preferred Stock shall be
entitled to receive from the Company on any Mandatory Redemption Date an amount
in cash for each share of Series C Preferred Stock to be redeemed on such
Mandatory Redemption Date (the "Series C Redemption Price") equal to the greater
-------------------------
of (i) the fair market value of a share of Series C Preferred Stock on such
Mandatory Redemption Date, or (ii) $3.475 (as adjusted for stock dividends,
combinations, splits or reclassifications with respect to such shares) plus any
accrued, or declared but unpaid, dividends
10
<PAGE>
on the Series C Preferred Stock as of the First Mandatory Redemption Date. The
holders of Series D Preferred Stock shall be entitled to receive from the
Company on any Mandatory Redemption Date an amount in cash for each share of
Series D Preferred Stock to be redeemed on such Mandatory Redemption Date (the
"Series D Redemption Price") equal to the greater of (i) the fair market value
-------------------------
of a share of Series D Preferred Stock on such Mandatory Redemption Date, or
(ii) $6.05 (as adjusted for stock dividends, combinations, splits or
reclassifications with respect to such shares) plus any accrued, or declared but
unpaid, dividends on the Series D Preferred Stock as of the First Mandatory
Redemption Date. The holders of Series E Preferred Stock shall be entitled to
receive from the Company on any Mandatory Redemption Date an amount in cash for
each share of Series E Preferred Stock to be redeemed on such Mandatory
Redemption Date (the "Series E Redemption Price") equal to the greater of (i)
-------------------------
the fair market value of a share of Series E Preferred Stock on such Mandatory
Redemption Date, or (ii) $11.34 (as adjusted for stock dividends, combinations,
splits or reclassifications with respect to such shares) plus any accrued, or
declared but unpaid, dividends on the Series E Preferred Stock as of the First
Mandatory Redemption Date. The Series A Redemption Price, Series B Redemption
Price, Series C Redemption Price, Series D Redemption Price and Series E
Redemption Price shall be adjusted for all redemptions of shares made after the
First Mandatory Redemption Date to include accrued interest compounded monthly
from the First Mandatory Redemption Date at the prime rate published in The
---
Wall Street Journal on such date through and until payment in full of the
- -------------------
Redemption Price for each share of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock or Series E Preferred
Stock, as the case may be, then outstanding in lieu of any further cumulative
dividends on the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock, as the
case may be, from and after the First Mandatory Redemption Date. For purposes
of this paragraph 3B, the "fair market value" of a share of Series A Preferred
-----------------
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock or Series E Preferred Stock, as the case may be, shall be its fair market
value as determined by a majority of the Disinterested Directors and a
Sufficient Vote of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock Series and Series E Preferred
Stock then outstanding, or, if they are unable to reach an agreement not later
than 20 days prior to such Mandatory Redemption Date, as determined by an
Independent Appraisal paid for by the Company.
3C. If the funds of the Company legally available for redemption
of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock on any Mandatory
Redemption Date are insufficient to redeem the total number of shares of Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock to be redeemed on such Mandatory
Redemption Date, those funds that are legally available will be used by the
Company to redeem the maximum possible number of shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock ratably among the holders of the shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock to be redeemed based upon
the proportion which the aggregate Series A Redemption Price, Series B
Redemption Price, Series C Redemption Price, Series D Redemption Price and
Series E Redemption Price, respectively, bears to the aggregate redemption price
to be paid with respect to the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D
11
<PAGE>
Preferred Stock and Series E Preferred Stock. At any time and from time to time
thereafter when additional funds of the Company are legally available for
redemption of shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock,
such funds immediately will be used by the Company to redeem the balance of the
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock which the Company
has become obligated to redeem on any Mandatory Redemption Date but which it has
not redeemed and such funds will not be used for any other purpose, including,
but not limited to, any redemption of the 1992 Preferred Stock as provided in
the Certificate of Incorporation, or any redemption of any shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock which the Company is obligated to
redeem on any subsequent Mandatory Redemption Date.
3D. No share of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock or Series E Preferred
Stock is entitled to any dividends accruing after the First Mandatory Redemption
Date. From and after the date on which the Series A Redemption Price, Series B
Redemption Price, Series C Redemption Price, Series D Redemption Price or Series
E Redemption Price is paid, all rights of the holders of such shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock will cease, and such shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock will not be deemed to be
outstanding.
3E. Any shares of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred
Stock which are redeemed or otherwise acquired by the Company will be cancelled
and will not be reissued, sold or transferred. If fewer than the total number of
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock represented by any
certificate are redeemed, a new certificate representing the number of
unredeemed shares of Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock will be
issued to the holder thereof without cost to such holder within ten business
days after surrender of the certificate representing the redeemed shares.
3F. Neither the Company nor any Subsidiary (as defined in part
(8)) will redeem, repurchase or otherwise acquire any shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock, except as expressly authorized
herein or pursuant to a purchase offer made pro rata to all holders of shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock on the basis of the number
of shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock owned by
each such holder.
(4) Voting Rights.
-------------
4A. Except as expressly provided in this Certificate of
Incorporation or in any agreement to which stockholders of the Company may be a
party with each other, each
12
<PAGE>
holder of shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock shall be
entitled to the number of votes equal to 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 and Series E Preferred Stock
could then be converted and shall have voting rights and powers equal to the
voting rights and powers of the Common Stock (except as otherwise expressly
provided in the Certificate of Incorporation or as required by law) and shall be
entitled to notice of any stockholders' meeting in accordance with the Bylaws of
the Company. Fractional votes shall not, however, be permitted and any
fractional votes resulting from the above formula shall be rounded to the
nearest whole number (with one-half being rounded upward).
4B. In addition, and without limiting any other rights to which
a holder of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock otherwise
may be entitled, the Company shall not engage in any of the transactions set
forth in subparagraphs (i), (ii), (iii) and (iv) of paragraph 2B, subparagraph
(c) of paragraph 2C, paragraph 2D, paragraph 3A and part (9) below of Section
4.1 of this Article IV, until such transaction has been approved by a Sufficient
Vote of the holders of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
then outstanding.
(5) Conversion.
----------
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
have conversion rights as follows (the "Conversion Rights"):
-----------------
5A. Right to Convert.
----------------
(i) Conversion of Series A Preferred Stock. Subject to
--------------------------------------
compliance with the provisions of paragraph 5C, each share of Series A Preferred
Stock shall be convertible, at the option of the holder thereof, at any time
after the date of issuance of such share, at the office of the Company or any
transfer agent for such share, into such number of fully paid and nonassessable
shares of Common Stock as is determined by dividing $1.52 by the conversion
price with respect to the Series A Preferred Stock (the "Series A Conversion
-------------------
Price") in effect at the time of conversion. The initial Series A Conversion
- -----
Price shall be $1.52 per share; provided, however, that such conversion price
shall be subject to adjustment as provided herein.
(ii) Conversion of Series B Preferred Stock. Subject to
--------------------------------------
compliance with the provisions of paragraph 5C, each share of Series B Preferred
Stock shall be convertible, at the option of the holder thereof, at any time
after the date of issuance of such share at the office of the Company or any
transfer agent for such share, into such number of fully paid and non-assessable
shares of Common Stock as is determined by dividing $2.03 by the conversion
price with respect to the Series B Preferred Stock (the "Series B Conversion
-------------------
Price") in effect at the time of conversion. The initial Series B Conversion
- -----
Price shall be $1.705 per share; provided, however, that such conversion price
shall be subject to adjustment as provided herein.
13
<PAGE>
(iii) Conversion of Series C Preferred Stock. Subject to
compliance with the provisions of paragraph 5C, each share of Series C Preferred
Stock shall be convertible, at the option of the holder thereof, at any time
after the date of issuance of such share at the office of the Company or any
transfer agent for such share, into such number of fully paid and non-assessable
shares of Common Stock as is determined by dividing $3.475 by the conversion
price with respect to the Series C Preferred Stock (the "Series C Conversion
-------------------
Price") in effect at the time of conversion. The initial Series C Conversion
- -----
Price shall be $3.475 per share; provided, however, that such conversion price
shall be subject to adjustment as provided herein.
(iv) Conversion of Series D Preferred Stock. Subject to
--------------------------------------
compliance with the provisions of paragraph 5C, each share of Series D Preferred
Stock shall be convertible, at the option of the holder thereof, at any time
after the date of issuance of such share at the office of the Company or any
transfer agent for such share, into such number of fully paid and non-assessable
shares of Common Stock as is determined by dividing $6.05 by the conversion
price with respect to the Series D Preferred Stock (the "Series D Conversion
-------------------
Price") in effect at the time of conversion. The initial Series D Conversion
- -----
Price shall be $6.05 per share; provided, however, that such conversion price
shall be subject to adjustment as provided herein.
(v) Conversion of Series E Preferred Stock. Subject to
--------------------------------------
compliance with the provisions of paragraph 5C, each share of Series E Preferred
Stock shall be convertible, at the option of the holder thereof, at any time
after the date of issuance of such share at the office of the Company or any
transfer agent for such share, into such number of fully paid and non-assessable
shares of Common Stock as is determined by dividing $11.34 by the conversion
price with respect to the Series E Preferred Stock (the "Series E Conversion
Price") in effect at the time of conversion. The initial Series E Conversion
Price shall be $11.34 per share; provided, however, that such conversion price
shall be subject to adjustment as provided herein.
5B. Automatic Conversion.
--------------------
(i) Each share of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock shall automatically be converted into shares of Common Stock at
the then effective Series A Conversion Price, Series B Conversion Price, Series
C Conversion Price, Series D Conversion Price and Series E Conversion Price,
respectively (each, a "Conversion Price"), immediately upon the closing of
----------------
the sale of the Company's Common Stock in a firm commitment underwritten public
offering pursuant to a registration statement under the Securities Act of 1933,
as amended, with aggregate gross proceeds to the Company and any selling
stockholders therein of at least $20,000,000 (before subtracting underwriting
commissions and expenses) at an offering price of at least $17.01 per share (as
adjusted for any stock dividends, combinations, splits or reclassifications, and
the like) (a "Qualified Public Offering") (in the event of which Qualified
-------------------------
Public Offering, the Person(s) entitled to receive Common Stock issuable upon
such conversion of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock shall not
be deemed to have converted that
14
<PAGE>
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock until immediately prior to
the closing of such offering).
(ii) Each share of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred
Stock shall automatically be converted into shares of Common Stock at the then
effective Conversion Price immediately upon the vote or written consent of the
holders of not less than eighty percent (80%) of the shares of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock then outstanding (voting or acting,
as the case may be, as a single class and without regard to the number of shares
issuable upon the conversion of such Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock).
5C. Mechanics of Conversion. Before any holder of Series A
-----------------------
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock shall be entitled to convert the
same into shares of Common Stock, such holder shall surrender the certificate or
certificates thereof, duly endorsed, at the office of the Company or of any
transfer agent for such shares, and shall give written notice to the Company at
such office that he elects to convert the same and shall state therein the name
or names in which the certificate or certificates for shares of Common Stock are
to be issued. The Company shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock certificate or certificates for the number of shares of Common
Stock to which the holder shall be entitled as provided herein. Such conversion
shall be deemed to have been made immediately prior to the close of business on
the date of surrender of the shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock to be converted, and the Person(s) entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock on such
date. In the event of an automatic conversion, the Board of Directors may elect
to treat the conversion of the shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock as having been made effective as of the date of the event
resulting in the automatic conversion.
5D. Adjustments to Conversion Price for Dilutive Issues.
---------------------------------------------------
(i) Special Definitions. For purposes of this paragraph 5D,
-------------------
the following definitions apply:
(a) "Additional Shares of Common Stock" shall mean all
---------------------------------
shares of Common Stock issued (or, pursuant to 5D(iii), deemed to be issued) by
the Company after the Series E Issue Date other than shares of Common Stock,
Options and/or Convertible Securities issued or issuable:
1. upon conversion of shares of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock;
15
<PAGE>
2. to current or former officers, directors,
employees or consultants of the Company pursuant to a stock option plan, stock
purchase plan or restricted stock plan approved by the stockholders and the
Board of Directors;
3. to directors, employees or consultants of the
Company as compensation for services rendered to the Company under agreements
approved by all members of the Board of Directors at a duly convened meeting at
which all such members were present or by their unanimous written consent;
4. upon exercise of certain warrants to purchase up
to 550,000 shares (which number is subject to adjustment as provided therein) of
Common Stock;
5. as a dividend or distribution on Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock;
6. pursuant to a transaction or event for which
adjustment of the Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price, Series D Conversion Price or Series E Conversion Price is made
pursuant to paragraph 5E; or
7. pursuant to the acquisition of another or other
Person by merger, share exchange or purchase of all or substantially all of the
assets of such Company or other Person or reorganization transaction.
(b) "Convertible Securities" shall mean any evidences of
indebtedness, shares (other than Common Stock, Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series
E Preferred Stock) or other securities convertible into or exchangeable for
Common Stock.
(c) "Options" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire either Common Stock or Convertible
Securities.
(ii) No Adjustment of Conversion Price. No adjustment in the
Series A Conversion Price, Series B Conversion Price, Series C Conversion Price,
Series D Conversion Price or Series E Conversion Price of a particular share of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock or Series E Preferred Stock, respectively, shall be
made in respect of the issuance of Additional Shares of Common Stock unless the
consideration per share for an Additional Share of Common Stock issued or deemed
to be issued by the Company is less than the Series A Conversion Price, Series B
Conversion Price, Series C Conversion Price, Series D Conversion Price or Series
E Conversion Price as the case may be, 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 or Series E
Preferred Stock, respectively.
(iii) Deemed Issue of Additional Shares of Common Stock. In the
event the Company, at any time or from time to time after the Series E Issue
Date, shall issue
16
<PAGE>
any Options or Convertible Securities or shall fix a record date for the
determination of holders of any class of securities then entitled to receive any
such Options or Convertible Securities, then the maximum number of shares (as
set forth in the instrument relating thereto without regard to any provisions
contained therein designed to protect against dilution) of Common Stock issuable
upon the exercise of such Options or, in the case of Convertible Securities and
Options therefor, the conversion or exchange of such Convertible Securities,
shall be deemed to be Additional Shares of Common Stock issued as of the time of
such issue or, in case such a record date shall have been fixed, as of the close
of business on such record date, provided that Additional Shares of Common Stock
shall not be deemed to have been issued unless the consideration per share
(determined pursuant to paragraph 5D(v) hereof) of such Additional Shares of
Common Stock would be less than the Series A Conversion Price, Series B
Conversion Price, Series C Conversion Price, Series D Conversion Price or Series
E Conversion Price, as the case may be, in effect on the date of and immediately
prior to such issue, or such record date, as the case may be, and provided
further that in any such case in which Additional Shares of Common Stock are
deemed to be issued:
(a) no further adjustments in the Series A
Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D
Conversion Price or Series E Conversion Price shall be made upon the subsequent
issue of Convertible Securities or shares of Common Stock upon the exercise of
such Options or conversion or exchange of such Convertible Securities;
(b) if such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise, for any increase in
the consideration payable to the Company, or decrease in the number of shares of
Common Stock issuable upon the exercise, conversion or exchange thereof, then
the Series A Conversion Price, Series B Conversion Price, Series C Conversion
Price, Series D Conversion Price or Series E Conversion Price, as the case may
be, computed upon the original issue thereof (or upon the occurrence of a record
date with respect thereto), and any subsequent adjustments based thereon, shall,
upon any such increase or decrease becoming effective, be recomputed to reflect
such increase or decrease insofar as it affects such Options or the rights of
conversion or exchange under such Convertible Securities (provided, however,
that no such adjustment of the Series A Conversion Price, Series B Conversion
Price, Series C Conversion Price, Series D Conversion Price or Series E
Conversion Price shall affect Common Stock previously issued upon conversion of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock or Series E Preferred Stock).
(c) upon the expiration of any such Options or
any rights of conversion or exchange under such Convertible Securities which
shall not have been exercised, the Series A Conversion Price, Series B
Conversion Price, Series C Conversion Price, Series D Conversion Price or Series
E Conversion Price computed upon the original issue thereof (or upon the
occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon such expiration, be recomputed as if:
1. in the case of Convertible Securities or
Options for Common Stock, the only Additional Shares of Common Stock issued were
the shares of Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or
17
<PAGE>
exchange of such Convertible Securities and the consideration received therefor
was the consideration actually received by the Company for the issue of all such
Options, whether or not exercised, plus the consideration actually received by
the Company upon such exercise, or for the issue of all such Convertible
Securities which were actually converted or exchanged, plus the additional
consideration, if any, actually received by the Company upon such conversion or
exchange, and
2. in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issue of such Options and the
consideration received by the Company for the Additional Shares of Common Stock
deemed to have been then issued was the consideration actually received by the
Company for the issue of all such Options, whether or not exercised, plus the
consideration deemed to have been received by the Company (determined pursuant
to paragraph 5D(v) below) upon the issue of the Convertible Securities with
respect to which such Options were actually exercised;
(d) no adjustment of the conversion rate for the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock or Series E Preferred Stock shall have the effect of
increasing the Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price, Series D Conversion Price or Series E Conversion Price to an
amount which exceeds the lower of (x) the Series A Conversion Price, Series B
Conversion Price, Series C Conversion Price, Series D Conversion Price or Series
E Conversion Price on the original adjustment date, or (y) the Series A
Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D
Conversion Price or Series E Conversion Price that would have resulted from any
actual issuance of Additional Shares of Common Stock between the original
adjustment date and such readjustment date;
(e) in the case of any Options which expire by their
terms not more than 30 days after the date of issue thereof, no adjustment of
the Series A Conversion Price, Series B Conversion Price, Series C Conversion
Price, Series D Conversion Price or Series E Conversion Price shall be made,
except as to shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock
converted during such period, until the expiration or exercise of all such
Options, whereupon such adjustment shall be made in the same manner provided in
clause (c) above; and
(f) if any such record date shall have been fixed and
such Options or Convertible Securities are not issued on the date fixed thereof,
the adjustment previously made in the Series A Conversion Price, Series B
Conversion Price, Series C Conversion Price, Series D Conversion Price or Series
E Conversion Price which became effective on such record date shall be cancelled
as of the close of business on such record date, and shall instead be made on
the actual date of issuance, if any.
(iv) Adjustment of Conversion Price Upon Issuance of
Additional Shares of Common Stock. In the event the Company, at any time after
the Series E Issue Date, shall issue Additional Shares of Common Stock
(including Additional Shares of Common Stock deemed to be issued pursuant to
paragraph 5D(iii)) for a consideration per share less than the Series A
Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D
Conversion Price or Series E Conversion Price, as the case may be, in effect on
the date of and immediately prior to such issue, then and in such event, such
Series A Conversion Price, Series B Conversion Price, Series C Conversion Price,
18
<PAGE>
Series D Conversion Price or Series E Conversion Price shall be reduced, as the
case may be, concurrently with such issue, to a price (calculated to the nearest
whole cent) determined by multiplying the Series A Conversion Price, Series B
Conversion Price, Series C Conversion Price, Series D Conversion Price or Series
E Conversion Price, as applicable, by a fraction, the numerator of which shall
be the number of shares of Common Stock outstanding immediately prior to such
issue plus the number of shares of Common Stock which the aggregate
consideration received by the Company for the total number of Additional Shares
of Common Stock so issued would purchase at the applicable Conversion Price, and
the denominator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issue plus the number of such Additional
Shares of Common Stock so issued; and provided further that, for the purposes of
this paragraph 5D(iv), all shares of Common Stock issuable upon conversion of
all outstanding Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock shall be
deemed to be outstanding. For example, if after the Series E Issue Date, the
Company issues 1,000,000 shares of Common Stock for consideration per share of
$10.00, assuming 5,386,643 shares of Common Stock outstanding (determined in the
manner provided above and using the initial Series E conversion rate of one
(1)), the Conversion Price of a share of Series E Preferred Stock immediately
would be reduced to the price determined by multiplying $11.34 (the initial
Series E Conversion Price) by the following fraction:
(5,386,643 + [(1,000,000 x 10.00) 11.34]) (5,386,643 + 1,000,000)
= 5,386,643 + 881,834
----------------------
6,386,643
= 6,268,477
---------
6,386,643
= 0.9815
resulting in an adjusted Series E Conversion Price of $11.34 x 0.9815 = $11.13,
and a revised Series E Conversion Rate of 1.02:1 (i.e., $11.34 $11.13).
(v) Determination of Consideration. For purposes of this
paragraph 5D, the consideration received by the Company for the issuance of
any Additional Shares of Common Stock shall be computed as follows:
(a) Cash and Property. Such consideration shall:
-----------------
1. insofar as it consists of cash, be computed
at the aggregate amount of cash received by the Company excluding amounts paid
or payable for accrued interest or accrued dividends after deducting all
commissions and expenses paid and concessions and discounts allowed to
underwriters, dealers or others performing similar services in connection with
such issue;
19
<PAGE>
2. insofar as it consists of property other than cash,
be computed at the fair value thereof at the time of such issue, as determined
in good faith by the Board of Directors; and
3. in the event Additional Shares of Common Stock are
issued together with other shares or securities or other assets of the Company
for consideration which covers both, be the proportion of such consideration so
received, computed as provided in clauses (1) and (2) above, as determined in
good faith by the Board of Directors.
(b) Options and Convertible Securities. The consideration
-----------------------------------
per share received by the Company for Additional Shares of Common Stock deemed
to have been issued pursuant to paragraph 5D(iii), relating to Options and
Convertible Securities, shall be determined by dividing:
1. the total amount, if any, received or receivable by
the Company as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein designed to protect against dilution) payable to the Company
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities, or in the case of Options for Convertible Securities,
the exercise of such Option for Convertible Securities and the conversion or
exchange of such Convertible Securities; by
2. the maximum number of shares of Common Stock (as set
forth in the instruments relating thereto, without regard to any provision
contained therein designed to protect against dilution) issuable upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities.
5E. Adjustments for Dividends, Combinations or Subdivisions of
----------------------------------------------------------
Common Stock. In the event that the Company at any time or from time to time
- -------------
after the Series E Issue Date shall declare or pay any dividend on the Common
Stock payable in Common Stock or in any right to acquire Common Stock, or shall
effect a subdivision of the outstanding shares of Common Stock into a greater
number of shares of Common Stock (by stock split, reclassification or
otherwise), or in the event the outstanding shares of Common Stock shall be
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares of Common Stock, then the Series A Conversion Price, Series B
Conversion Price, Series C Conversion Price, Series D Conversion Price and
Series E Conversion Price in effect immediately prior to such event shall,
concurrently with the effectiveness of such event, be proportionately decreased
or increased, as appropriate.
5F. Other Distributions. In the event the Company shall at any
--------------------
time or from time to time make or issue, or fix a record date for the
determination of holders of Common Stock entitled to receive a dividend or other
distribution payable in securities of other Persons, evidences of indebtedness
issued by the Company or any of its subsidiaries or other Persons, assets
(excluding cash dividends) or Options or rights not referred to in paragraph
5D(iii), then in each such event provision shall be made so that the holders of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock or Series E Preferred Stock
20
<PAGE>
shall receive, upon the conversion thereof, the securities of the Company which
they would have received had their stock been converted into Common Stock on the
date of such event.
5G. Other Adjustments. In case of any reorganization or any
------------------
reclassification of the capital stock of the Company, any consolidation, merger
or share exchange of the Company with or into another corporation or
corporations (other than a consolidation or merger deemed to be a liquidation,
dissolution or winding up of the Company as provided in paragraph 2B above),
each share of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock shall
thereafter be convertible into the number of shares of stock or other securities
or property (including cash) to which a holder of the number of shares of Common
Stock deliverable upon conversion of such share of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or
Series E Preferred Stock would have been entitled upon the record date of (or
date of, if no record date is fixed) such reorganization, reclassification,
consolidation, merger or share exchange; and, in any case appropriate adjustment
(as determined by the Board of Directors) shall be made in the application of
the provisions herein set forth with respect to the rights and interests
thereafter of the holders of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock
to the end that the provisions set forth herein shall thereafter be applicable,
as nearly equivalent as is practicable, in relation to any shares of stock or
the securities or property (including cash) thereafter deliverable upon the
conversion of the shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock.
5H. No Impairment. The Company will not, by amendment of its
--------------
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company but will at all
times in good faith assist in the carrying out of all the provisions of this
part (5) and in the taking of all such action as may be necessary or appropriate
in order to protect the conversion right of the holders of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock against impairment.
5I. Certificates as to Adjustments. Upon the occurrence of each
-------------------------------
adjustment or readjustment of the Series A Conversion Price, Series B Conversion
Price, Series C Conversion Price, Series D Conversion Price or Series E
Conversion Price, as the case may be, pursuant to this part (5), the Company at
its expense shall promptly compute such adjustment and prepare and furnish to
each holder of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock, as the
case may be, a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Company shall, upon the written request at any time of any holder of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock or Series E Preferred Stock, as the case may be,
furnish or cause to be furnished to such holder a like certificate setting forth
(i) such adjustments and readjustments, (ii) the Series A Conversion Price,
Series B Conversion Price, Series C Conversion Price, Series D Conversion Price
and Series E Conversion Price at the time in effect, and (iii) the number of
shares of Common Stock and the amount, if any, of other
21
<PAGE>
property which at the time would be received upon the conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock.
5J. Issue Taxes. The Company shall pay any and all issue and
------------
other taxes that may be payable in respect of any issue or delivery of shares of
Common Stock on conversion of shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock pursuant hereto; provided, however, that the Company shall not
be obligated to pay any transfer taxes resulting from any transfer requested by
any holder in connection with any such conversion.
5K. Reservation of Stock Issuable Upon Conversion. The Company
----------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock, such
number of its shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all outstanding shares of the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock; and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of all then outstanding shares of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock, the Company will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose, including, without limitation, engaging in best efforts to obtain the
requisite stockholder approval of any necessary amendment to its Certificate of
Incorporation.
5L. Fractional Shares. No fractional share shall be issued upon
------------------
the conversion of any share or shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock. All shares of Common Stock (including fractions thereof)
issuable upon conversion of more than one share of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or
Series E Preferred Stock by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of any
fractional share. If, after such aggregation, the conversion would result in the
issuance of a fraction of a share of Common Stock, the Company shall, in lieu of
issuing any fractional share, pay the holder otherwise entitled to such fraction
a sum in cash equal to the fair market value of such fraction on the date of
conversion (as determined in good faith by the Board of Directors of the
Company).
(6) Registration of Transfer.
------------------------
The Company will keep at its principal office a register for the
registration of shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock.
Upon the surrender of any certificate representing shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock at such place, the Company will, at the
request of the record holder of such certificate, execute and deliver (at the
Company's expense) a new
22
<PAGE>
certificate or certificates in exchange therefor representing in the aggregate
the number of shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
represented by the surrendered certificate. Each such new certificate will be
registered in such name and will represent such number of shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock as is requested by the holder of
the surrendered certificate and will be substantially identical in form to the
surrendered certificate, and dividends will accrue on the shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock represented by such new certificate
from the date to which dividends have been fully paid on such shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock represented by the surrendered
certificate.
(7) Replacement.
------------
Upon receipt of evidence reasonably satisfactory to the Company (an
affidavit of the registered holder will be satisfactory) of the ownership and
the loss, theft, destruction or mutilation of any certificate evidencing shares
of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock or Series E Preferred Stock, and in the case of any
such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Company or, in the case of any mutilation, upon surrender of
such certificate the Company will (at its expense) execute and deliver in lieu
of such certificate a new certificate of like kind representing the number of
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock or Series E Preferred Stock represented by such
lost, stolen, destroyed or mutilated certificate, and dividends will accrue on
the shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock
represented by such new certificate from the date to which dividends have been
fully paid on such lost, stolen, destroyed or mutilated certificate.
(8) Certain Definitions. When used in this Part D of this Section 4.1
--------------------
of Article IV:
"Common Stock" means, collectively, the Company's Common Stock, par
------------
value $0.001 per share, and any capital stock of any class of the Company
hereafter authorized which is not limited to a fixed sum or percentage of par or
stated value in respect to the rights of the holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution or
winding up of the Company.
"Person" means an individual, a partnership, a corporation, an
------
association, a joint stock company, a trust, a joint venture, an unincorporated
organization and a governmental entity or any department, agency or political
subdivision thereof.
"Subsidiary" means any corporation more than fifty percent (50%) of
----------
the outstanding voting securities are owned by the Company or any Subsidiary,
directly or indirectly, or a partnership or limited liability company in which
the Company or any Subsidiary is a general partner or manager or holds interests
entitling it to receive more than fifty percent (50%) of the profits or losses
of the partnership or limited liability company.
23
<PAGE>
(9) Amendment and Waiver.
---------------------
No amendment, modification or waiver of this Part D of this Section 4.1
of Article IV will be binding or effective with respect to any provision of
these terms without the vote or prior written consent of a Sufficient Vote of
the holders of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
outstanding at the time such action is taken, voting together as a single class.
No change in the terms hereof may be accomplished by merger or consolidation of
the Company or any other liquidation event under Section 2B above with another
Person unless the Company has obtained the prior written consent of the holders
of a Sufficient Vote of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock.
(10) Notices.
--------
10A. Any notice or other communication required or permitted
hereunder shall be in writing and shall be delivered personally or by express
courier, telegraphed, telexed, sent by facsimile transmission or sent postage
prepaid by certified or registered mail, return receipt requested, or by express
mail. Any such notice shall be deemed given when so delivered personally,
telegraphed, telexed, or sent by confirmed facsimile transmission or, if mailed,
three (3) business days after the date of deposit in the United States mail
addressed (a) to the Company, at its principal executive offices and (b) to any
stockholder, at such holder's address as it appears in the stock records of the
Company (unless otherwise indicated by any such holder). Notice given by
personal delivery, courier service or mail shall be effective upon actual
receipt. Notice given by telecopier shall be confirmed by appropriate answer
back and shall be effective upon actual receipt if received during the
recipient's normal business hours, or at the beginning of the next day after
receipt if not received during the recipient's normal business hours.
10B. In the event of any taking by the Company 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) or other distribution, any security or right convertible into or
entitling the holder thereof to receive Additional Shares of Common Stock, or
any right to subscribe for, purchase or otherwise acquire any shares of stock of
any class or any other securities or property, or to receive any other right,
the Company shall mail to each holder of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock at least 20 days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken, and the amount and
character of such dividend, distribution, security or right.
E. Common Stock. The Common Stock shall be subject to the prior and
-------------
superior rights of the 1992 Preferred Stock, Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock and of any subsequent series of preferred stock. Each share of
Common Stock shall be equal to every other share of Common Stock. The holder of
shares of Common Stock shall be entitled to one vote for each share of such
stock upon matters presented to stockholders.
24
<PAGE>
4.2 Effective as of a Qualified Public Offering (as defined in Section
5B of Part D of Section 4.1 of this Article IV), the Company's capital stock
shall be comprised as follows:
A. Authorized Shares. The aggregate number of shares that the Company
------------------
shall have authority to issue is Two Hundred Million (200,000,000), (a) One
Hundred Seventy-Five Million (175,000,000) shares of which shall be Common
Stock, par value $0.001 per share, and (b) Twenty-Five Million Four Hundred
Twenty Thousand (25,420,000) shares of which shall be Preferred Stock, par value
$0.001 per share. Of such Preferred Stock, Four Hundred Twenty Thousand
(420,000) shall be designated as the "1992 Preferred Stock" (the "1992 Preferred
---------------
Stock").
- -----
B. Common Stock. Each share of Common Stock shall have one vote on each
------------
matter submitted to a vote of the stockholders of the Company. Subject to the
provisions of applicable law and the rights of the holders of the outstanding
shares of Preferred Stock, if any, the holders of shares of Common Stock shall
be entitled to receive, when and as declared by the Board of Directors of the
Company, out of the assets of the Company legally available therefor, dividends
or other distributions, whether payable in cash, property or securities of the
Company. The holders of shares of Common Stock shall be entitled to receive, in
proportion to the number of shares of Common Stock held, the net assets of the
Company upon dissolution after any preferential amounts required to be paid or
distributed to holders of outstanding shares of Preferred Stock, if any, are so
paid or distributed.
C. Preferred Stock.
---------------
(1) Series. The Preferred Stock may be issued from time to time by
-------
the Board of Directors as shares of one or more series. The description of
shares of each additional series of Preferred Stock, including any designations,
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption shall be as set forth in resolutions adopted by the Board of
Directors.
(2) Rights and Preferences. The Board of Directors is expressly
-----------------------
authorized, at any time, by adopting resolutions providing for the issuance of,
or providing for a change in the number of, shares of any particular series of
Preferred Stock and, if and to the extent from time to time required by law, by
filing certificates of amendment or designation which are effective without
stockholder action, to increase or decrease the number of shares included in
each series of Preferred Stock, but not below the number of shares then issued,
and to set in any one or more respects the designations, preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms and conditions of redemption relating to the shares of
each such series. The authority of the Board of Directors with respect to each
series of Preferred Stock shall include, but not be limited to, setting or
changing the following:
(a) the dividend rate, if any, on shares of such series, the
times of payment and the date from which dividends shall be accumulated, if
dividends are to be cumulative ;
(b) whether the shares of such series shall be redeemable and,
if so, the redemption price and the terms and conditions of such redemption;
25
<PAGE>
(c) the obligation, if any, of the Company to redeem shares of
such series pursuant to a sinking fund;
(d) whether shares of such series shall be convertible into, or
exchangeable for, shares of stock of any other class or classes and, if so, the
terms and conditions of such conversion or exchange, including the price or
prices or the rate or rates of conversion or exchange and the terms of
adjustment, if any;
(e) whether the shares of such series shall have voting rights, in
addition to the voting rights provided by law, and, if so, the extent of such
voting rights;
(f) the rights of the shares of such series in the event of
voluntary or involuntary liquidation, dissolution or winding-up of the Company;
and
(g) any other relative rights, powers, preferences,
qualifications, limitations or restrictions thereof relating to such series.
D. The 1992 Preferred Stock shall have the preferences, limitations and
relative rights set forth below:
(1) Dividends. Holders of the 1992 Preferred Stock shall not be
---------
entitled to receive dividends, payable in cash, stock or otherwise, with respect
to such 1992 Preferred Stock at any time while such 1992 Preferred Stock is
outstanding.
(2) Redemption. The 1992 Preferred Stock shall be redeemable by the
----------
Company. Such redemption shall be effected by the Company at such time as the
Board of Directors of the Company determines, in its sole discretion, that the
Company has available funds in excess of the anticipated needs of the Company,
including reasonable reserves for future expenses or capital costs. No dividends
shall be declared or paid with respect to the Common Stock so long as any shares
of 1992 Preferred Stock are issued and outstanding. The redemption price per
share of 1992 Preferred Stock shall be $0.50.
At such time or times as the Board of Directors determines that funds
are available for the redemption of all or a portion of the 1992 Preferred
Stock, the Company shall provide each holder of 1992 Preferred Stock with
written notice of its election to redeem all or a portion of such 1992 Preferred
Stock. If only a portion of the total outstanding shares of 1992 Preferred
Stock is to be redeemed, a pro rata portion of each holder's shares of 1992
Preferred Stock shall be redeemed, provided that such redemption shall be
adjusted to preclude the creation of fractional shares pursuant to such
redemption.
Any shares of 1992 Preferred Stock which are redeemed by the Company
will be cancelled and will not be reissued, sold or transferred. If fewer than
the total number of shares of 1992 Preferred Stock represented by any
certificate are redeemed, a new certificate representing the number of
unredeemed shares of 1992 Preferred Stock will be issued to the holder thereof
without cost to such holder within twenty days after surrender of the
certificate representing the redeemed shares.
26
<PAGE>
The Company will not redeem, repurchase or otherwise acquire any
shares of 1992 Preferred Stock except as expressly authorized herein or pursuant
to a purchase offer made pro rata to all holders of shares of 1992 Preferred
Stock on the basis of the number of shares of 1992 Preferred Stock owned by each
such holder.
(3) Liquidation. Subject to the rights of any series of Preferred
------------
Stock which may from time to time come into existence, in the event of a
voluntary or involuntary liquidation, dissolution or winding up of the Company,
holders of the then outstanding shares of 1992 Preferred Stock shall be entitled
to receive for each such share of 1992 Preferred Stock payment in cash equal to
$0.50, before any distribution of assets is made to holders of the Common Stock
or any other class or series of capital stock of the Company ranking junior to
the 1992 Preferred Stock as to distribution on liquidation, dissolution or
winding up. Subject to the rights of any series of Preferred Stock which may
from time to time come into existence, if, upon any such liquidation,
dissolution or winding up of the Company, the assets of the Company available
for distribution to holders of 1992 Preferred Stock shall be insufficient to
permit payment in full of the aforesaid preferential amounts, then all such
assets of the Company shall be distributed ratably among the holders of the 1992
Preferred Stock in proportion to the full preferential amounts to which they
shall be entitled respectively.
After distribution in full of the preferential amounts to be
distributed to the holders of any outstanding shares of 1992 Preferred Stock,
and to the holders of any outstanding securities of the Company having a
preference to distributions of assets of the Company upon liquidation,
dissolution or winding up of the Company, the holders of the shares of Common
Stock shall be entitled to receive all remaining assets of the Company available
for distributions to its stockholders, ratably in proportion to the number of
shares of the Common Stock held by them, and the holders of the 1992 Preferred
Stock shall have no right to participate in such remaining assets.
Neither the merger nor consolidation of the Company into or with any
other entity, nor the merger or consolidation of any other entity into or with
the Company, nor a sale, transfer, lease or other disposition of all or any part
of the assets of the Company shall be deemed to be a liquidation, dissolution or
winding up of the Company within the meaning of this Part D of Section 4.2 of
Article IV.
(4) Voting Rights. The holders of shares of 1992 Preferred Stock shall
--------------
not be entitled to vote upon any matter submitted to a vote of the stockholders
of the Company except to the extent required by law.
ARTICLE V
A director of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director, except for liability (a) for any breach of the director's duty of
loyalty to the Company or its stockholders, (b) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (c) under Section 174 of the Delaware
27
<PAGE>
General Corporation Law or (d) for any transaction from which the director
derived any improper personal benefit. If the Delaware General Corporation Law
is amended after approval by the stockholders of this Article to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of the Company shall be eliminated
or limited to the fullest extent permitted by the Delaware General Corporation
Law as so amended.
ARTICLE VI
The management of the business and the conduct of the affairs of the
Company shall be vested in its Board of Directors. The number of directors
which shall constitute the whole Board of Directors shall be fixed by, or in the
manner provided in, the Bylaws of the Company.
ARTICLE VII
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws of the Company may provide. The books of the Company
may be kept (subject to any provision contained in the statutes) outside the
State of Delaware at such place or places as may be designated from time to time
by the Board of Directors or in the Bylaws of the Company.
ARTICLE VIII
Election of directors at an annual or special meeting of stockholders
need not be by written ballot unless the Bylaws of the Company shall so provide.
ARTICLE IX
A. At each annual meeting of stockholders, directors of the Company shall
be elected to hold office until the expiration of the term for which they are
elected, and until their successors have been duly elected and qualified.
Effective immediately following the closing of the initial public offering of
the Company's capital stock pursuant to an effective registration statement
filed under the Securities Act of 1933, as amended (the "Initial Public
--------------
Offering"), the directors of the Company shall be divided into three classes as
nearly equal in size as is practicable, hereby designated as Class I, Class II
and Class III. The initial Class I, Class II and Class III directors shall be
those directors designated and elected by resolution of the Board of Directors
or stockholders prior to the Initial Public Offering. The term of office of the
initial Class I directors shall expire at the first annual meeting of
stockholders following the closing of the Initial Public Offering (the "First
-----
Public Company Annual Meeting"); the term of office of the initial Class II
- -----------------------------
directors shall expire at the next succeeding annual meeting of stockholders;
and the term of office of the initial Class III directors shall expire at the
second succeeding annual meeting of stockholders. At each annual meeting after
the First Public Company Annual Meeting, directors to replace those of a Class
whose terms expire at such annual meeting shall be elected to hold office until
the third succeeding annual meeting and until their respective successors shall
have been duly elected and qualified. If the number of directors is hereafter
changed, any newly created directorships or decrease in directorships shall be
so apportioned among the classes as to make all classes as nearly equal in
number as is practicable.
28
<PAGE>
B. Vacancies occurring on the Board of Directors for any reason may be
filled by vote of a majority of the remaining members of the Board of Directors,
although less than a quorum, at a meeting of the Board of Directors. A person
so elected by the Board of Directors to fill a vacancy shall hold office until
the next succeeding annual meeting of stockholders of the Company and until his
or her successor shall have been duly elected and qualified.
ARTICLE X
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter, amend or
repeal the Bylaws of the Company.
ARTICLE XI
Effective upon the closing of the Initial Public Offering,
stockholders of the Company may not take action by written consent in lieu of a
meeting but must take any actions at a duly called annual or special meeting.
ARTICLE XII
Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of the
capital stock required by law or this Certificate of Incorporation, effective as
of the Initial Public Offering, the affirmative vote of the holders of at least
two-thirds (2/3) of the combined voting power of all of the then-outstanding
shares of the Company entitled to vote shall be required to alter, amend or
repeal Articles IX or XI or this Article XII, or any provisions thereof.
ARTICLE XIII
Subject to Article XII above, the Company reserves the right to amend,
alter, change or repeal any provision contained in this Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred on stockholders herein are granted subject to this reservation.
* * *
29
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
ACTIVE POWER, INC.,
a Delaware corporation
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I. Offices....................................................... 1
Section 1.1 Registered Office................................... 1
Section 1.2 Other Offices....................................... 1
ARTICLE II. Corporate Seal............................................... 1
ARTICLE III. Stockholders' Meetings...................................... 1
Section 3.1 Place of Meetings................................... 1
Section 3.2 Annual Meeting...................................... 2
Section 3.3 Special Meetings.................................... 4
Section 3.4 Notice of Meetings.................................. 4
Section 3.5 Quorum.............................................. 4
Section 3.6 Adjournment and Notice of Adjourned Meetings........ 5
Section 3.7 Voting Rights....................................... 5
Section 3.8 Joint Owners of Stock............................... 5
Section 3.9 List of Stockholders................................ 6
Section 3.10 No Action Without Meeting........................... 6
Section 3.11 Organization........................................ 6
ARTICLE IV. Directors.................................................... 7
Section 4.1 Number and Term of Office; Classification........... 7
Section 4.2 Powers.............................................. 7
Section 4.3 Vacancies........................................... 7
Section 4.4 Resignation......................................... 8
Section 4.5 Removal............................................. 8
Section 4.6 Meetings............................................ 8
Section 4.7 Quorum and Voting................................... 9
Section 4.8 Action Without Meeting.............................. 9
Section 4.9 Fees and Compensation............................... 9
Section 4.10 Committees.......................................... 10
ARTICLE V. Officers...................................................... 11
Section 5.1 Officers Designated................................. 11
Section 5.2 Tenure and Duties of Officers....................... 11
Section 5.3 Delegation of Authority............................. 14
Section 5.4 Resignations........................................ 14
Section 5.5 Removal............................................. 14
ARTICLE VI. Execution of Corporate Instruments and Voting of Securities
Owned by the Corporation................................................ 14
Section 6.1 Execution of Corporate Instruments.................. 14
Section 6.2 Voting of Securities Owned by the Corporation....... 15
</TABLE>
ii
<PAGE>
ARTICLE VII. Shares of Stock............................................. 15
Section 7.1 Form and Execution of Certificates.................. 15
Section 7.2 Lost Certificates................................... 16
Section 7.3 Transfers........................................... 16
Section 7.4 Fixing Record Dates................................. 16
Section 7.5 Registered Stockholders............................. 17
ARTICLE VIII. Other Securities of the Corporation........................ 17
Section 8.1 Execution of Other Securities....................... 17
ARTICLE IX. Dividends.................................................... 18
Section 9.1 Declaration of Dividends............................ 18
Section 9.2 Dividend Reserve.................................... 18
ARTICLE X. Fiscal Year................................................... 18
ARTICLE XI. Indemnification of Directors, Officers, Employees and Other
Agents.................................................................. 18
Section 11.1 Directors and Executive Officers.................... 18
Section 11.2 Other Officers, Employees and Other Agents.......... 19
Section 11.3 Good Faith.......................................... 19
Section 11.4 Expenses............................................ 19
Section 11.5 Enforcement......................................... 20
Section 11.6 Non-Exclusivity of Rights........................... 20
Section 11.7 Survival of Rights.................................. 20
Section 11.8 Insurance........................................... 20
Section 11.9 Amendments.......................................... 21
Section 11.10 Savings Clause...................................... 21
Section 11.11 Certain Definitions................................. 21
ARTICLE XII. Notices..................................................... 22
Section 12.1 Notice to Stockholders.............................. 22
Section 12.2 Notice to Directors................................. 22
Section 12.3 Address Unknown..................................... 22
Section 12.4 Affidavit of Mailing................................ 22
Section 12.5 Time Notices Deemed Given........................... 22
Section 12.6 Failure to Receive Notice........................... 22
Section 12.7 Notice to Person with Whom Communication Is Unlawful 22
Section 12.8 Notice to Person with Undeliverable Address......... 23
ARTICLE XIII. Amendments................................................. 23
Section 13.1 Amendments.......................................... 23
Section 13.2 Application of Bylaws............................... 23
iii
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
ACTIVE POWER, INC.,
a Delaware corporation
- --------------------------------------------------------------------------------
ARTICLE I.
OFFICES
-------
Section 1.1 Registered Office. The registered office of the corporation
-----------------
shall be the registered office named in the certificate of incorporation of the
corporation, or such other office as may be designated from time to time by the
Board of Directors in the manner provided by law.
Section 1.2 Other Offices. The corporation may have offices at such
-------------
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the corporation may
require. The books of the corporation may be kept (subject to any provision
contained in the Delaware General Corporation Law) outside the State of Delaware
at such place or places as may be designated from time to time by the Board of
Directors or in these Bylaws.
ARTICLE II.
CORPORATE SEAL
--------------
The corporate seal shall consist of a die bearing the name of the
corporation. Said seal may be used by causing it, or a facsimile thereof, to be
impressed, affixed or reproduced.
ARTICLE III.
STOCKHOLDERS' MEETINGS
----------------------
Section 3.1 Place of Meetings. Meetings of the stockholders of the
-----------------
corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the principal executive offices of the
corporation.
<PAGE>
Section 3.2 Annual Meeting.
--------------
(a) The annual meeting of the stockholders of the corporation, for
the purpose of election of Directors and for such other business as may lawfully
come before it, shall be held on such date and at such time as may be designated
from time to time by the Board of Directors.
(b) At an annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (A) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors; (B) otherwise properly brought before the meeting by
or at the direction of the Board of Directors; or (C) otherwise properly brought
before the meeting by a stockholder. For business to be properly brought before
an annual meeting by a stockholder, the stockholder must have given timely
notice thereof in writing to the Secretary of the corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received by the
Secretary of the corporation not later than the close of business on the one
hundred twentieth (120th) day prior to the first anniversary of the date of the
proxy statement delivered to stockholders in connection with the preceding
year's annual meeting; provided, however, that if either (i) the date of the
annual meeting is advanced more than thirty (30) days or delayed (other than as
a result of adjournment) more than sixty (60) days from such an anniversary date
or (ii) no proxy statement was delivered to stockholders in connection with the
preceding year's annual meeting, notice by the stockholder to be timely must be
so delivered not earlier than the close of business on the ninetieth (90th) day
prior to such annual meeting and not later than the close of business on the
later of the sixtieth (60th) day prior to such annual meeting or the close of
business on the tenth (10th) day following the day on which public announcement
of the date of such meeting is first made by the corporation. To be in proper
form, a stockholder's notice to the Secretary shall set forth as to each matter
the stockholder proposes to bring before the annual meeting:
(i) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business
at the annual meeting;
(ii) a representation that the stockholder is a holder of
record of stock of the corporation entitled to vote at such meeting
and, if applicable, intends to appear in person or by proxy at the
meeting to nominate the person or persons specified in the notice or
introduce the business specified in the notice;
(iii) the name and address, as they appear on the corporation's
books, of the stockholder proposing such business;
(iv) the class and number of shares of the corporation which
are beneficially owned by the stockholder;
(v) any material interest of the stockholder in such business;
and
(vi) any other information that is required to be provided by
the stockholder pursuant to Regulation 14A under the Securities
Exchange Act of
2
<PAGE>
1934, as amended (the "Exchange Act"), in such stockholder's capacity
as a proponent of a stockholder proposal.
The chairman of the meeting shall determine whether any business
proposed to be transacted by the stockholders has been properly brought before
the meeting and, if any proposed business has not been properly brought before
the meeting, the chairman shall declare that such proposed business shall not be
presented for stockholder action at the meeting. For purposes of this Section
3.2, "public announcement" shall mean disclosure in a press release reported by
the Dow Jones News Service, Associated Press or comparable national news service
or in a document publicly filed by the corporation with the Securities and
Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act.
Notwithstanding any provision in this Section 3.2 to the contrary, requests for
inclusion of proposals in the corporation's proxy statement made pursuant to
Rule 14a-8 under the Exchange Act shall be deemed to have been delivered in a
timely manner if delivered in accordance with such Rule. Notwithstanding
compliance with the requirements of this Section 3.2, the chairman presiding at
any meeting of the stockholders may, in his sole discretion, refuse to allow a
stockholder or stockholder representative to present any proposal which the
corporation would not be required to include in a proxy statement under any rule
promulgated by the Securities and Exchange Commission.
(c) Only persons who are nominated in accordance with the procedures
set forth in this paragraph shall be eligible for election as Directors.
Nominations of persons for election to the Board of Directors of the corporation
may be made at a meeting of stockholders by or at the direction of the Board of
Directors or by any stockholder of the corporation entitled to vote in the
election of Directors at the meeting who complies with the notice procedures set
forth in this paragraph. Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made pursuant to timely notice in
writing to the Secretary of the corporation in accordance with the provisions of
paragraph (b) of this Section 3.2. Such stockholder's notice shall set forth (i)
as to each person, if any, whom the stockholder proposes to nominate for
election or re-election as a Director: (A) the name, age, business address and
residence address of such person; (B) the principal occupation or employment of
such person; (C) the class and number of shares of the corporation which are
beneficially owned by such person; (D) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nominations are to
be made by the stockholder; and (E) any other information relating to such
person that is required to be disclosed in solicitations of proxies for election
of Directors, or is otherwise required in each case pursuant to Regulation 14A
under the 1934 Act (including without limitation such person's written consent
to being named in the proxy statement, if any, as a nominee and to serving as a
Director if elected); and (ii) as to such stockholder giving notice, the
information required to be provided pursuant to paragraph (b) of this Section
3.2. At the request of the Board of Directors, any person nominated by a
stockholder for election as a Director shall furnish to the Secretary of the
corporation that information required to be set forth in the stockholder's
notice of nomination which pertains to the nominee. No person shall be eligible
for election as a Director of the corporation unless nominated in accordance
with the procedures set forth in this paragraph. The chairman of the meeting
shall, if the facts warrant, determine and declare at the meeting that a
nomination was not made in accordance with the procedures prescribed by these
Bylaws, and if the chairman should so determine, the chairman shall so declare
at the meeting, and the defective nomination shall be disregarded.
3
<PAGE>
Section 3.3 Special Meetings.
-----------------
(a) Special meetings of the stockholders of the corporation may only be
called, for any purpose or purposes, by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of authorized Directors
(whether or not there exist any vacancies in previously authorized directorships
at the time any such resolution is presented to the Board of Directors for
adoption).
(b) No business may be transacted at such special meeting otherwise than
specified in the resolution calling for the meeting. The Board of Directors
shall determine the time and place of such special meeting, which shall be held
not less than thirty-five (35) nor more than one hundred twenty (120) days after
the date of the receipt of the request other than any actions effected prior to
the corporation's initial public offering of its capital stock pursuant to an
effective registration statement filed under the Securities Act of 1933, as
amended (the "Initial Public Offering"). Upon determination of the time and
place of the meeting, notice shall be given to the stockholders entitled to
vote, in accordance with the provisions of Section 3.4 of these Bylaws. If the
notice is not given within sixty (60) days after the receipt of the request, the
person or persons requesting the meeting may set the time and place of the
meeting and give the notice. Nothing contained in this paragraph (b) shall be
construed as limiting, fixing or affecting the time when a meeting of
stockholders may be held.
Section 3.4 Notice of Meetings. Except as otherwise provided by law or
-------------------
the certificate of incorporation of the corporation, as the same may be amended
or restated from time to time and including any certificates of designation
thereunder (hereinafter, the "Certificate of Incorporation"), and for actions
effected prior to an Initial Public Offering (for which no notice need be given)
written notice of each meeting of stockholders shall be given not less than ten
(10) nor more than sixty (60) days before the date of the meeting to each
stockholder entitled to vote at such meeting, such notice to specify the place,
date, time and purpose or purposes of the meeting. Notice of any meeting of
stockholders may be waived in writing, signed by the person entitled to notice
thereof, either before or after such meeting, and will be waived by any
stockholder by his attendance thereat in person or by proxy, except when the
stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Any stockholder so waiving notice of such
meeting shall be bound by the proceedings of any such meeting in all respects as
if due notice thereof had been given.
Section 3.5 Quorum. At all meetings of stockholders, except where
-------
otherwise provided by statute or by the Certificate of Incorporation, or by
these Bylaws, the presence, in person or by duly authorized proxy, of the
holders of a majority of the outstanding shares of stock entitled to vote shall
constitute a quorum for the transaction of business. In the absence of a quorum,
any meeting of stockholders may be adjourned, from time to time, either by the
chairman of the meeting or by vote of the holders of a majority of the shares
represented thereat, but no other business shall be transacted at such meeting.
The stockholders present at a duly called or convened meeting, at which a quorum
is present, may continue to transact business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum. Except as
otherwise provided by law, the Certificate of Incorporation or these Bylaws, all
actions taken by the holders of a majority of the votes cast, excluding
abstentions, at any
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meeting at which a quorum is present shall be valid and binding upon the
corporation; provided, however, that Directors shall be elected by a plurality
of the votes of the shares present in person or represented by proxy at the
meeting and entitled to vote on the election of Directors. Where a separate vote
by a class or classes is required, a majority of the outstanding shares of such
class or classes, present in person or represented by proxy, shall constitute a
quorum entitled to take action with respect to that vote on that matter and the
affirmative vote of the majority (plurality, in the case of the election of
Directors) of shares of such class or classes present in person or represented
by proxy at the meeting shall be the act of such class.
Section 3.6 Adjournment and Notice of Adjourned Meetings. Any meeting
--------------------------------------------
of stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the shares
casting votes, excluding abstentions. When a meeting is adjourned to another
time or place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken. At
the adjourned meeting, the corporation may transact any business which might
have been transacted at the original meeting. If the adjournment is for more
than thirty (30) days or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 3.7 Voting Rights. For the purpose of determining those
--------------
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the stock
records of the corporation on the record date, as provided in Section 7.5 of
these Bylaws, shall be entitled to vote at any meeting of stockholders. Every
person entitled to vote or execute consents shall have the right to do so either
in person or by an agent or agents authorized by a written proxy executed by
such person or his duly authorized agent, which proxy shall be filed with the
Secretary at or before the meeting at which it is to be used. An agent so
appointed need not be a stockholder. No proxy shall be voted after three (3)
years from its date of creation unless the proxy provides for a longer period.
Elections of Directors need not be by written ballot, unless otherwise provided
in the Certificate of Incorporation.
Section 3.8 Joint Owners of Stock. If shares or other securities having
----------------------
voting power stand of record in the names of two (2) or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, tenants
by the entirety, or otherwise, or if two (2) or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect: (a) if only
one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the
majority so voting binds all; or (c) if more than one (1) votes, but the vote is
evenly split on any particular matter, each faction may vote the securities in
question proportionally, or may apply to the Delaware Court of Chancery for
relief as provided in the Delaware General Corporation Law, Section 217(b). If
the instrument filed with the Secretary shows that any such tenancy is held in
unequal interests, a majority or even-split for the purpose of clause (c) shall
be a majority or even-split in interest.
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Section 3.9 List of Stockholders. The Secretary shall prepare and make,
--------------------
at least ten (10) days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at said meeting, arranged in alphabetical
order, showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not
specified, at the place where the meeting is to be held. The list shall be
produced and kept at the time and place of meeting during the whole time thereof
and may be inspected by any stockholder who is present.
Section 3.10 No Action Without Meeting. Effective upon the closing of
-------------------------
the corporation's Initial Public Offering, the stockholders of the corporation
may not take action by written consent without a meeting and must take any
actions at a duly called annual or special meeting.
Section 3.11 Organization.
-------------
(a) At every meeting of stockholders, unless another officer of the
corporation has been appointed by the Board of Directors, the Chairman of the
Board of Directors, or, if a Chairman has not been appointed, is absent, or
designates the next senior officer present to so act, the President, or, if the
President is absent, the most senior Vice President present, or, in the absence
of any such officer, a chairman of the meeting chosen by a majority in interest
of the stockholders entitled to vote, present in person or by proxy, shall act
as chairman. The Secretary, or, in his absence, an Assistant Secretary directed
to do so by the President, shall act as secretary of the meeting.
(b) The Board of Directors of the corporation shall be entitled to make
such rules or regulations for the conduct of meetings of stockholders as it
shall deem necessary, appropriate or convenient. Subject to such rules and
regulations of the Board of Directors, if any, the chairman of the meeting shall
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts as, in the judgment of such chairman, are necessary,
appropriate or convenient for the proper conduct of the meeting, including,
without limitation, establishing an agenda or order of business for the meeting,
rules and procedures for maintaining order at the meeting and the safety of
those present, limitations on participation in such meeting to stockholders of
record of the corporation and their duly authorized and constituted proxies and
such other persons as the chairman shall permit, restrictions on entry to the
meeting after the time fixed for the commencement thereof, limitations on the
time allotted to questions or comments by participants and regulation of the
opening and closing of the polls for balloting on matters which are to be voted
on by ballot. Unless and to the extent determined by the Board of Directors or
the chairman of the meeting, meetings of stockholders shall not be required to
be held in accordance with rules of parliamentary procedure.
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ARTICLE IV.
DIRECTORS
---------
Section 4.1 Number and Term of Office; Classification.
------------------------------------------
(a) The number of directors which shall constitute the whole Board of
Directors shall be determined from time to time by the Board of Directors
(provided that no decrease in the number of directors which would have the
effect of shortening the term of an incumbent director may be made by the Board
of Directors), provided that the number of directors shall be not less than one
(1). At each annual meeting of stockholders, Directors of the corporation shall
be elected to hold office until the expiration of the term for which they are
elected, and until their successors have been duly elected and qualified or
until such Director's earlier death, resignation or due removal; except that if
any such election shall not be so held, such election shall take place at a
stockholders' meeting called and held in accordance with the Delaware General
Corporation Law. Directors need not be stockholders unless so required by the
Certificate of Incorporation. If, for any reason, the Directors shall not have
been elected at an annual meeting, they may be elected as soon thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in these Bylaws.
(b) Effective immediately following the closing of the Initial Public
Offering, the Directors of the corporation shall be divided into three classes
as nearly equal in size as is practicable, hereby designated Class I, Class II
and Class III. The initial Class I, Class II and Class III directors shall be
those directors designated and elected by resolution of the Board of Directors
or stockholders prior to the Initial Public Offering. The term of office of the
initial Class I directors shall expire at the first annual meeting of
stockholders following the closing of the Initial Public Offering (the "First
Public Company Annual Meeting"); the term of office of the initial Class II
directors shall expire at the next succeeding annual meeting of stockholders;
and the term of office of the initial Class III directors shall expire at the
second succeeding annual meeting of stockholders. At each annual meeting of
stockholders following the First Public Company Annual Meeting, Directors to
replace those of the Class whose terms expire at such annual meeting shall be
elected to hold office until the third succeeding annual meeting and until their
respective successors shall have been duly elected and qualified. If the number
of directors is hereafter changed, any newly created directorships or decrease
in directorships shall be so apportioned among the classes as to make all
classes as nearly equal in number as is practicable.
Section 4.2 Powers. The powers of the corporation shall be exercised,
------
its business conducted and its property controlled by the Board of Directors,
except as may be otherwise provided by statute or by the Certificate of
Incorporation.
Section 4.3 Vacancies. Vacancies occurring on the Board of Directors
---------
may be filled by vote of a majority of the remaining members of the Board of
Directors, although less than a quorum. Each Director so elected shall hold
office for the unexpired portion of the term of the Director or newly created
directorship whose place shall be vacant and until his or her successor shall
have been duly elected and qualified or until such Director's earlier death,
resignation or due removal. A vacancy in the Board of Directors shall be deemed
to exist under
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this Section 4.3 in the case of (i) the death, removal or resignation of any
Director; (ii) an increase in the authorized number of Directors pursuant to
Section 4.1(a) above; or (iii) if the stockholders fail at any meeting of
stockholders at which Directors are to be elected (including any meeting
referred to in Section 4.6 below) to elect the number of Directors then
constituting the whole Board of Directors.
Section 4.4 Resignation. Any Director may resign at any time by
-----------
delivering his or her written resignation to the Secretary, such resignation to
specify whether it will be effective at a particular time, upon receipt by the
Secretary or at the pleasure of the Board of Directors. If no such specification
is made, it shall be deemed effective at the pleasure of the Board of Directors.
When one or more Directors shall resign from the Board of Directors, effective
at a future date, a majority of the Directors then in office, including those
who have so resigned, shall have power to fill such vacancy or vacancies, the
vote thereon to take effect when such resignation or resignations shall become
effective, and each Director so chosen shall hold office for the unexpired
portion of the term of the Director whose place shall be vacated and until his
successor shall have been duly elected and qualified.
Section 4.5 Removal. At a special meeting of stockholders called for
-------
such purpose and in the manner provided herein, subject to any limitations
imposed by law or the Certificate of Incorporation, the Board of Directors, or
any individual Director, may only be removed from office for cause, and a new
Director or Directors shall be elected by a vote of stockholders holding a
majority of the outstanding shares entitled to vote at an election of Directors.
Section 4.6 Meetings.
--------
(a) Annual Meetings. Unless the Board shall determine otherwise, the
----------------
annual meeting of the Board of Directors shall be held immediately before or
after the annual meeting of stockholders and at the place where such meeting is
held. No notice of an annual meeting of the Board of Directors shall be
necessary and such meeting shall be held for the purpose of electing officers
and transacting such other business as may lawfully come before it.
(b) Regular Meetings. Except as hereinafter otherwise provided, regular
-----------------
meetings of the Board of Directors shall be held in the principal executive
offices of the corporation. Unless otherwise restricted by the Certificate of
Incorporation, regular meetings of the Board of Directors may also be held at
any place within or without the State of Delaware which has been designated by
resolution of the Board of Directors or the written consent of all directors.
(c) Special Meetings. Unless otherwise restricted by the Certificate of
----------------
Incorporation, and subject to the notice requirements contained herein, special
meetings of the Board of Directors may be held at any time and place within or
without the State of Delaware whenever called by the Chairman of the Board, the
President or any two of the Directors.
(d) Telephone Meetings. Any member of the Board of Directors, or of any
------------------
committee thereof, may participate in a meeting by means of conference telephone
or similar communications equipment by means of which all persons participating
in the meeting can hear
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each other, and participation in a meeting by such means shall constitute
presence in person at such meeting.
(e) Notice of Meetings. Written notice of the time and place of all
-------------------
special meetings of the Board of Directors shall be given at least one (1) day
before the date of the meeting. Such notice need not state the purpose or
purposes of such meeting, except as may otherwise be required by law or provided
for in the Certificate of Incorporation or these Bylaws. Notice of any meeting
may be waived in writing at any time before or after the meeting and will be
deemed waived by any Director by attendance thereat, except when the Director
attends the meeting solely for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened.
(f) Waiver of Notice. The transaction of all business at any meeting of
-----------------
the Board of Directors, or any committee thereof, however called or noticed, or
wherever held, shall be as valid as though had at a meeting duly held after
regular call and notice, if a quorum be present and if, either before or after
such meeting, each of the Directors not present shall sign a written waiver of
notice, or a consent to holding such meeting, or an approval of the minutes
thereof. All such waivers, consents or approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.
Section 4.7 Quorum and Voting.
------------------
(a) Unless the Certificate of Incorporation requires a greater number
and except with respect to indemnification questions arising under Article XI
hereof, for which a quorum shall be one-third of the exact number of Directors
fixed from time to time in accordance with Section 4.1 hereof, but not less than
one (1), a quorum of the Board of Directors shall consist of a majority of the
exact number of directors fixed from time to time in accordance with Section 4.1
of these Bylaws, but not less than one (1); provided, however, at any meeting
whether a quorum be present or otherwise, a majority of the Directors present
may adjourn from time to time until the time fixed for the next regular meeting
of the Board of Directors, without notice other than by announcement at the
meeting.
(b) At each meeting of the Board of Directors at which a quorum is
present, all questions and business shall be determined by a vote of the
majority of the Directors present, unless a different vote is required by law,
the Certificate of Incorporation or these Bylaws.
Section 4.8 Action Without Meeting. Unless otherwise restricted by the
----------------------
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and such writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
Section 4.9 Fees and Compensation. Directors shall be entitled to such
----------------------
compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any
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<PAGE>
meeting of a committee of the Board of Directors. Nothing herein contained shall
be construed to preclude any Director from serving the corporation in any other
capacity as an officer, agent, employee, or otherwise and receiving compensation
therefor.
Section 4.10 Committees.
-----------
(a) Executive Committee. The Board of Directors may by resolution
--------------------
passed by a majority of the whole Board of Directors appoint an Executive
Committee to consist of one (1) or more members of the Board of Directors. The
Executive Committee, to the extent permitted by law and specifically granted by
the Board of Directors, shall have, and may exercise when the Board of Directors
is not in session, all powers of the Board of Directors in the management of the
business and affairs of the corporation except such committee shall not have the
power or authority to amend the Certificate of Incorporation, to adopt an
agreement of merger or consolidation, to recommend to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, to recommend to the stockholders of the corporation a dissolution of the
corporation or a revocation of a dissolution, or to amend these Bylaws.
(b) Other Committees. The Board of Directors may, by resolution passed
-----------------
by a majority of the whole Board of Directors, from time to time appoint such
other committees as may be permitted by law. Such other committees appointed by
the Board of Directors shall consist of one (1) or more members of the Board of
Directors and shall have such powers and perform such duties as may be
prescribed by the resolution or resolutions creating such committees, but in no
event shall any such committee have the powers denied to the Executive Committee
in these Bylaws.
(c) Term. Each member of a committee of the Board of Directors shall
-----
serve a term on the committee coexistent with such member's term on the Board of
Directors. The Board of Directors, subject to the provisions of paragraphs (a)
and (b) of this Section 4.10 may at any time increase or decrease the number of
members of a committee or terminate the existence of a committee. The membership
of a committee member shall terminate on the date of his or her death or
voluntary resignation from the committee or from the Board of Directors. The
Board of Directors may at any time for any reason remove any individual
committee member and the Board of Directors may fill any committee vacancy
created by death, resignation, removal or increase in the number of members of
the committee. The Board of Directors may designate one or more Directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee, and, in addition, in the absence or
disqualification of any member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member.
(d) Meetings. Unless the Board of Directors shall otherwise provide,
---------
regular meetings of the Executive Committee or any other committee appointed
pursuant to this Section 4.10 shall be held at such times and places as are
determined by the Board of Directors, or by any such committee, and when notice
thereof has been given to each member of such committee, no further notice of
such regular meetings need be given thereafter. Special meetings
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<PAGE>
of any such committee may be held at any place which has been determined from
time to time by such committee, and may be called by any Director who is a
member of such committee, upon written notice to the members of such committee
of the time and place of such special meeting given in the manner provided for
the giving of written notice to members of the Board of Directors of the time
and place of special meetings of the Board of Directors. Notice of any special
meeting of any committee may be waived in writing at any time before or after
the meeting and will be waived by any Director by attendance thereat, except
when the Director attends such special meeting solely for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. A majority of the
authorized number of members of any such committee shall constitute a quorum for
the transaction of business, and the act of a majority of those present at any
meeting at which a quorum is present shall be the act of such committee.
(e) Organization. The Chairman of the Board shall preside at every
-------------
meeting of the Board of Directors, if present. In the case of any meeting, if
there is no Chairman of the Board or if the Chairman is not present, the Vice
Chairman (if there be one) shall preside, or if there be no Vice Chairman or if
the Vice Chairman is not present, a chairman chosen by a majority of the
Directors present shall act as chairman of such meeting. The Secretary of the
corporation or, in the absence of the Secretary, any person appointed by the
Chairman shall act as secretary of the meeting.
ARTICLE V.
OFFICERS
--------
Section 5.1 Officers Designated. The officers of the corporation shall
--------------------
include a President and a Secretary, and, if and when designated by the Board of
Directors, a Chairman of the Board of Directors, one or more executive and non-
executive Vice Presidents (any one or more of which executive Vice Presidents
may be designated as Executive Vice President or Senior Vice President or a
similar title), and a Treasurer. The Board of Directors also may, at its
discretion, create additional officers and assign such duties to those offices
as it may deem appropriate from time to time, which offices may include a Vice
Chairman of the Board of Directors, a Chief Executive Officer, a Chief Operating
Officer, a Chief Financial Officer, one or more Assistant Secretaries and
Assistant Treasurers, and one or more other officers which may be created at the
discretion of the Board of Directors. Any one person may hold any number of
offices of the corporation at any one time unless specifically prohibited
therefrom by law. The salaries and other compensation of the officers of the
corporation shall be fixed by or in the manner designated by the Board of
Directors.
Section 5.2 Tenure and Duties of Officers.
------------------------------
(a) General. All officers shall hold office at the pleasure of the
--------
Board of Directors and until their successors shall have been duly elected and
qualified, unless sooner removed. Any officer elected or appointed by the Board
of Directors may be removed at any time by the Board of Directors. If the office
of any officer becomes vacant for any reason, the
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<PAGE>
vacancy may be filled by the Board of Directors. Except for the Chairman of the
Board and the Vice Chairman of the Board, no officer need be a director.
(b) Duties of Chairman of the Board of Directors. The Chairman of the
---------------------------------------------
Board of Directors, when present, shall preside at all meetings of the Board of
Directors and, unless the Chairman has designated the next senior officer to so
preside, at all meetings of the stockholders. The Chairman of the Board of
Directors shall perform other duties commonly incident to such office and shall
also perform such other duties and have such other powers as the Board of
Directors shall designate from time to time.
(c) Powers and Duties of the Vice Chairman of the Board. The Board of
----------------------------------------------------
Directors may but is not required to assign areas of responsibility to a Vice
Chairman of the Board, and, in such event, and subject to the overall direction
of the Chairman of the Board and the Board of Directors, the Vice Chairman of
the Board shall be responsible for supervising the management of the affairs of
the corporation and its subsidiaries within the area or areas assigned and shall
monitor and review on behalf of the Board of Directors all functions within such
corresponding area or areas of the corporation and each such subsidiary of the
corporation. In the absence of the President, or in the event of the President's
inability or refusal to act, the Vice Chairman of the Board shall perform 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. Further, the Vice Chairman
of the Board shall have such other powers and duties as designated in accordance
with these Bylaws and as from time to time may be assigned to the Vice Chairman
of the Board by the Board of Directors or the Chairman of the Board.
(d) Duties of President. Unless the Board of Directors otherwise
--------------------
determines (including by election of Chief Executive Officer) and subject to the
provisions of paragraph (e) below, the President shall be the chief executive
and chief operating officer of the corporation. Unless the Board of Directors
otherwise determines, he shall, in the absence of the Chairman of the Board or
Vice Chairman of the Board or if there be no Chairman of the Board or Vice
Chairman of the Board, preside at all meetings of the stockholders and (should
he be a director) of the Board of Directors. The President shall have such other
powers and duties as designated in accordance with these Bylaws and as from time
to time may be assigned to him by the Board of Directors.
(e) Duties of the Chief Executive and Chief Operating Officers. Subject
-----------------------------------------------------------
to the control of the Board of Directors, the chief executive officer shall have
general executive charge, management and control, of the properties, business
and operations of the corporation with all such powers as may be reasonably
incident to such responsibilities; and subject to the control of the chief
executive officer, the chief operating officer shall have general operating
charge, management and control, of the properties, business and operations of
the corporation with all such powers as may be reasonably incident to such
responsibilities.
(f) Duties of Vice Presidents. Vice Presidents, by virtue of their
--------------------------
appointment as such, shall not necessarily be deemed to be executive officers of
the corporation, such status as an executive officer only being conferred if and
to the extent such Vice President is placed in charge of a principal business
unit, division or function (e.g., sales, administration or finance) or performs
a policy-making function for the corporation (within the meaning of Section 16
of the
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<PAGE>
1934 Act and the rules and regulations promulgated thereunder). Each executive
Vice President shall at all times possess, and upon the authority of the
President or the chief executive officer any non-executive Vice President shall
from time to time possess, power to sign all certificates, contracts and other
instruments of the corporation, except as otherwise limited pursuant to Article
VI hereof or by the Chairman of the Board, the President, chief executive
officer or the Vice Chairman of the Board. The Vice Presidents shall perform
other duties commonly incident to their office and shall also perform such other
duties and have such other powers as the Board of Directors or the President
shall designate from time to time.
(g) Duties of Secretary. The Secretary shall keep the minutes of all
--------------------
meetings of the Board of Directors, committees of the Board of Directors and the
stockholders, in books provided for that purpose; shall attend to the giving and
serving of all notices; may in the name of the corporation affix the seal of the
corporation to all contracts and attest the affixation of the seal of the
corporation thereto; may sign with the other appointed officers all certificates
for shares of capital stock of the corporation; and shall have charge of the
certificate books, transfer books and stock ledgers, and such other books and
papers as the Board of Directors may direct, all of which shall at all
reasonable times be open to inspection of any director upon application at the
office of the corporation during business hours. The Secretary shall perform all
other duties given in these Bylaws and other duties commonly incident to such
office and shall also perform such other duties and have such other powers as
the Board of Directors shall designate from time to time. The chief executive
officer may direct any Assistant Secretary to assume and perform the duties of
the Secretary in the absence or disability of the Secretary, and each Assistant
Secretary shall perform other duties commonly incident to such office and shall
also perform such other duties and have such other powers as the Board of
Directors or the chief executive officer, shall designate from time to time.
(h) Assistant Secretaries. Each Assistant Secretary shall have the
----------------------
usual powers and duties pertaining to such offices, together with such other
powers and duties as designated in these Bylaws and as from time to time may be
assigned to an Assistant Secretary by the Board of Directors, the Chairman of
the Board, the President, the Vice Chairman of the Board, or the Secretary. The
Assistant Secretaries shall exercise the powers of the Secretary during that
officer's absence or inability or refusal to act.
(i) Duties of Treasurer.
--------------------
(i) The Treasurer shall keep or cause to be kept the books of
account of the corporation in a thorough and proper manner and shall render
statements of the financial affairs of the corporation in such form and as often
as required by the Board of Directors, the Chairman of the Board, the Vice
Chairman of the Board, chief executive officer, if one be designated, or the
Chief Financial Officer. The Treasurer, subject to the order of the Board of
Directors, shall have the custody of all funds and securities of the
corporation. The Treasurer shall perform other duties commonly incident to such
office and shall also perform such other duties and have such other powers as
the Board of Directors, the Chairman of the Board, the Vice Chairman of the
Board or the President shall designate from time to time.
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(ii) In absence of a designated Chief Financial Officer, unless
otherwise determined by the Board of Directors or chief executive officer, the
Treasurer shall serve as the chief financial officer subject to control of the
chief executive officer.
(iii) The Chief Financial Officer, if any be designated, may, but
need not serve as the Treasurer.
(j) Assistant Treasurers. Each Assistant Treasurer shall have the usual
---------------------
powers and duties pertaining to such office, together with such other powers and
duties as designated in these Bylaws and as from time to time may be assigned to
each Assistant Treasurer by the Board of Directors, the Chairman of the Board,
the President, the Vice Chairman of the Board, or the Treasurer. The Assistant
Treasurers shall exercise the powers of the Treasurer during that officer's
absence or inability or refusal to act.
Section 5.3 Delegation of Authority. For any reason that the Board of
------------------------
Directors may deem sufficient, the Board of Directors may, except where
otherwise provided by statute, delegate the powers or duties of any officer to
any other person, and may authorize any officer to delegate specified duties of
such office to any other person. Any such delegation or authorization by the
Board shall be effected from time to time by resolution of the Board of
Directors.
Section 5.4 Resignations. Any officer may resign at any time by giving
-------------
written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer.
Section 5.5 Removal. Any officer may be removed from office at any
--------
time, either with or without cause, by the vote or written consent of a majority
of the Directors in office at the time, or by any committee or superior officers
upon whom such power of removal may have been conferred by the Board of
Directors.
ARTICLE VI.
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING
---------------------------------------------
OF SECURITIES OWNED BY THE CORPORATION
--------------------------------------
Section 6.1 Execution of Corporate Instruments. The Board of Directors
----------------------------------
may, in its discretion, determine the method and designate the signatory officer
or officers, or other person or persons, to execute on behalf of the corporation
any corporate instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into contracts on behalf of
the corporation, except where otherwise provided by law or these Bylaws, and
such execution or signature shall be binding upon the corporation.
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Unless otherwise specifically determined by the Board of Directors or
otherwise required by law, promissory notes, deeds of trust, mortgages and other
evidences of indebtedness of the corporation, and other corporate instruments or
documents requiring the corporate seal, and certificates of shares of stock
owned by the corporation, shall be executed, signed or endorsed by the Chairman
of the Board of Directors, the President, Chief Executive Officer or any
executive Vice President and if any be designated, Chief Financial Officer,
Treasurer, Assistant Secretary or Assistant Treasurer, and upon the authority
conferred by the Board of Directors, President or Chief Executive Officer, any
non-executive Vice President, and by the Secretary. All other instruments and
documents requiring the corporate signature, but not requiring the corporate
seal, may be executed as aforesaid or in such other manner as may be directed by
the Board of Directors.
All checks and drafts drawn on banks or other depositaries on funds to the
credit of the corporation or in special accounts of the corporation shall be
signed by such person or persons as the Board of Directors shall authorize so to
do.
Unless authorized or ratified by the Board of Directors or 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.
Section 6.2 Voting of Securities Owned by the Corporation. All stock
---------------------------------------------
and other securities of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such authorization,
by the Chairman or Vice Chairman of the Board of Directors, Chief Executive
Officer, the President, or any executive Vice President.
ARTICLE VII.
SHARES OF STOCK
---------------
Section 7.1 Form and Execution of Certificates. Certificates for the
-----------------------------------
shares of stock of the corporation shall be in such form as is consistent with
the Certificate of Incorporation and applicable law. Every holder of stock in
the corporation shall be entitled to have a certificate signed by or in the name
of the corporation by the Chairman or Vice Chairman of the Board of Directors,
the Chief Executive Officer, the President or any executive Vice President and
by the Secretary or an Assistant Secretary or the Treasurer or an Assistant
Treasurer, certifying the number of shares and the class or series owned by him
in the corporation. Where such certificate is countersigned by a transfer agent
other than the corporation or its employee, or by a registrar other than the
corporation or its employee, any other signature on the certificate may be a
facsimile. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may
15
<PAGE>
be issued with the same effect as if he were such officer, transfer agent, or
registrar at the date of issue.
Section 7.2 Lost Certificates. A new certificate or certificates shall
------------------
be issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require or to
give the corporation a surety bond in such form and amount as it may direct as
indemnity against any claim that may be made against the corporation with
respect to the certificate alleged to have been lost, stolen or destroyed.
Section 7.3 Transfers.
----------
(a) Transfers of record of shares of stock of the corporation shall be
made only on its books by the holders thereof, in person or by attorney duly
authorized and upon the surrender of a properly endorsed certificate or
certificates for a like number of shares. Upon surrender to the corporation or a
transfer agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books. The Board of Directors shall have the power and
authority to make all such other rules and regulations as they may deem
expedient concerning the issue, transfer and registration or the replacement of
certificates for shares of capital stock of the corporation.
(b) The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the Delaware General Corporation Law.
Section 7.4 Fixing Record Dates.
--------------------
(a) In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix, in advance, a record date,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, and which record date
shall not be more than sixty (60) nor less than ten (10) days before the date of
such meeting. If no record date is fixed by the Board of Directors, the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day next preceding the
day on which notice is given, or if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held. A determination
of stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
16
<PAGE>
(b) In order that the corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty (60)
days prior to such action. If no record date is fixed by the Board of Directors,
the record date for determining stockholders for any such purpose shall be at
the close of business on the day on which the Board of Directors adopts the
resolution relating thereto.
Section 7.5 Registered Stockholders. The corporation shall be entitled
------------------------
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and shall not
be bound to recognize any equitable or other claim to or interest in such share
or shares on the part of any other person whether or not it shall have express
or other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VIII.
OTHER SECURITIES OF THE CORPORATION
-----------------------------------
Section 8.1 Execution of Other Securities. All bonds, debentures and
------------------------------
other corporate ecurities of the corporation, other than stock certificates
(covered in Section 7.1), may be signed by the Chairman or Vice Chairman of the
Board of Directors, the Chief Executive Officer, the President or any executive
Vice President, or such other person as may be authorized by the Board of
Directors, and the corporate seal impressed thereon or a facsimile of such seal
imprinted thereon and attested by the signature of the Secretary or an Assistant
Secretary, or the Treasurer or an Assistant Treasurer; provided, however, that
where any such bond, debenture or other corporate security shall be
authenticated by the manual signature of a trustee under an indenture pursuant
to which such bond, debenture or other corporate security shall be issued, the
signatures of the persons signing and attesting the corporate seal on such bond,
debenture or other corporate security may be the imprinted facsimile of the
signatures of such persons. Interest coupons appertaining to any such bond,
debenture or other corporate security, authenticated by a trustee as aforesaid,
shall be signed by the Treasurer or an Assistant Treasurer of the corporation or
such other person as may be authorized by the Board of Directors, or bear
imprinted thereon the facsimile signature of such person. In case any officer
who shall have signed or attested any bond, debenture or other corporate
security, or whose facsimile signature shall appear thereon or on any such
interest coupon, shall have ceased to be such officer before any bond, debenture
or other corporate security so signed or attested shall have been delivered,
such bond, debenture or other corporate security nevertheless may be adopted by
the corporation and issued and delivered as though the person who signed the
same or whose facsimile signature shall have been used thereon had not ceased to
be such officer of the corporation.
17
<PAGE>
ARTICLE IX.
DIVIDENDS
---------
Section 9.1 Declaration of Dividends. Dividends upon the capital stock
-------------------------
of the corporation, subject to the provisions of the Certificate of
Incorporation, if any, may be declared by the Board of Directors pursuant to law
at any regular or special meeting. Dividends may be paid in cash, in property,
or in shares of the capital stock, subject to the provisions of the Certificate
of Incorporation.
Section 9.2 Dividend Reserve. Before payment of any dividend, there may
-----------------
be set aside out of any funds of the corporation available for dividends such
sum or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created.
ARTICLE X.
FISCAL YEAR
-----------
The fiscal year of the corporation shall end as of December 31st, unless
otherwise fixed by resolution of the Board of Directors.
ARTICLE XI.
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS
------------------------------------------------------------------
Section 11.1 Directors and Executive Officers. The corporation shall
---------------------------------
indemnify its Directors and executive officers to the fullest extent not
prohibited by the Delaware General Corporation Law; provided, however, that the
-------- -------
corporation may limit the extent of such indemnification by individual contracts
with its Directors and executive officers; and, provided, further, that the
-------- -------
corporation shall not be required to indemnify any Director or executive officer
in connection with any proceeding (or part thereof) initiated by such person or
any proceeding by such person against the corporation or its Directors,
officers, employees or other agents unless (i) such indemnification is expressly
required to be made by law, (ii) the proceeding was authorized by the Board of
Directors of the corporation, or (iii) such indemnification is provided by the
corporation, in its sole discretion, pursuant to the powers vested in the
corporation under the Delaware General Corporation Law.
18
<PAGE>
Section 11.2 Other Officers, Employees and Other Agents. The corporation
------------------------------------------
shall have power to indemnify its other officers, employees and other agents as
set forth in the Delaware General Corporation Law.
Section 11.3 Good Faith.
-----------
(a) For purposes of any determination under this Article XI, a Director
or executive officer shall be deemed to have acted in good faith and in a manner
such officer reasonably believed to be in or not opposed to the best interests
of the corporation, and, with respect to any criminal action or proceeding, to
have had no reasonable cause to believe that such officer's conduct was
unlawful, if such officer's action is based on information, opinions, reports
and statements, including financial statements and other financial data, in each
case prepared or presented by:
(i) one or more officers or employees of the corporation whom the
Director or executive officer believed to be reliable and
competent in the matters presented ;
(ii) counsel, independent accountants or other persons as to matters
which the Director or executive officer believed to be within such
person's professional competence; and
(iii) with respect to a Director, a committee of the Board upon which
such Director does not serve, as to matters within such
committee's designated authority, which committee the Director
believes to merit confidence; so long as, in each case, the
Director or executive officer acts without knowledge that would
cause such reliance to be unwarranted.
(b) The termination of any proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal proceeding, that
such person had reasonable cause to believe that his conduct was unlawful.
(c) The provisions of this Section 11.3 shall not be deemed to be
exclusive or to limit in any way the circumstances in which a person may be
deemed to have met the applicable standard of conduct set forth by the Delaware
General Corporation Law.
Section 11.4 Expenses. The corporation shall advance, prior to the final
---------
disposition of any proceeding, promptly following request therefor, all expenses
incurred by any Director or executive officer in connection with such proceeding
upon receipt of an undertaking by or on behalf of such person to repay said
amounts if it should be determined ultimately that such person is not entitled
to be indemnified under this Article XI or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to
Section 11.5 of this Article XI, no advance shall be made by the corporation if
a determination is reasonably and
19
<PAGE>
promptly made (i) by the Board of Directors by a majority vote of a quorum
consisting of Directors who were not parties to the proceeding, or (ii) if such
quorum is not obtainable, or, even if obtainable, a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, that
the facts known to the decision-making party at the time such determination is
made demonstrate clearly and convincingly that such person acted in bad faith or
in a manner that such person did not believe to be in or not opposed to the best
interests of the corporation.
Section 11.5 Enforcement. Without the necessity of entering into an
-----------
express contract, all rights to indemnification and advances to Directors and
executive officers under this Article XI shall be deemed to be contractual
rights and be effective to the same extent and as if provided for in a contract
between the corporation and the Director or executive officer. Any right to
indemnification or advances granted by this Article XI to a Director or
executive officer shall be enforceable by or on behalf of the person holding
such right in any court of competent jurisdiction if (i) the claim for
indemnification or advances is denied, in whole or in part, or (ii) no
disposition of such claim is made within ninety (90) days of request therefor.
The claimant in such enforcement action, if successful in whole or in part, also
shall be entitled to be paid the expense of prosecuting his 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
Delaware General Corporation Law for the corporation to indemnify the claimant
for the amount claimed. Neither the failure of the corporation (including its
Board of Directors, independent legal counsel or its stockholders) to have made
a determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because such person has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the corporation (including its Board of
Directors, independent legal counsel or its stockholders) that the claimant has
not met such applicable standard of conduct, shall be a defense to the action or
create a presumption that claimant has not met the applicable standard of
conduct.
Section 11.6 Non-Exclusivity of Rights. The rights conferred on any
--------------------------
person by this Article XI shall not be exclusive of any other right which such
person may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested Directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding office. The corporation is
specifically authorized to enter into individual contracts with any or all of
its Directors, officers, employees or agents respecting indemnification and
advances, to the fullest extent not prohibited by the Delaware General
Corporation Law.
Section 11.7 Survival of Rights. The rights conferred on any person by
-------------------
this Article XI shall continue as to a person who has ceased to be a Director,
officer, employee or other agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
Section 11.8 Insurance. To the fullest extent permitted by the Delaware
----------
General Corporation Law, the corporation, upon approval by the Board of
Directors, may purchase insurance on behalf of any person required or permitted
to be indemnified pursuant to this Article XI.
20
<PAGE>
Section 11.9 Amendments. Any repeal or modification of this Article XI
-----------
shall only be prospective and shall not affect the rights under this Article XI
in effect at the time of the alleged occurrence of any action or omission to act
that is the cause of any proceeding against any agent of the corporation.
Section 11.10 Savings Clause. If this Article XI or any portion hereof
---------------
shall be invalidated on any ground by any court of competent jurisdiction, then
the corporation shall nevertheless indemnify each Director and executive officer
to the full extent not prohibited by any applicable portion of this Article XI
that shall not have been invalidated, or by any other applicable law.
Section 11.11 Certain Definitions. For the purposes of this Article XI,
--------------------
the following definitions shall apply:
(a) The term "proceeding" shall be broadly construed and shall include,
without limitation, the investigation, preparation, prosecution, defense,
settlement, arbitration and appeal of, and the giving of testimony in, any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative.
(b) The term "expenses" shall be broadly construed and shall include,
without limitation, court costs, attorneys' fees, witness fees, fines, amounts
paid in settlement or judgment and any other costs and expenses of any nature or
kind incurred in connection with any proceeding.
(c) The term the "corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under the provisions
of this Article XI with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
(d) References to a "director," "officer," "employee," or "agent" of the
corporation shall include without limitation, situations where such person is
serving at the request of the corporation as a director, officer, employee,
trustee or agent of another corporation, partnership, joint venture, trust or
other enterprise.
(e) References to "other enterprises" shall include employee benefit
plans; references to "fines" shall include any excise taxes assessed on a person
with respect to an employee benefit plan; and references to "serving at the
request of the corporation" shall include any service as a director, officer,
employee or agent of the corporation which imposes duties on, or involves
services by, such director, officer, employee, or agent with respect to an
employee benefit plan, its participants, or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in the interest
of the participants and beneficiaries of an
21
<PAGE>
employee benefit plan shall be deemed to have acted in a manner "not opposed to
the best interests of the corporation" as referred to in this Article XI.
ARTICLE XII.
NOTICES
-------
Section 12.1 Notice to Stockholders. Unless the Certificate of
-----------------------
Incorporation requires otherwise, whenever, under any provisions of these
Bylaws, notice is required to be given to any stockholder, it shall be given in
writing, timely and duly deposited in the United States mail, postage prepaid,
and addressed to such stockholder's last known post office address as shown by
the stock record of the corporation or its transfer agent.
Section 12.2 Notice to Directors. Any notice required to be given to any
--------------------
Director may be given by the method stated in Section 12.1, or by facsimile,
telex or telegram, except that such notice other than one which is delivered
personally shall be sent to such address as such Director shall have filed in
writing with the Secretary, or, in the absence of such filing, to the last known
post office address of such Director. It shall not be necessary that the same
method of giving notice be employed in respect of all Directors, but one
permissible method may be employed in respect of any one or more, and any other
permissible method or methods may be employed in respect of any other or others.
Section 12.3 Address Unknown. If no address of a stockholder or Director
----------------
be known, notice may be sent to the principal executive officer of the
corporation.
Section 12.4 Affidavit of Mailing. An affidavit of mailing, executed by
---------------------
a duly authorized and competent employee of the corporation or its transfer
agent appointed with respect to the class of stock affected, specifying the name
and address or the names and addresses of the stockholder or stockholders, or
Director or Directors, to whom any such notice or notices was or were given, and
the time and method of giving the same, shall be conclusive evidence of the
statements therein contained.
Section 12.5 Time Notices Deemed Given. All notices given by mail, as
--------------------------
above provided, shall be deemed to have been given as at the time of mailing,
and all notices given by facsimile, telex or telegram shall be deemed to have
been given as of the sending time recorded at the time of transmission.
Section 12.6 Failure to Receive Notice. The period or limitation of time
--------------------------
within which any stockholder may exercise any option or right, or enjoy any
privilege or benefit, or be required to act, or within which any Director may
exercise any power or right, or enjoy any privilege, pursuant to any notice sent
such person in the manner above provided, shall not be affected or extended in
any manner by the failure of such stockholder or such Director to receive such
notice.
Section 12.7 Notice to Person with Whom Communication Is Unlawful.
-----------------------------------------------------
Whenever notice is required to be given, under any provision of law or of the
Certificate of
22
<PAGE>
Incorporation or Bylaws of the corporation, to any person with whom
communication is unlawful, the giving of such notice to such person shall not be
required and there shall be no duty to apply to any governmental authority or
agency for a license or permit to give such notice to such person. Any action or
meeting which shall be taken or held without notice to any such person with whom
communication is unlawful shall have the same force and effect as if such notice
had been duly given. In the event that the action taken by the corporation is
such as to require the filing of a certificate under any provision of the
Delaware General Corporation Law, the certificate shall state, if such is the
fact and if notice is required, that notice was given to all persons entitled to
receive notice except such persons with whom communication is unlawful.
Section 12.8 Notice to Person with Undeliverable Address. Whenever
--------------------------------------------
notice is required to be given, under any provision of law or the Certificate of
Incorporation or Bylaws of the corporation, to any stockholder to whom (i)
notice of two consecutive annual meetings, and all notices of meetings to such
person during the period between such two consecutive annual meetings, or (ii)
all, and at least two, payments (if sent by first class mail) of dividends or
interest on securities during a twelve-month period, have been mailed addressed
to such person at such person's address as shown on the records of the
corporation and have been returned undeliverable, the giving of such notice to
such person shall not be required. Any action or meeting which shall be taken or
held without notice to such person shall have the same force and effect as if
such notice had been duly given. If any such person shall deliver to the
corporation a written notice setting forth such person's then current address,
the requirement that notice be given to such person shall be reinstated. In the
event that the action taken by the corporation is such as to require the filing
of a certificate under any provision of the Delaware General Corporation Law,
the certificate need not state that notice was not given to persons to whom
notice was not required to be given pursuant to this paragraph.
ARTICLE XIII.
AMENDMENTS
----------
Section 13.1 Amendments. Except as otherwise provided in the Certificate
-----------
of Incorporation, these Bylaws may be altered, amended or repealed, or new
Bylaws may be adopted, by the holders of a majority of the outstanding voting
shares or by the Board of Directors, when such power is conferred upon the Board
of Directors by the Certificate of Incorporation, at any regular meeting of the
stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors if notice of such alteration,
amendment, repeal or adoption of new Bylaws be contained in the notice of such
special meeting. If the power to adopt, amend or repeal Bylaws is conferred upon
the Board of Directors by the Certificate of Incorporation, it shall not divest
or limit the power of the stockholders to adopt, amend or repeal Bylaws.
Section 13.2 Application of Bylaws. In the event that any provisions of
----------------------
these Bylaws is or may be in conflict with any law of the United States, of the
state of incorporation of the corporation or of any other governmental body or
power having jurisdiction over this corporation, or over the subject matter to
which such provision of these Bylaws applies, or may apply, such provision of
these Bylaws shall be inoperative to the extent only that the operation
23
<PAGE>
thereof unavoidably conflicts with such law, and shall in all other respects be
in full force and effect.
24
<PAGE>
EXHIBIT 4.2
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF REGISTRATION UNDER
SUCH ACT AND APPLICABLE LAWS, OR IN A TRANSACTION WHICH, IN THE OPINION OF
COUNSEL TO THE HOLDERS OF THIS WARRANT (WHICH COUNSEL SHALL BE SATISFACTORY TO
THE COMPANY), QUALIFIES AS AN EXEMPT TRANSACTION UNDER THE SECURITIES ACT AND
THE RULES PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION THEREUNDER.
THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT ARE SUBJECT TO
CERTAIN RESTRICTIONS CONTAINED IN AN INVESTORS' RIGHTS AGREEMENT, INCLUDING
MARKET STAND-OFF PROVISIONS AND A SHAREHOLDERS AGREEMENT, BOTH AS AMENDED,
COPIES OF WHICH ARE ON FILE AT THE OFFICE OF THE SECRETARY OF THE COMPANY.
No. - WC-001 - November 23, 1999
ACTIVE POWER, INC.
COMMON STOCK PURCHASE WARRANT
This certifies that, for value received, ECT MERCHANT INVESTMENTS
CORP. ("ECT"), or registered assigns (the "Holder"), during the term of this
--- ------
Warrant as set forth in Section 1, is entitled to purchase from ACTIVE POWER,
INC., a Texas corporation (the "Company"), for value received, up to SEVENTY-
-------
FIVE THOUSAND (75,000) Warrant Shares (as defined below), upon surrender hereof
at the principal office of the Company referred to below, with a duly executed
Notice of Exercise in the form attached, and simultaneous payment therefor in
lawful money of the United States, at the Exercise Price (as defined in Section
2 below). The number, character and Exercise Price of such Warrant Shares are
subject to adjustment as provided herein. The term "Warrant" as used herein
-------
shall include this Warrant, and any warrants delivered in substitution or
exchange therefor as provided herein.
"Warrant Shares" shall mean the Company's Common Stock, par value
---------------
$0.01 per share ("Common Stock").
------------
1. Term of Warrant. Subject to the terms and conditions set forth
---------------
herein, this Warrant shall be exercisable, in whole or in part, at any time or
from time to time before 5:00 p.m. Austin, Texas time, on the date (the
"Expiration Date") which is seven years after the date hereof. After the
---------------
Expiration Date this Warrant shall be void.
<PAGE>
2. Exercise Price. The purchase price per share for the Common Stock
--------------
purchased under this Warrant shall be TWENTY-TWO AND 68/100 DOLLARS ($22.68)
(the "Exercise Price"), subject to adjustment as provided under Section 12
--------------
hereof.
3. Exercise of Warrant.
-------------------
(a) Method of Exercise. The purchase rights represented by this
------------------
Warrant are exercisable by the Holder by delivery of a Notice of Exercise, the
form of which is attached hereto as Exhibit A, duly completed and executed on
---------
behalf of the Holder, at the office of the Company, and upon payment therewith
of the aggregate Exercise Price with respect to such Warrant Shares in cash or
by check payable to the Company.
(b) Other Matters. This Warrant shall be deemed to have been
-------------
exercised immediately prior to the close of business on the date of its
surrender for exercise as provided above, and the person entitled to receive the
Warrant Shares issuable upon such exercise shall be treated for all purposes as
the holder of record of such shares as of the close of business on such date. As
promptly as practicable on or after such date and in any event within ten (10)
days thereafter, the Company at its expense shall issue and deliver to the
person or persons entitled to receive the same a certificate or certificates for
the number of shares issued upon such exercise. In the event that this Warrant
is exercised in part, the Company at its expense will execute and deliver a new
Warrant of like tenor exercisable for the remaining number of shares for which
this Warrant may then be exercised.
4. No Fractional Shares or Scrip. No fractional shares or scrip
-----------------------------
representing fractional shares shall be issued upon the exercise of this
Warrant. In lieu of any fractional share to which the Holder would otherwise be
entitled, the Company shall make a cash payment equal to the Exercise Price
multiplied by such fraction.
5. Replacement of Warrant. On receipt of evidence reasonably
----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and substance to the Company
or, in the case of mutilation, on surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor and amount.
6. No Rights as Stockholders; Notices to Holders. Nothing contained in
---------------------------------------------
this Warrant or in any of the Warrants shall be construed as conferring upon the
Holders or their transferees the right to vote or to receive dividends or to
consent or to receive notice as shareholders in respect of any meeting of
shareholders for the election of directors of the Company or any other matter,
or any rights whatsoever as shareholders of the Company.
7. Transfer; Issuance of Stock Certificates; Restrictive Legends.
-------------------------------------------------------------
(a) Transfer. Subject to compliance with the restrictions on
--------
transfer set forth in this Section 7, each transfer of this Warrant and all
rights hereunder, in whole or in part, shall be registered on the books of the
Company to be maintained for such purpose, upon surrender of this Warrant to the
Company, together with a written assignment of this Warrant in
2
<PAGE>
the form of Exhibit B hereto duly executed by the Holder or its agent or
---------
attorney. Upon such surrender and delivery, the Company shall execute and
deliver a new Warrant or Warrants in the name of the assignee or assignees and
in the denominations specified in such instrument of assignment. A Warrant, if
properly assigned in compliance with the provisions hereof, may be exercised by
the new holder for the purchase of Warrant Shares without having a new Warrant
issued. Prior to presentment for registration or transfer thereof, the Company
may deem and treat the registered holder of this Warrant as the absolute owner
hereof (notwithstanding any notations of ownership or writing thereon made by
anyone other than a duly authorized officer of the Company) for all purposes and
shall not be affected by any notice to the contrary. All Warrants issued upon
assignment of Warrants shall be the valid obligations of the Company, evidencing
the same rights and entitled to the same benefits as the Warrants surrendered
upon such registration of transfer or exchange. Notwithstanding the foregoing,
the Holder hereof may not transfer this Warrant to any subsequent transferees
(other than to transferees who are affiliates of the Holder) unless the Holder
transfers all shares of Series E Preferred Stock or Common Stock or rights to
acquire shares of Common Stock then held by the Holder (including those held by
affiliates of the Holder).
(b) Stock Certificates. Certificates for the Warrant Shares shall
------------------
be delivered to the Holder within a reasonable time after the rights represented
by this Warrant shall have been exercised pursuant to Section 1, and a new
Warrant representing the shares of Common Stock, if any, with respect to which
this Warrant shall not then have been exercised shall also be issued to the
Holder within such time. The issuance of certificates for Warrant Shares upon
the exercise of this Warrant shall be made without charge to the Holder
including, without limitation, any documentary, stamp or similar tax that may be
payable in respect thereof; provided, however, that the Company shall not be
-------- --------
required to pay any income tax to which the holder hereof may be subject in
connection with the issuance of this Warrant or the Warrant Shares; and provided
------------
further, that if Warrant Shares are to be delivered in a name other than the
- -------
name of the Holder representing any Warrant being exercised, then no such
delivery shall be made unless the person requiring the same has paid to the
Company the amount of transfer taxes or charges incident thereto, if any.
(c) Restrictive Legends.
-------------------
(i) Except as otherwise provided in this Section 7, each
certificate for Warrant Shares initially issued upon the exercise of this
Warrant, and each certificate for Warrant Shares issued to any subsequent
transferee of any such certificate, shall be stamped or otherwise imprinted with
a legend in substantially the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAW. NO TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE SHALL
BE VALID OR EFFECTIVE UNLESS (A) SUCH TRANSFER IS MADE PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND IN COMPLIANCE WITH ANY
APPLICABLE STATE SECURITIES LAWS, OR (B) THE HOLDER SHALL DELIVER TO THE COMPANY
AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY ACCEPTABLE TO THE COMPANY
THAT SUCH PROPOSED TRANSFER IS EXEMPT FROM THE
3
<PAGE>
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND OF ANY APPLICABLE STATE
SECURITIES LAWS."
(ii) Except as otherwise provided in this Section 7, each
Warrant shall be stamped or otherwise imprinted with a legend in substantially
the following form:
"NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF REGISTRATION UNDER
SUCH ACT AND APPLICABLE LAWS, OR IN A TRANSACTION WHICH, IN THE OPINION OF
COUNSEL TO THE HOLDERS OF THIS WARRANT (WHICH COUNSEL SHALL BE SATISFACTORY TO
THE COMPANY), QUALIFIES AS AN EXEMPT TRANSACTION UNDER THE SECURITIES ACT AND
THE RULES PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION THEREUNDER."
(iii) Notwithstanding the foregoing, the legend
requirements of this Section 7 shall terminate as to any particular Warrant or
Warrant Share when the Company shall have received from the Holder an opinion of
counsel in form and substance reasonably acceptable to the Company that such
legend is not required in order to ensure compliance with the Securities Act.
Whenever the restrictions imposed by this Section 7 shall terminate, the Holder
hereof or of the Warrant Shares, as the case may be, shall be entitled to
receive from the Company without cost to Holder a new Warrant or certificate for
Warrant Shares of like tenor, as the case may be, without such restrictive
legend.
(d) Compliance with Securities Laws.
--------------------------------
(i) The Holder of this Warrant, by acceptance hereof,
acknowledges that this Warrant and the Warrant Shares to be issued upon exercise
hereof are being acquired solely for the Holder's own account for investment,
and that the Holder will not offer, sell or otherwise dispose of this Warrant or
any Warrant Shares to be issued upon exercise hereof or except under
circumstances that will not result in a violation of the Securities Act or any
state securities laws. Upon exercise of this Warrant, the Holder shall, if
requested by the Company, confirm in writing, by executing the form attached as
Schedule 1 to Exhibit A hereto, that the Warrant Shares so purchased are being
---------
acquired for investment, and not with a view toward distribution or resale in
violation of applicable securities laws.
(ii) In connection with the issuance of this Warrant, the Holder
specifically represents to the Company by acceptance of this Warrant as follows:
(A) The Holder has had an opportunity to discuss the
Company's business with the management of the Company, is aware of the Company's
business affairs and financial condition, has had access to the Company's books
and records, and has been afforded the opportunity to ask questions of and
receive answers from officers of the Company. The Holder has substantial
experience in evaluating the merits and risks of its investment in the
4
<PAGE>
Company. The Purchaser is an "accredited investor" within the meaning of Rule
501 of Regulation D of the Securities Act as presently in effect.
(B) The Holder understands that this Warrant has not been,
and upon exercise hereof the Warrant Shares will not be, registered under the
Securities Act in reliance upon a specific exemption therefrom, which exemption
depends upon, among other things, the bona fide nature of the Holder's
investment intent as expressed herein.
(C) The Holder further understands that this Warrant, and
upon exercise the Warrant Shares, must be held indefinitely unless subsequently
registered under the Securities Act and any applicable state securities laws, or
unless exemptions from registration are otherwise available.
8. Reservation of Stock. The Company covenants that during the term
--------------------
this Warrant is exercisable, the Company will reserve from its authorized and
unissued Common Stock a sufficient number of Warrant Shares to provide for the
issuance of Common Stock upon the exercise of this Warrant and, from time to
time, will take all steps necessary to amend its corporate charter, if
necessary, to provide sufficient reserves of Warrant Shares issuable upon
exercise of the Warrant. The Company further covenants that all Warrant Shares
that may be issued upon the exercise of this Warrant will be free from all
taxes, liens and charges except for restrictions on transfer and any taxes,
liens and charges imposed on the Holder unrelated to the Company's issuance of
Warrant Shares upon exercise of the Warrant.
9. Representations and Warranties. The Company represents and warrants
------------------------------
to the Holder as follows:
(a) Authorization. This Warrant has been duly authorized and
--------------
executed by the Company and is a valid and binding obligation of the Company
enforceable in accordance with its terms, subject to laws of general application
relating to bankruptcy, insolvency and the relief of debtors and the rules of
law or principles at equity governing specific performance, injunctive and other
equitable remedies;
(b) Reservation; Issuance. The Warrant Shares have been duly
---------------------
authorized and reserved for issuance by the Company and, when issued in
accordance with the terms hereof, will be validly issued, fully paid and
nonassessable;
(c) No Conflicts. The execution and delivery of this Warrant are
------------
not, and the issuance of the Warrant Shares upon exercise of this Warrant in
accordance with the terms hereof will not be, inconsistent with the Company's
charter or bylaws; do not and will not contravene any law, governmental rule or
regulation, judgment or order applicable to the Company; and do not and will not
conflict with or contravene any provision of, or constitute a default under, any
indenture, mortgage, contract or other instrument of which the Company is a
party or by which it is bound or require the consent or approval of, the giving
of notice to, the registration or filing with or the taking of any action in
respect of or by, any federal, state or local government authority or agency or
other person, except for the filing of notices pursuant to federal and state
securities laws, which filings will be effected by the time required thereby,
and
5
<PAGE>
the filing of any registration statements required to be filed by the Company
pursuant to any registration rights granted to Holder by the Company.
(d) No Litigation. There are no actions, suits, audits,
-------------
investigations or proceedings pending or, to the knowledge of the Company,
threatened against the Company in any court or before any governmental
commission, board or authority which, if adversely determined, will have a
material adverse effect on the ability of the Company to perform its obligations
under this Warrant.
10. Notices. All notices, requests and other communications with
-------
respect to the Warrants shall be in writing. Communications may be made by
telecopy or similar writing. Each communication shall be given to the Holder at
the address in the warrant register and the Company at its offices in Austin,
Texas, or at any other address as the party may specify for this purpose by
notice to the other party. Each communication shall be effective (1) if given by
telecopy, when the telecopy is transmitted to the proper address and the receipt
of the transmission is confirmed, (2) if given by mail, 72 hours after the
communication is deposited in the mails properly addressed with first class
postage prepaid or (3) if given by any other means, when delivered to the proper
address and a written acknowledgement of delivery is received.
11. Amendments. Any term of this Warrant may be amended with the
----------
written consent of the Company and the Holder of this Warrant.
12. Adjustments. The Exercise Price and the number of shares
-----------
purchasable hereunder are subject to adjustment from time to time as follows:
(a) Adjustment for Dividends in Other Stock, Property, etc.;
-------------------------------------------------------
Reclassification, etc. In case at any time while this Warrant is outstanding and
- ---------------------
unexpired, the holders of Warrant Shares shall have received, or (on or after
the record date fixed for the determination of stockholders eligible to receive)
shall have become entitled to receive, without payment therefor, (i) other or
additional stock or other securities or property (other than cash) by way of
dividend; or (ii) other or additional stock or other securities or property by
way of stock-split, spin-off, split-up, reclassification, recapitalization,
combination of shares or similar corporate rearrangement; then and in each such
case the Holder, upon the exercise hereof, shall be entitled to receive the
amount of stock and other securities and property which such Holder would hold
on the date of such exercise if on the original issue date he had been the
holder of record of the number of Warrant Shares called for on the face of this
Warrant and had thereafter, during the period from the original issue date to
and including the date of such exercise, retained such shares and all such other
or additional stock and other securities and properties receivable by him as
aforesaid during such period, giving effect to all adjustments called for during
such period by this Section 12.
(b) Merger, Consolidation or Disposition of Assets. In the event
----------------------------------------------
of any capital reorganization or any reclassification (other than a change in
par value) of the capital stock of the Company, or of any exchange or conversion
of the Warrant Shares for or into securities of another corporation, or in the
event of the consolidation or merger of the Company with or into any other
person (other than a merger which does not result in any reclassification,
conversion, exchange or cancellation of outstanding shares of Common Stock) or
in case of any
6
<PAGE>
sale or conveyance of all or substantially all of the assets of the Company
including intellectual property rights which, in the aggregate constitute
substantially all of the Company's material assets, the person formed by such
consolidation or resulting from such capital reorganization, reclassification or
merger or which acquires such assets, as the case may be, shall make provision
such that this Warrant shall thereafter be exercisable for the kind and amount
of shares of stock, other securities, cash and other property receivable upon
such capital reorganization, reclassification of capital stock, consolidation,
merger, sale or conveyance, as the case may be, by a holder of the shares of
Common Stock equal to the number of Warrant Shares issuable upon exercise of
this Warrant immediately prior to the effective date of such capital
reorganization, reclassification of capital stock, consolidation, merger, sale
or conveyance, assuming (i) such holder of Common Stock of the Company is not a
person with which the Company consolidated or into which the Company merged or
which merged into the Company or to which such sale or transfer was made as the
case may be (each, a "constituent entity"), or an affiliate of a constituent
entity, and (ii) such person failed to exercise his rights of election, if any,
as to the kind or amount of securities, cash and other property receivable upon
such capital reorganization, reclassification of capital stock, consolidation,
merger, sale or conveyance and, in any case appropriate adjustment shall be made
in the application of the provisions herein set forth with respect to rights and
interests thereafter of the Holder, to the end that the provisions set forth
herein (including the specified changes in and other adjustments to the Exercise
Price and the number of Warrant Shares issuable upon exercise of this Warrant)
shall thereafter be applicable, as near as reasonably may be, in relating to any
shares of stock or other securities or other property thereafter deliverable
upon exercise of this Warrant.
(c) Time of Adjustments. Each adjustment required by this Section
-------------------
12 shall be effective as and when the event requiring such adjustment occurs.
(d) Notice of Adjustment. Whenever the Exercise Price and the
--------------------
number of Warrant Shares purchasable upon the exercise of each Warrant is
adjusted as herein provided, the Company shall promptly provide each Holder a
certificate setting forth the Exercise Price and the number of Warrant Shares
purchasable upon the exercise of each Warrant after such adjustment, setting
forth a brief statement of the facts requiring such adjustments and setting
forth the computation by which such adjustments were made. Such certificate
shall be conclusive evidence of the correctness of such adjustments.
(e) No Adjustment for Cash Dividends. Except as provided in this
--------------------------------
Section 12, no adjustment in respect of any cash dividends shall be made during
the term of a Warrant or upon the exercise of a Warrant.
(f) Statement on Warrants. Irrespective of any adjustments in the
---------------------
number or kind of shares purchasable upon the exercise of the Warrant, the
Warrants theretofore or thereafter issued may continue to express the same price
and number and kind of shares as are stated in the initial Warrant.
(g) No Dilution or Impairment. The Company will not, by amendment
-------------------------
to its charter or through any reorganization, sale of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of this
Warrant, but will at all times in good faith assist in the
7
<PAGE>
carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the Holder of the
Warrant. Without limiting the generality of the foregoing, the Company (i) will
not increase the par value of any shares of stock receivable upon the exercise
of the Warrant above the amount payable therefor upon such exercise; and (ii)
will take all such action as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
stock upon the full exercise of the Warrant.
(h) Notices of Record Date, etc. In the event of:
---------------------------
(i) any taking by the Company 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) or other
distribution, or any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, or to receive
any other right;
(ii) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
conveyance of all or substantially all the assets of the Company to or
consolidation or merger of the Company with or into any other corporation; or
(iii) any voluntary or involuntary dissolution, liquidation
or winding up of the Company;
then and in each such event the Company will mail or cause to be mailed to the
Holder a notice specifying (A) the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and stating the amount
and character of such dividend, distribution or right; (B) the date on which any
such reorganization, reclassification, conveyance, consolidation, merger,
dissolution, liquidation, or winding up is to take place, and the time, if any
is to be fixed, as of which the holders of record of Warrant Shares (or other
securities) shall be entitled to exchange their Warrant Shares (or other
securities) for securities or other property deliverable upon such
reorganization, reclassification, recapitalization, conveyance, consolidation,
merger, dissolution, liquidation, or winding up; and (C) the amount and
character of any stock or other securities, or rights or options with respect
thereto, proposed to be issued or granted, the date of such proposed issue or
grant and the persons or class of persons to whom such proposed issue or grant
is to be offered or made. Such notice shall be mailed at least 15 days prior to
the date therein specified.
13. Miscellaneous.
-------------
(a) Successors and Assigns. This Warrant and the rights evidenced
----------------------
hereby shall inure to the benefit of and be binding upon the successors of the
Company and the Holder and their respective permitted assigns. The provisions of
this Warrant are intended to be for the benefit of all Holders from time to time
of this Warrant, and shall be enforceable by any such Holder.
(b) Headings. The headings of the Sections of this Warrant are
--------
for the convenience of reference only and shall not, for any purpose, be deemed
a part of this Warrant.
8
<PAGE>
(c) Choice of Law. This Warrant and the performance or breach
-------------
thereof shall be governed by and interpreted as to substantive matters in
accordance with the applicable laws of the State of Texas (excluding its choice
of law rules), except that upon the Company's reincorporation as a Delaware
corporation, if effected, the Warrant shall be governed under Delaware law.
* * * *
9
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Warrant to
be executed by its officers thereunto duly authorized.
Dated: November 23, 1999 ACTIVE POWER, INC.
By: /s/
------------------------------------
Name:__________________________________
Title:_________________________________
Address: 11525 Stonehollow Drive,
Suite 135 Austin, Texas 78758
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
------------------
(1) The undersigned hereby irrevocably elects to purchase ___________
shares of Common Stock of Active Power, Inc., pursuant to the terms of the
attached Warrant, and tenders herewith payment in full of the aggregate
purchase price of $_________ for such shares.
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the shares of Common Stock are being acquired for
investment and not with a view to, or for resale in connection with, the
distribution thereof and that the undersigned has no present intention of
distributing or reselling such shares. In support thereof, the undersigned
has executed an Investment Representation Statement attached hereto as
Schedule 1.
(3) Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name
or names as are specified below:
_______________________________
(Name)
_______________________________
_______________________________
(address)
(4) Please issue a new Warrant for the unexercised portion of the
attached Warrant in the name of the undersigned.
ECT MERCHANT INVESTMENTS CORP.
By:__________________________
Name:________________________
Title:_______________________
Date:________________________
<PAGE>
Schedule 1
INVESTMENT REPRESENTATION STATEMENT
To: Active Power, Inc.
Security: Common Stock issuable upon exercise of Common Stock Purchase
Warrant dated November 23, 1999.
In connection with the purchase of the above-listed securities (the
"Securities"), the undersigned (the "Purchaser") represents to the Company as
---------
follows:
(a) The Purchaser is aware of the Company business affairs and
financial condition, and has acquired sufficient information about the Company
to reach an informed and knowledgeable decision to acquire the Securities. The
Purchaser is purchasing the Securities for its own account for investment
purposes only and not with a view to, or for the resale in connection with, any
"distribution" thereof for purposes of the Securities Act of 1933, as amended
(the "Securities Act").
--------------
(b) The Purchaser understands that the Securities have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of the Purchaser's investment intent as expressed herein. In this
connection, the Purchaser understands that, in the view of the Securities and
Exchange Commission ("SEC"), the statutory basis for such exemption may be
---
unavailable if the Purchaser's representation was predicated solely upon a
present intention to hold these Securities for the minimum capital gains period
specified under tax statutes, for a deferred sale, for or until an increase or
decrease in the market price of the Securities, or for a period of one year or
any other fixed period in the future.
(c) The Purchaser further understands that the Securities must be held
indefinitely unless subsequently registered under the Securities Act or unless
an exemption from registration is otherwise available. In addition, the
Purchaser understands that the certificate evidencing the Securities will be
imprinted with the legend referred to in the Warrant under which the Securities
are being purchased.
(d) The Purchaser is aware of the provisions of Rule 144 and 144A,
promulgated under the Securities Act, which, in substance, permit limited public
resale of "restricted securities" acquired, directly or indirectly, from the
issuer thereof (or from an affiliate of such issuer), in a non-public offering
subject to the satisfaction of certain conditions, if applicable, including,
among other things: The availability of certain public information about the
Company, the resale occurring not less than one year after the party has
purchased and paid for the securities to be sold; the sale being made through a
broker in an unsolicited "broker's transaction" or in transactions directly with
a market maker (as said term is defined under the
<PAGE>
Securities Exchange Act of 1934, as amended) and the amount of securities being
sold during any three-month period not exceeding the specified limitations
stated therein.
(e) The Purchaser further understands that at the time it wishes to
sell the Securities there may be no public market upon which to make such a
sale, and that, even if such a public market then exists, the Company may not be
satisfying the current public information requirements of Rule 144 and 144A, and
that, in such event, the Purchaser may be precluded from selling the Securities
under Rule 144 and 144A even if the two-year minimum holding period had been
satisfied.
(f) The Purchaser further understands that in the event all of the
requirements of Rule 144 and 144A are not satisfied, registration under the
Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rule 144 is
not exclusive, the Staff of the SEC has expressed its opinion that persons
proposing to sell private placement securities other than in a registered
offering and otherwise than pursuant to Rule 144 will have a substantial burden
of proof in establishing that an exemption from registration is available for
such offers or sales, and that such persons and their respective brokers who
participate in such transactions do so at their own risk.
Purchaser:
__________________________
Date:_____________________
<PAGE>
Exhibit B
ASSIGNMENT FORM
---------------
(Subject to compliance with Section 7)
FOR VALUE RECEIVED, the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under the within Warrant, with respect to the number
of Warrant Shares set forth below:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
and does hereby irrevocably constitute and appoint ____________________ to make
such transfer on the books of Active Power, Inc., maintained for the purpose,
with full power of substitution in the premises.
The undersigned also represents that, by assignment hereof, the
Assignee acknowledges that this Warrant and the shares of stock to be issued
upon exercise hereof are being acquired for investment and that the Assignee
will not offer, sell or otherwise dispose of this Warrant or any shares of stock
to be issued upon exercise hereof except in compliance with Securities Act of
1933, as amended, or any state securities laws. Further, the Assignee has
acknowledged that upon exercise of this Warrant, the Assignee shall, if
requested by the Company, confirm in writing, in a form satisfactory to the
Company, that the shares of stock so purchased are being acquired for investment
and not with a view toward distribution or resale.
Signature:_______________________________________
Name of Holder:__________________________________
Name of Authorized Representative,
if a legal entity:____________________________
Title of Representative:_________________________
Date:____________________________________________
<PAGE>
EXHIBIT 4.3
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF REGISTRATION UNDER
SUCH ACT AND APPLICABLE LAWS, OR IN A TRANSACTION WHICH, IN THE OPINION OF
COUNSEL TO THE HOLDERS OF THIS WARRANT (WHICH COUNSEL SHALL BE SATISFACTORY TO
THE COMPANY), QUALIFIES AS AN EXEMPT TRANSACTION UNDER THE SECURITIES ACT AND
THE RULES PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION THEREUNDER.
THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT ARE SUBJECT TO
CERTAIN RESTRICTIONS CONTAINED IN AN INVESTORS' RIGHTS AGREEMENT, INCLUDING
MARKET STAND-OFF PROVISIONS AND A SHAREHOLDERS AGREEMENT, BOTH AS AMENDED,
COPIES OF WHICH ARE ON FILE AT THE OFFICE OF THE SECRETARY OF THE COMPANY.
No. - WC-002 - November 23, 1999
ACTIVE POWER, INC.
COMMON STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, STEPHENS-GROUP, INC.
("Stephens"), or registered assigns (the "Holder"), during the term of this
-------- ------
Warrant as set forth in Section 1, is entitled to purchase from ACTIVE POWER,
INC., a Texas corporation (the "Company"), for value received, up to TWENTY-FIVE
-------
THOUSAND (25,000) Warrant Shares (as defined below), upon surrender hereof at
the principal office of the Company referred to below, with a duly executed
Notice of Exercise in the form attached, and simultaneous payment therefor in
lawful money of the United States, at the Exercise Price (as defined in Section
2 below). The number, character and Exercise Price of such Warrant Shares are
subject to adjustment as provided herein. The term "Warrant" as used herein
-------
shall include this Warrant, and any warrants delivered in substitution or
exchange therefor as provided herein.
"Warrant Shares" shall mean the Company's Common Stock, par value
--------------
$0.01 per share ("Common Stock").
------------
1. Term of Warrant. Subject to the terms and conditions set forth
---------------
herein, this Warrant shall be exercisable, in whole or in part, at any time or
from time to time before 5:00 p.m. Austin, Texas time, on the date (the
"Expiration Date") which is seven years after the date hereof. After the
---------------
Expiration Date this Warrant shall be void.
1
<PAGE>
2. Exercise Price. The purchase price per share for the Common Stock
--------------
Stock purchased under this Warrant shall be TWENTY-TWO AND 68/100 DOLLARS
($22.68) (the "Exercise Price"), subject to adjustment as provided under Section
--------------
12 hereof.
3. Exercise of Warrant.
-------------------
(a) Method of Exercise. The purchase rights represented by
------------------
this Warrant are exercisable by the Holder by delivery of a Notice of Exercise,
the form of which is attached hereto as Exhibit A, duly completed and executed
---------
on behalf of the Holder, at the office of the Company, and upon payment
therewith of the aggregate Exercise Price with respect to such Warrant Shares in
cash or by check payable to the Company.
(b) Other Matters. This Warrant shall be deemed to have been
-------------
exercised immediately prior to the close of business on the date of its
surrender for exercise as provided above, and the person entitled to receive the
Warrant Shares issuable upon such exercise shall be treated for all purposes as
the holder of record of such shares as of the close of business on such date. As
promptly as practicable on or after such date and in any event within ten (10)
days thereafter, the Company at its expense shall issue and deliver to the
person or persons entitled to receive the same a certificate or certificates for
the number of shares issued upon such exercise. In the event that this Warrant
is exercised in part, the Company at its expense will execute and deliver a new
Warrant of like tenor exercisable for the remaining number of shares for which
this Warrant may then be exercised.
4. No Fractional Shares or Scrip. No fractional shares or scrip
-----------------------------
representing fractional shares shall be issued upon the exercise of this
Warrant. In lieu of any fractional share to which the Holder would otherwise be
entitled, the Company shall make a cash payment equal to the Exercise Price
multiplied by such fraction.
5. Replacement of Warrant. On receipt of evidence reasonably
----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and substance to the Company
or, in the case of mutilation, on surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor and amount.
6. No Rights as Stockholders; Notices to Holders. Nothing contained
---------------------------------------------
in this Warrant or in any of the Warrants shall be construed as conferring upon
the Holders or their transferees the right to vote or to receive dividends or to
consent or to receive notice as shareholders in respect of any meeting of
shareholders for the election of directors of the Company or any other matter,
or any rights whatsoever as shareholders of the Company.
7. Transfer; Issuance of Stock Certificates; Restrictive Legends.
-------------------------------------------------------------
(a) Transfer. Subject to compliance with the restrictions on
--------
transfer set forth in this Section 7, each transfer of this Warrant and all
rights hereunder, in whole or in part, shall be registered on the books of
the Company to be maintained for such purpose, upon surrender of this
Warrant to the Company, together with a written assignment of this Warrant
in
2
<PAGE>
the form of Exhibit B hereto duly executed by the Holder or its agent or
---------
attorney. Upon such surrender and delivery, the Company shall execute and
deliver a new Warrant or Warrants in the name of the assignee or assignees
and in the denominations specified in such instrument of assignment. A
Warrant, if properly assigned in compliance with the provisions hereof, may
be exercised by the new holder for the purchase of Warrant Shares without
having a new Warrant issued. Prior to presentment for registration or
transfer thereof, the Company may deem and treat the registered holder of
this Warrant as the absolute owner hereof (notwithstanding any notations of
ownership or writing thereon made by anyone other than a duly authorized
officer of the Company) for all purposes and shall not be affected by any
notice to the contrary. All Warrants issued upon assignment of Warrants
shall be the valid obligations of the Company, evidencing the same rights
and entitled to the same benefits as the Warrants surrendered upon such
registration of transfer or exchange. Notwithstanding the foregoing, the
Holder hereof may not transfer this Warrant to any subsequent transferees
(other than to transferees who are affiliates of the Holder) unless the
Holder transfers all shares of Series E Preferred Stock or Common Stock or
rights to acquire shares of Common Stock then held by the Holder (including
those held by affiliates of the Holder) to such subsequent transferees.
(b) Stock Certificates. Certificates for the Warrant Shares
------------------
shall be delivered to the Holder within a reasonable time after the rights
represented by this Warrant shall have been exercised pursuant to Section 1, and
a new Warrant representing the shares of Common Stock, if any, with respect to
which this Warrant shall not then have been exercised shall also be issued to
the Holder within such time. The issuance of certificates for Warrant Shares
upon the exercise of this Warrant shall be made without charge to the Holder
including, without limitation, any documentary, stamp or similar tax that may be
payable in respect thereof; provided, however, that the Company shall not be
-----------------
required to pay any income tax to which the holder hereof may be subject in
connection with the issuance of this Warrant or the Warrant Shares; and provided
--------
further, that if Warrant Shares are to be delivered in a name other than the
- -------
name of the Holder representing any Warrant being exercised, then no such
delivery shall be made unless the person requiring the same has paid to the
Company the amount of transfer taxes or charges incident thereto, if any.
(c) Restrictive Legends.
-------------------
(i) Except as otherwise provided in this Section 7, each
certificate for Warrant Shares initially issued upon the exercise of this
Warrant, and each certificate for Warrant Shares issued to any subsequent
transferee of any such certificate, shall be stamped or otherwise imprinted with
a legend in substantially the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAW. NO TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE SHALL
BE VALID OR EFFECTIVE UNLESS (A) SUCH TRANSFER IS MADE PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND IN COMPLIANCE WITH ANY
APPLICABLE STATE SECURITIES LAWS, OR (B) THE HOLDER SHALL DELIVER TO THE COMPANY
AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY ACCEPTABLE TO THE COMPANY
THAT SUCH PROPOSED TRANSFER IS EXEMPT FROM THE
3
<PAGE>
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND OF ANY APPLICABLE STATE
SECURITIES LAWS."
(ii) Except as otherwise provided in this Section 7, each
Warrant shall be stamped or otherwise imprinted with a legend in substantially
the following form:
"NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF REGISTRATION UNDER
SUCH ACT AND APPLICABLE LAWS, OR IN A TRANSACTION WHICH, IN THE OPINION OF
COUNSEL TO THE HOLDERS OF THIS WARRANT (WHICH COUNSEL SHALL BE SATISFACTORY TO
THE COMPANY), QUALIFIES AS AN EXEMPT TRANSACTION UNDER THE SECURITIES ACT AND
THE RULES PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION THEREUNDER."
(iii) Notwithstanding the foregoing, the legend
requirements of this Section 7 shall terminate as to any particular Warrant or
Warrant Share when the Company shall have received from the Holder an opinion of
counsel in form and substance reasonably acceptable to the Company that such
legend is not required in order to ensure compliance with the Securities Act.
Whenever the restrictions imposed by this Section 7 shall terminate, the Holder
hereof or of the Warrant Shares, as the case may be, shall be entitled to
receive from the Company without cost to Holder a new Warrant or certificate for
Warrant Shares of like tenor, as the case may be, without such restrictive
legend.
(d) Compliance with Securities Laws.
-------------------------------
(i) The Holder of this Warrant, by acceptance hereof,
acknowledges that this Warrant and the Warrant Shares to be issued upon exercise
hereof are being acquired solely for the Holder's own account for investment,
and that the Holder will not offer, sell or otherwise dispose of this Warrant or
any Warrant Shares to be issued upon exercise hereof or except under
circumstances that will not result in a violation of the Securities Act or any
state securities laws. Upon exercise of this Warrant, the Holder shall, if
requested by the Company, confirm in writing, by executing the form attached as
Schedule 1 to Exhibit A hereto, that the Warrant Shares so purchased are being
---------
acquired for investment, and not with a view toward distribution or resale in
violation of applicable securities laws.
(ii) In connection with the issuance of this Warrant, the
Holder specifically represents to the Company by acceptance of this Warrant as
follows:
(A) The Holder has had an opportunity to discuss
the Company's business with the management of the Company, is aware of the
Company's business affairs and financial condition, has had access to the
Company's books and records, and has been afforded the opportunity to ask
questions of and receive answers from officers of the Company. The Holder has
substantial experience in evaluating the merits and risks of its investment in
the
4
<PAGE>
Company. The Purchaser is an "accredited investor" within the meaning of Rule
501 of Regulation D of the Securities Act as presently in effect.
(B) The Holder understands that this Warrant has
not been, and upon exercise hereof the Warrant Shares will not be, registered
under the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of the Holder's
investment intent as expressed herein.
(C) The Holder further understands that this
Warrant, and upon exercise the Warrant Shares, must be held indefinitely unless
subsequently registered under the Securities Act and any applicable state
securities laws, or unless exemptions from registration are otherwise available.
8. Reservation of Stock. The Company covenants that during the term
--------------------
this Warrant is exercisable, the Company will reserve from its authorized and
unissued Common Stock a sufficient number of Warrant Shares to provide for the
issuance of Common Stock upon the exercise of this Warrant and, from time to
time, will take all steps necessary to amend its corporate charter, if
necessary, to provide sufficient reserves of Warrant Shares issuable upon
exercise of the Warrant. The Company further covenants that all Warrant Shares
that may be issued upon the exercise of this Warrant will be free from all
taxes, liens and charges except for restrictions on transfer and any taxes,
liens and charges imposed on the Holder unrelated to the Company's issuance of
Warrant Shares upon exercise of the Warrant.
9. Representations and Warranties. The Company represents and
------------------------------
warrants to the Holder as follows:
(a) Authorization. This Warrant has been duly authorized and
-------------
executed by Company and is a valid and binding obligation of the Company
enforceable in accordance with its terms, subject to laws of general application
relating to bankruptcy, insolvency and the relief of debtors and the rules of
law or principles at equity governing specific performance, injunctive and other
equitable remedies;
(b) Reservation; Issuance. The Warrant Shares have been duly
---------------------
authorized and reserved for issuance by the Company and, when issued in
accordance with the terms hereof, will be validly issued, fully paid and
nonassessable;
(c) No Conflicts. The execution and delivery of this Warrant
------------
are not, and the issuance of the Warrant Shares upon exercise of this Warrant in
accordance with the terms hereof will not be, inconsistent with the Company's
charter or bylaws; do not and will not contravene any law, governmental rule or
regulation, judgment or order applicable to the Company; and do not and will not
conflict with or contravene any provision of, or constitute a default under, any
indenture, mortgage, contract or other instrument of which the Company is a
party or by which it is bound or require the consent or approval of, the giving
of notice to, the registration or filing with or the taking of any action in
respect of or by, any federal, state or local government authority or agency or
other person, except for the filing of notices pursuant to federal and state
securities laws, which filings will be effected by the time required thereby,
and
5
<PAGE>
the filing of any registration statements required to be filed by the Company
pursuant to any registration rights granted to Holder by the Company.
(d) No Litigation. There are no actions, suits, audits,
-------------
investigations or proceedings pending or, to the knowledge of the Company,
threatened against the Company in any court or before any governmental
commission, board or authority which, if adversely determined, will have a
material adverse effect on the ability of the Company to perform its obligations
under this Warrant.
10. Notices. All notices, requests and other communications with
-------
respect to the Warrants shall be in writing. Communications may be made by
telecopy or similar writing. Each communication shall be given to the Holder at
the address in the warrant register and the Company at its offices in Austin,
Texas, or at any other address as the party may specify for this purpose by
notice to the other party. Each communication shall be effective (1) if given by
telecopy, when the telecopy is transmitted to the proper address and the receipt
of the transmission is confirmed, (2) if given by mail, 72 hours after the
communication is deposited in the mails properly addressed with first class
postage prepaid or (3) if given by any other means, when delivered to the proper
address and a written acknowledgement of delivery is received.
11. Amendments. Any term of this Warrant may be amended with the
----------
written consent of the Company and the Holder of this Warrant.
12. Adjustments. The Exercise Price and the number of shares
-----------
purchasable hereunder are subject to adjustment from time to time as follows:
(a) Adjustment for Dividends in Other Stock, Property, etc.;
--------------------------------------------------------
Reclassification, etc. In case at any time while this Warrant is outstanding
- ----------------------
and unexpired, the holders of Warrant Shares shall have received, or (on or
after the record date fixed for the determination of stockholders eligible to
receive) shall have become entitled to receive, without payment therefor, (i)
other or additional stock or other securities or property (other than cash) by
way of dividend; or (ii) other or additional stock or other securities or
property by way of stock-split, spin-off, split-up, reclassification,
recapitalization, combination of shares or similar corporate rearrangement; then
and in each such case the Holder, upon the exercise hereof, shall be entitled to
receive the amount of stock and other securities and property which such Holder
would hold on the date of such exercise if on the original issue date he had
been the holder of record of the number of Warrant Shares called for on the face
of this Warrant and had thereafter, during the period from the original issue
date to and including the date of such exercise, retained such shares and all
such other or additional stock and other securities and properties receivable by
him as aforesaid during such period, giving effect to all adjustments called for
during such period by this Section 12.
(b) Merger, Consolidation or Disposition of Assets. In the
----------------------------------------------
event of any capital reorganization or any reclassification (other than a change
in par value) of the capital stock of the Company, or of any exchange or
conversion of the Warrant Shares for or into securities of another corporation,
or in the event of the consolidation or merger of the Company with or into any
other person (other than a merger which does not result in any reclassification,
conversion, exchange or cancellation of outstanding shares of Common Stock) or
in case of any
6
<PAGE>
sale or conveyance of all or substantially all of the assets of the Company
including intellectual property rights which, in the aggregate constitute
substantially all of the Company's material assets, the person formed by such
consolidation or resulting from such capital reorganization, reclassification or
merger or which acquires such assets, as the case may be, shall make provision
such that this Warrant shall thereafter be exercisable for the kind and amount
of shares of stock, other securities, cash and other property receivable upon
such capital reorganization, reclassification of capital stock, consolidation,
merger, sale or conveyance, as the case may be, by a holder of the shares of
Common Stock equal to the number of Warrant Shares issuable upon exercise of
this Warrant immediately prior to the effective date of such capital
reorganization, reclassification of capital stock, consolidation, merger, sale
or conveyance, assuming (i) such holder of Common Stock of the Company is not a
person with which the Company consolidated or into which the Company merged or
which merged into the Company or to which such sale or transfer was made as the
case may be (each, a "constituent entity"), or an affiliate of a constituent
entity, and (ii) such person failed to exercise his rights of election, if any,
as to the kind or amount of securities, cash and other property receivable upon
such capital reorganization, reclassification of capital stock, consolidation,
merger, sale or conveyance and, in any case appropriate adjustment shall be made
in the application of the provisions herein set forth with respect to rights and
interests thereafter of the Holder, to the end that the provisions set forth
herein (including the specified changes in and other adjustments to the Exercise
Price and the number of Warrant Shares issuable upon exercise of this Warrant)
shall thereafter be applicable, as near as reasonably may be, in relating to any
shares of stock or other securities or other property thereafter deliverable
upon exercise of this Warrant.
(c) Time of Adjustments. Each adjustment required by this
-------------------
Section 12 shall be effective as and when the event requiring such
adjustment occurs.
(d) Notice of Adjustment. Whenever the Exercise Price and the
--------------------
number of Warrant Shares purchasable upon the exercise of each Warrant is
adjusted as herein provided, the Company shall promptly provide each Holder a
certificate setting forth the Exercise Price and the number of Warrant Shares
purchasable upon the exercise of each Warrant after such adjustment, setting
forth a brief statement of the facts requiring such adjustments and setting
forth the computation by which such adjustments were made. Such certificate
shall be conclusive evidence of the correctness of such adjustments.
(e) No Adjustment for Cash Dividends. Except as provided in
--------------------------------
this Section 12, no adjustment in respect of any cash dividends shall be made
during the term of a Warrant or upon the exercise of a Warrant.
(f) Statement on Warrants. Irrespective of any adjustments in
---------------------
the number or kind of shares purchasable upon the exercise of the Warrant, the
Warrants theretofore or thereafter issued may continue to express the same price
and number and kind of shares as are stated in the initial Warrant.
(g) No Dilution or Impairment. The Company will not, by
-------------------------
amendment to its charter or through any reorganization, sale of assets,
consolidation, merger, dissolution, issue or sale of securities, or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of this Warrant, but will at all times in good faith assist in the
7
<PAGE>
carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the Holder of the
Warrant. Without limiting the generality of the foregoing, the Company (i) will
not increase the par value of any shares of stock receivable upon the exercise
of the Warrant above the amount payable therefor upon such exercise; and (ii)
will take all such action as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
stock upon the full exercise of the Warrant.
(h) Notices of Record Date, etc. In the event of:
----------------------------
(i) any taking by the Company 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) or other
distribution, or any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, or to receive
any other right;
(ii) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
conveyance of all or substantially all the assets of the Company to or
consolidation or merger of the Company with or into any other corporation; or
(iii) any voluntary or involuntary dissolution, liquidation
or winding up of the Company;
then and in each such event the Company will mail or cause to be mailed to the
Holder a notice specifying (A) the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and stating the amount
and character of such dividend, distribution or right; (B) the date on which any
such reorganization, reclassification, conveyance, consolidation, merger,
dissolution, liquidation, or winding up is to take place, and the time, if any
is to be fixed, as of which the holders of record of Warrant Shares (or other
securities) shall be entitled to exchange their Warrant Shares (or other
securities) for securities or other property deliverable upon such
reorganization, reclassification, recapitalization, conveyance, consolidation,
merger, dissolution, liquidation, or winding up; and (C) the amount and
character of any stock or other securities, or rights or options with respect
thereto, proposed to be issued or granted, the date of such proposed issue or
grant and the persons or class of persons to whom such proposed issue or grant
is to be offered or made. Such notice shall be mailed at least 15 days prior to
the date therein specified.
13. Miscellaneous.
-------------
(a) Successors and Assigns. This Warrant and the rights
----------------------
evidenced hereby shall inure to the benefit of and be binding upon the
successors of the Company and the Holder and their respective permitted assigns.
The provisions of this Warrant are intended to be for the benefit of all Holders
from time to time of this Warrant, and shall be enforceable by any such Holder.
(b) Headings. The headings of the Sections of this Warrant
--------
are for the convenience of reference only and shall not, for any purpose, be
deemed a part of this Warrant.
8
<PAGE>
(c) Choice of Law. This Warrant and the performance or
-------------
breach thereof shall be governed by and interpreted as to substantive matters in
accordance with the applicable laws of the State of Texas (excluding its choice
of law rules), except that upon the Company's reincorporation as a Delaware
corporation, if effected, the Warrant shall be governed under Delaware law.
* * * *
9
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Warrant to be
executed by its officers thereunto duly authorized.
Dated: November 23, 1999 ACTIVE POWER, INC.
By: /s/
-------------------------
Name:_______________________
Title:______________________
Address: 11525 Stonehollow Drive, Suite 135
Austin, Texas 78758
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
------------------
(1) The undersigned hereby irrevocably elects to purchase ________
shares of Common Stock of Active Power, Inc., pursuant to the terms of the
attached Warrant, and tenders herewith payment in full of the aggregate
purchase price of $_________ for such shares.
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the shares of Common Stock are being acquired for
investment and not with a view to, or for resale in connection with, the
distribution thereof and that the undersigned has no present intention of
distributing or reselling such shares. In support thereof, the undersigned
has executed an Investment Representation Statement attached hereto as
Schedule 1.
(3) Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name
or names as are specified below:
_____________________________________
(Name)
_____________________________________
_____________________________________
(address)
(4) Please issue a new Warrant for the unexercised portion of the
attached Warrant in the name of the undersigned.
STEPHENS GROUP, INC.
By:________________________________
Name:______________________________
Title:_____________________________
Date:______________________________
<PAGE>
Schedule 1
----------
INVESTMENT REPRESENTATION STATEMENT
To: Active Power, Inc.
Security: Common Stock issuable upon exercise of Common Stock Purchase Warrant
dated November 23, 1999.
In connection with the purchase of the above-listed securities (the
"Securities"), the undersigned (the "Purchaser") represents to the Company as
---------- ---------
follows:
(a) The Purchaser is aware of the Company business affairs and financial
condition, and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. The Purchaser is
purchasing the Securities for its own account for investment purposes only and
not with a view to, or for the resale in connection with, any "distribution"
thereof for purposes of the Securities Act of 1933, as amended (the "Securities
----------
Act").
- ---
(b) The Purchaser understands that the Securities have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of the Purchaser's investment intent as expressed herein. In this
connection, the Purchaser understands that, in the view of the Securities and
Exchange Commission ("SEC"), the statutory basis for such exemption may be
---
unavailable if the Purchaser's representation was predicated solely upon a
present intention to hold these Securities for the minimum capital gains period
specified under tax statutes, for a deferred sale, for or until an increase or
decrease in the market price of the Securities, or for a period of one year or
any other fixed period in the future.
(c) The Purchaser further understands that the Securities must be held
indefinitely unless subsequently registered under the Securities Act or unless
an exemption from registration is otherwise available. In addition, the
Purchaser understands that the certificate evidencing the Securities will be
imprinted with the legend referred to in the Warrant under which the Securities
are being purchased.
(d) The Purchaser is aware of the provisions of Rule 144 and 144A,
promulgated under the Securities Act, which, in substance, permit limited public
resale of "restricted securities" acquired, directly or indirectly, from the
issuer thereof (or from an affiliate of such issuer), in a non-public offering
subject to the satisfaction of certain conditions, if applicable, including,
among other things: The availability of certain public information about the
Company, the resale occurring not less than one year after the party has
purchased and paid for the securities to be sold; the sale being made through a
broker in an unsolicited "broker's transaction" or in transactions directly with
a market maker (as said term is defined under the
<PAGE>
Securities Exchange Act of 1934, as amended) and the amount of securities being
sold during any three-month period not exceeding the specified limitations
stated therein.
(e) The Purchaser further understands that at the time it wishes to sell
the Securities there may be no public market upon which to make such a sale, and
that, even if such a public market then exists, the Company may not be
satisfying the current public information requirements of Rule 144 and 144A, and
that, in such event, the Purchaser may be precluded from selling the Securities
under Rule 144 and 144A even if the two-year minimum holding period had been
satisfied.
(f) The Purchaser further understands that in the event all of the
requirements of Rule 144 and 144A are not satisfied, registration under the
Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rule 144 is
not exclusive, the Staff of the SEC has expressed its opinion that persons
proposing to sell private placement securities other than in a registered
offering and otherwise than pursuant to Rule 144 will have a substantial burden
of proof in establishing that an exemption from registration is available for
such offers or sales, and that such persons and their respective brokers who
participate in such transactions do so at their own risk.
Purchaser:
_____________________________
Date:________________________
<PAGE>
Exhibit B
ASSIGNMENT FORM
---------------
(Subject to compliance with Section 7)
FOR VALUE RECEIVED, the undersigned registered owner of this Warrant hereby
sells, assigns and transfers unto the Assignee named below all of the rights of
the undersigned under the within Warrant, with respect to the number of Warrant
Shares set forth below:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
and does hereby irrevocably constitute and appoint ____________________ to make
such transfer on the books of Active Power, Inc., maintained for the purpose,
with full power of substitution in the premises.
The undersigned also represents that, by assignment hereof, the Assignee
acknowledges that this Warrant and the shares of stock to be issued upon
exercise hereof are being acquired for investment and that the Assignee will not
offer, sell or otherwise dispose of this Warrant or any shares of stock to be
issued upon exercise hereof except in compliance with Securities Act of 1933, as
amended, or any state securities laws. Further, the Assignee has acknowledged
that upon exercise of this Warrant, the Assignee shall, if requested by the
Company, confirm in writing, in a form satisfactory to the Company, that the
shares of stock so purchased are being acquired for investment and not with a
view toward distribution or resale.
Signature:__________________________________________
Name of Holder:_____________________________________
Name of Authorized Representative,
if a legal entity:_________________________________
Title of Representative:____________________________
Date:_______________________________________________
<PAGE>
EXHIBIT 10.1
INDEMNITY AGREEMENT
This Indemnity Agreement is made and entered into as of this _____ day
of ________, 2000 between Active Power, Inc., a Delaware corporation (the
"Corporation"), and _______________________________ ("Indemnitee").
- ------------ ----------
I N T R O D U C T I O N:
A. Indemnitee is an executive officer, director and/or agent of the
Corporation (or a subsidiary of the Corporation), as the case may be from time
to time, and performs a valuable service for the Corporation in such capacity
(or capacities); and
B. The Certificate of Incorporation (the "Certificate") and the
-----------
Bylaws (the "Bylaws") of the Corporation contain provisions providing for the
-----
indemnification of the officers, directors and agents of the Corporation to the
maximum extent authorized by Section 145 of the Delaware General Corporation
Law, as amended ("DGCL"); and
----
C. The Certificate, the Bylaws and the DGCL, by their non-exclusive
nature, permit contracts between the Corporation and the members of its Board of
Directors and officers with respect to indemnification of such directors and
officers; and
D. In accordance with the authorization as provided by the DGCL, the
Corporation has purchased and presently maintains a policy or policies of
Directors and Officers Liability Insurance ("D & O Insurance"), covering certain
---------------
liabilities which may be incurred by its directors and officers in the
performance of their duties as directors or officers of the Corporation; and
E. As a result of developments affecting the terms, scope and
availability of D & O Insurance there exists general uncertainty as to the
extent of protection afforded members of the Board of Directors and executive
officers of the Corporation by such D & O Insurance and by statutory and bylaw
indemnification provisions; and
F. In order to induce Indemnitee to continue to serve as an executive
officer, director or agent of the Corporation, the Corporation has determined
and agreed to enter into this contract with Indemnitee.
A G R E E M E N T:
Now, Therefore, in consideration of Indemnitee's continued service as
an executive officer and a member of the Board of Directors after the date
hereof, the parties hereto agree as follows:
1. Indemnification of Indemnitee. The Corporation hereby agrees to
-----------------------------
hold harmless and indemnify Indemnitee and any partnership, corporation, trust
or other entity of
<PAGE>
which Indemnitee is or was a partner, shareholder, trustee, director, officer,
employee or agent (Indemnitee and each such partnership, corporation, trust or
other entity being hereinafter referred to collectively as an "Indemnitee") to
----------
the fullest extent authorized or permitted by the provisions of the DGCL, as may
be amended from time to time.
2. Additional Indemnity. Subject only to the exclusions set forth in
--------------------
Section 3 hereof, the Corporation hereby further agrees to hold harmless and
indemnify Indemnitee:
(a) against any and all expenses (including attorney's
fees), witness fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by Indemnitee in connection with any
threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (including an action by
or in the right of the Corporation) to which Indemnitee is, was or at
any time becomes a party, or is threatened to be made a party, by reason
of the fact that Indemnitee is, was or at any time becomes a director,
officer, employee or agent of the Corporation or any subsidiary of the
Corporation, or is or was serving or at any time serves at the request
of the Corporation or any subsidiary of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise, if Indemnitee
acted in good faith and in a manner Indemnitee reasonably believed to be
in or not opposed to the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe Indemnitee's conduct was unlawful; and
(b) otherwise to the fullest extent as may be provided to
Indemnitee by the Corporation under the non-exclusivity provisions of
Article XI of the Corporation's Bylaws (as the same, including such
article, may be amended, modified or restated from time to time) and the
DGCL.
3. Limitations on Additional Indemnity. No indemnity pursuant to
-----------------------------------
Section 2 hereof shall be paid by the Corporation:
(a) except to the extent the aggregate of losses to be
indemnified thereunder exceeds the sum of such losses for which the
Indemnitee is indemnified pursuant to Section 1 hereof or pursuant to
any D & O Insurance purchased and maintained by the Corporation;
(b) in respect to remuneration paid to Indemnitee if it
shall be determined by a final judgment or other final adjudication that
such remuneration was in violation of law ;
(c) on account of any suit in which judgment is rendered
against Indemnitee for an accounting of profits made from the purchase
or sale by Indemnitee of securities of the Corporation pursuant to the
provisions of Section 16(b) of the Securities Exchange Act of 1934 and
amendments thereto or similar provisions of any federal, state or local
statutory law;
2
<PAGE>
(d) on account of Indemnitee's conduct which is finally
adjudged to have been knowingly fraudulent or deliberately dishonest, or
to constitute willful misconduct;
(e) on account of Indemnitee's conduct which is the subject
of an action, suit or proceeding described in Section 7(c)(ii) hereof;
(f) on account of any action, claim or proceeding (other
than a proceeding referred to in Section 8(b) hereof) initiated by the
Indemnitee unless such action, claim or proceeding was authorized in the
specific case by action of the Board of Directors; and
(g) if a final decision by a Court having jurisdiction in
the matter shall determine that such indemnification is not lawful (and,
in this respect, both the Corporation and Indemnitee have been advised
that the Securities and Exchange Commission believes that
indemnification for liabilities arising under the federal securities
laws is against public policy and is, therefore, unenforceable and that
claims for indemnification should be submitted to appropriate courts for
adjudication).
4. Contribution. If the indemnification provided in Sections 1
------------
and 2 hereof is unavailable by reason of a Court decision described in Section
3(g) hereof based on grounds other than any of those set forth in paragraphs (b)
through (f) of Section 3 hereof, then in respect of any threatened, pending or
completed action, suit or proceeding in which the Corporation is jointly liable
with Indemnitee (or would be if joined in such action, suit or proceeding), the
Corporation shall contribute to the amount of expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred and paid or payable by Indemnitee in such proportion as is appropriate
to reflect (a) the relative benefits received by the Corporation on the one hand
and Indemnitee on the other hand from the transaction from which such action,
suit or proceeding arose, and (b) the relative fault of the Corporation on the
one hand and of Indemnitee on the other in connection with the events which
resulted in such expenses, judgments, fines or settlement amounts, as well as
any other relevant equitable considerations. The relative fault of the
Corporation on the one hand and of Indemnitee on the other shall be determined
by reference to, among other things, the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent the circumstances
resulting in such expenses, judgments, fines or settlement amounts. The
Corporation agrees that it would not be just and equitable if contribution
pursuant to this Section 4 were determined by pro rata allocation or any other
method of allocation that does not take account of the foregoing equitable
considerations.
5. Continuation of Obligations. All agreements and obligations of
---------------------------
the Corporation contained herein shall continue during the period Indemnitee is
a director, officer or agent of the Corporation or any subsidiary of the
Corporation (or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise) if Indemnitee acted
in good faith and in a manner Indemnitee reasonably believed to be in or not
opposed to the best interests of the Corporation, except that no indemnification
shall be made in respect of any claim, issue or matter as to which Indemnitee
shall have been adjudged to be liable to the Corporation unless
3
<PAGE>
and only to the extent that the Court of Chancery of the State of Delaware or
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, Indemnitee is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery of the State of Delaware
or such other court shall deem proper and shall continue thereafter so long as
Indemnitee shall be subject to any possible claim or threatened, pending or
completed action, suit or proceeding, whether civil, criminal or investigative,
by reason of the fact that Indemnitee was an officer of the Corporation or
serving in any other capacity referred to herein.
6. Notification and Defense of Claim. Not later than thirty days
---------------------------------
after receipt by Indemnitee of notice of the commencement of any action, suit or
proceeding, Indemnitee will, if a claim in respect thereof is to be made against
the Corporation under this Agreement, notify the Corporation of the commencement
thereof; but the omission so to notify the Corporation will not relieve it from
any liability which it may have to Indemnitee otherwise than under this
Agreement. With respect to any such action, suit or proceeding as to which
Indemnitee notifies the Corporation of the commencement thereof:
(a) the Corporation will be entitled to participate therein
at its own expense;
(b) except as otherwise provided below, to the extent that
it may wish, the Corporation jointly with any other indemnifying party
similarly notified will be entitled to assume the defense thereof, with
counsel reasonably satisfactory to Indemnitee. After notice from the
Corporation to Indemnitee of its election so as to assume the defense
thereof, the Corporation will not be liable to Indemnitee under this
Agreement for any legal or other expenses subsequently incurred by
Indemnitee in connection with the defense thereof other than reasonable
costs of investigation or as otherwise provided below. Indemnitee shall
have the right to employ its counsel in such action, suit or proceeding
but the fees and expenses of such counsel incurred after notice from the
Corporation of its assumption of the defense thereof shall be at the
expense of Indemnitee unless (i) the employment of counsel by Indemnitee
has been authorized by the Corporation, (ii) Indemnitee shall have
reasonably concluded that there may be a conflict of interest between
the Corporation and Indemnitee in the conduct of the defense of such
action or (iii) the Corporation shall not in fact have employed counsel
to assume the defense of such action, in each of which cases the fees
and expenses of Indemnitee's separate counsel shall be at the expense of
the Corporation. The Corporation shall not be entitled to assume the
defense of any action, suit or proceeding brought by or on behalf of the
Corporation or as to which Indemnitee shall have made the conclusion
provided for in (ii) above; and
(c) the Corporation shall not be liable to indemnify
Indemnitee under this Agreement for any amounts paid in settlement of
any action or claim effected without its written consent. The
Corporation shall be permitted to settle any action except that it shall
not settle any action or claim in any manner which would impose any
penalty or limitation on Indemnitee without Indemnitee's written
consent. Neither the Corporation nor Indemnitee will unreasonably
withhold its consent to any proposed settlement.
4
<PAGE>
7. Advancement and Repayment of Expenses.
-------------------------------------
(a) In the event that Indemnitee employs his own counsel
pursuant to Section 6(b)(i) through (iii) above, the Corporation shall
advance to Indemnitee, prior to any final disposition of any threatened
or pending action, suit or proceeding, whether civil, criminal,
administrative or investigative, any and all reasonable expenses
(including legal fees and expenses) incurred in investigating or
defending any such action, suit or proceeding within ten days after
receiving copies of invoices presented to Indemnitee for such expenses;
(b) Indemnitee agrees that Indemnitee will reimburse the
Corporation for all reasonable expenses paid by the Corporation in
defending any civil or criminal action, suit or proceeding against
Indemnitee in the event and only to the extent it shall be ultimately
determined by a final judicial decision (from which there is no right of
appeal) that Indemnitee is not entitled, under the provisions of the
DGCL, the Certificate, the Bylaws, this Agreement or otherwise, to be
indemnified by the Corporation for such expenses; and
(c) Notwithstanding the foregoing, the Corporation shall
not be required to advance such expenses to Indemnitee if Indemnitee (i)
commences any action, suit or proceeding as a plaintiff unless such
advance is specifically approved by a majority of the Board of Directors
or (ii) is a party to an action, suit or proceeding brought by the
Corporation and approved by a majority of the Board which alleges
willful misappropriation of corporate assets by Indemnitee, disclosure
of confidential information in violation of Indemnitee's fiduciary or
contractual obligations to the Corporation, or any other willful and
deliberate breach in bad faith of Indemnitee's duty to the Corporation
or its shareholders.
8. Procedure. Any indemnification and advances provided for in
---------
Section 1 and Section 2 shall be made no later than 45 days after receipt of the
written request of Indemnitee. If a claim under this Agreement, under any
statute, or under any provision of the Corporation's Certificate of
Incorporation or Bylaws providing for indemnification, is not paid in full by
the Corporation within 45 days after a written request for payment thereof has
first been received by the Corporation, Indemnitee may, but need not, at any
time thereafter bring an action against the Corporation to recover the unpaid
amount of the claim and, subject to Section 12 of this Agreement, Indemnitee
shall also be entitled to be paid for the expenses (including attorneys' fees)
of bringing such action. It shall be a defense to any such action (other than
an action brought to enforce a claim for expenses incurred in connection with
any action, suit or proceeding in advance of its final disposition) that
Indemnitee has not met the standards of conduct which make it permissible under
applicable law for the Corporation to indemnify Indemnitee for the amount
claimed, but the burden of proving such defense shall be on the Corporation and
Indemnitee shall be entitled to receive interim payments of expenses pursuant to
Subsection 2(a) unless and until such defense may be finally adjudicated by
court order or judgment from which no further right of appeal exists. It is the
parties' intention that if the Corporation contests Indemnitee's right to
indemnification, the question of Indemnitee's right to indemnification shall be
for the court to decide, and neither the failure of the Corporation (including
its Board of Directors, any committee or subgroup of the Board of Directors,
5
<PAGE>
independent legal counsel, or its stockholders) to have made a determination
that indemnification of Indemnitee is proper in the circumstances because
Indemnitee has met the applicable standard of conduct required by applicable
law, nor an actual determination by the Corporation (including its Board of
Directors, any committee or subgroup of the Board of Directors, independent
legal counsel, or its stockholders) that Indemnitee has not met such applicable
standard of conduct, shall create a presumption that Indemnitee has or has not
met the applicable standard of conduct.
9. Enforcement.
-----------
(a) The Corporation expressly confirms and agrees that it
has entered into this Agreement and assumed the obligations imposed on
the Corporation hereby in order to induce Indemnitee to continue as an
executive officer, director or agent of the Corporation, and
acknowledges that Indemnitee is relying upon this Agreement in
continuing in such capacity; and
(b) In the event Indemnitee is required to bring any action
to enforce rights or to collect moneys due under this Agreement and is
successful in such action, the Corporation shall reimburse Indemnitee
for all Indemnitee's reasonable fees and expenses in bringing and
pursuing such action.
10. Subrogation. In the event of payment under this agreement,
-----------
the Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all documents required and
shall do all acts that may be necessary to secure such rights and to enable the
Corporation effectively to bring suit to enforce such rights.
11. Non-Exclusivity of Rights. The rights conferred on Indemnitee
-------------------------
by this Agreement shall not be exclusive of any other right which Indemnitee may
have or hereafter acquire under any statute, provisions of the Corporation's
Certificate of Incorporation or Bylaws, agreement, vote of stockholders or
directors, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office.
12. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Corporation for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred by Indemnitee in the investigation, defense, appeal or settlement of
any civil or criminal action, suit or proceeding, but not, however, for the
total amount thereof, the Corporation shall nevertheless indemnify Indemnitee
for the portion of such expenses, judgments, fines or penalties to which
Indemnitee is entitled.
13. Survival of Rights. The rights conferred on Indemnitee by this
------------------
Agreement shall continue after Indemnitee has ceased to be a director, officer,
employee or other agent of the Corporation and shall inure to the benefit of
Indemnitee's heirs, executors and administrators.
14. Separability. Each of the provisions of this Agreement is a
------------
separate and distinct agreement and independent of the others, so that if any or
all of the provisions hereof shall be held to be invalid or unenforceable for
any reason, such invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions hereof or the obligation of
6
<PAGE>
the Corporation to indemnify the Indemnitee to the full extent provided by the
Certificate, Bylaws or the DGCL.
15. Governing Law; Consent to Jurisdiction. This Agreement shall be
--------------------------------------
interpreted and enforced in accordance with the laws of the State of Delaware.
The Corporation and Indemnitee each hereby irrevocably consent to the
jurisdiction of the courts of the State of Delaware for all purposes in
connection with any action or proceeding which arises out of or relates to this
Agreement and agree that any action instituted under this Agreement shall be
brought only in the state courts of the State of Delaware.
16. Binding Effect. This Agreement shall be binding upon Indemnitee
--------------
and upon the Corporation, its successors and assigns, and shall inure to the
benefit of Indemnitee, his heirs, personal representatives and assigns and to
the benefit of the Corporation, its successors and assigns.
17. Amendment and Termination. No amendment, modification,
-------------------------
termination or cancellation of this Agreement shall be effective unless in
writing signed by both parties hereto.
18. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
[Signature Page Follows]
7
<PAGE>
In Witness Whereof, the parties hereto have executed this Indemnity
Agreement on and as of the day and year first above written.
Active Power, Inc.
By:
---------------------------------
Name:
-------------------------------
Title:
-----------------------------
Indemnitee
------------------------------------
Print Name:
-------------------------
[Signature Page to Indemnity Agreement]
<PAGE>
EXHIBIT 10.4
ACTIVE POWER, INC.
______________________________
SECOND AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
______________________________
November 23, 1999
<PAGE>
ACTIVE POWER, INC.
SECOND AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
TABLE OF CONTENTS
<TABLE>
<S> <C>
INDEX OF DEFINED TERMS.......................................................... -ii-
ARTICLE I REGISTRATION RIGHTS............................................ 1
Section 1.1 Certain Definitions............................................ 1
Section 1.2 Piggyback Registrations........................................ 2
Section 1.3 Demand Registrations........................................... 2
Section 1.4 Registrations on Form S-3...................................... 4
Section 1.5 Registration Procedures........................................ 4
Section 1.6 Expenses of Registration....................................... 5
Section 1.7 Underwritten Registrations..................................... 5
Section 1.8 Rule 144 Requirements; Termination of Registration Rights...... 6
Section 1.9 Information by Holder.......................................... 6
Section 1.10 Prospectus Delivery Requirement................................ 6
Section 1.11 Rule 144 Reporting............................................. 6
Section 1.12 Other Registration Rights...................................... 7
Section 1.13 Listing Application............................................ 7
Section 1.14 Damages; Injunctive Relief..................................... 7
Section 1.15 Indemnification................................................ 7
Section 1.16 Assignment of Registration Rights.............................. 10
ARTICLE II COVENANTS OF THE COMPANY....................................... 10
Section 2.1 Affirmative Covenants.......................................... 10
Section 2.2 Negative Covenants............................................. 16
ARTICLE III MISCELLANEOUS.................................................. 19
Section 3.1 Successors and Assigns......................................... 19
Section 3.2 Governing Law.................................................. 19
Section 3.3 Counterparts................................................... 19
Section 3.4 Titles and Subtitles........................................... 19
Section 3.5 Notices........................................................ 19
Section 3.6 Expenses....................................................... 20
Section 3.7 Amendments and Waivers......................................... 20
Section 3.8 Severability................................................... 20
Section 3.9 Aggregation of Stock........................................... 21
Section 3.10 Entire Agreement; No Waiver.................................... 21
</TABLE>
Schedule A Key Management
Schedule B Investors
Schedule C Independent Series A Holders
Schedule D Series D Preferred Shareholders
Schedule E Common Shareholders
i
<PAGE>
INDEX OF DEFINED TERMS
----------------------
TERM LOCATION
- ---- --------
Agreement Introduction
Articles of Incorporation Section 2.1(a)
Beneficiaries Section 1.5
Board Observer Qualified Holder Section 2.1(c)(ii)
Code Section 2.1(i)
Common Shareholders Introduction
Company Introduction
Exchange Act Section 1.1(a)
Holder Section 1.1(b)
Indemnified Party Section 1.15(c)
Indemnifying Party Section 1.15(c)
Independent Series A Holders Introduction
Investor/Investors Introduction
Key Management Introduction and Section 1.1(i)
Previous Agreement Recitals
Prior Restated Agreement Section 1.1(e)
Qualified Holder Section 2.1(b)(i)
Qualified Public Offering Section 2.1(b)(i)
Registrable Securities Section 1.1(c)
Registration Expenses Section 1.1(d)
SEC Section 1.1(f)
Securities Act Section 1.1(g)
Selling Expenses Section 1.1(h)
Series D Preferred Shareholders Introduction
Series E Preferred Stock Recitals
Series E Purchase Agreement Recitals
Under Subscribing Holder Section 2.2(a)(v)(D)(3)
ii
<PAGE>
ACTIVE POWER, INC.
SECOND AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
THIS SECOND AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT (the
"Agreement") is made as of the 23rd day of November, 1999, by and among Active
---------
Power, Inc., a Texas corporation (the "Company"), certain members of Company's
-------
management listed on Schedule A hereto, as the same may be amended from time to
time pursuant to Section 1.1(i) hereof (the "Key Management"), the investors
--------------
listed on Schedule B hereto (each, an "Investor" and collectively, the
--------
"Investors"), certain holders of the Series A Convertible Preferred Stock of the
---------
Company listed on Schedule C hereto (the "Independent Series A Holders"),
----------------------------
certain holders of the Series D Convertible Preferred Stock of the Company
listed on Schedule D hereto (The "Series D Preferred Shareholders") and certain
-------------------------------
other holders of the Common Stock of the Company listed on Schedule E hereto
(the "Common Shareholders").
-------------------
R E C I T A L S:
WHEREAS, the Company, the Investors, the Independent Series A Holders,
the Series D Preferred Shareholders and the Common Shareholders are parties to
that certain Amended and Restated Investors' Rights Agreement, dated June 16,
1998 (the "Previous Agreement");
------------------
WHEREAS, the Series D Preferred Shareholders also hold the Company's
Series B Convertible Preferred Stock and Series C Convertible Preferred Stock;
WHEREAS, the Company and the Investors are parties to the Series E
Convertible Preferred Stock Purchase Agreement dated as of even date herewith
(the "Series E Purchase Agreement") pursuant to which the Company has agreed to
---------------------------
sell, and the Investors have agreed to purchase, shares of the Series E
Convertible Preferred Stock (the "Series E Preferred Stock") of the Company; and
------------------------
WHEREAS, the parties desire to enter into this Agreement to amend and
supersede the Previous Agreement as a material inducement to the Investors to
enter into the Series E Agreement and invest funds in the Company.
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein and for certain other good and valuable consideration, the
receipt and sufficiency of which in hereby acknowledged, the parties hereto
agree as follows:
1
<PAGE>
ARTICLE I
REGISTRATION RIGHTS
Section 1.1 Certain Definitions. As used in this Agreement, the following
-------------------
terms shall have the respective meanings set forth below:
(a) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended, and the rules and regulations promulgated thereunder;
(b) "Holder" means the person who is then the record owner of
------
Registrable Securities which have not been sold to the public.
(c) "Registrable Securities" means (i) the Common Stock issuable upon
----------------------
conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or the
exercise of the Warrants; and (ii) any Common Stock issued or issuable with
respect to the shares referred to in clause (i) by way of a stock dividend or
stock split or in connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization; provided that any such share
shall cease to be a Registrable Security when sold pursuant to a registration
statement declared effective under the Securities Act or sold to the public
pursuant to a broker transaction under Rule 144 promulgated thereunder.
(d) "Registration Expenses" means all expenses incurred by the
---------------------
Company in compliance with Sections 2, 3, and 4 hereof, including, without
limitation, all registration and filing fees, printing expenses, fees and
disbursements of counsel for the Company, blue sky fees and expenses, the
expense of any special audits incident to or required by any such registration
and the reasonable fees and disbursements of a single special counsel for the
Holders, provided the Holders shall have used their reasonable best efforts to
utilize the counsel for the Company or the Underwriters and shall employ such
separate special counsel only if necessary.
(e) "Prior Restated Agreement" means the First Amended and Restated
------------------------
Stock Purchase and Stockholders' Agreement made and entered into as of March 6,
1995 by and among the Company and the persons listed on the signature pages
thereto, as amended pursuant to Amendment No. 1 thereto dated as of May 6, 1996.
(f) "SEC" means the United States Securities and Exchange Commission.
---
(g) "Securities Act" means the Securities Act of 1933, as amended, and
--------------
the rules and regulations promulgated thereunder.
(h) "Selling Expenses" means all underwriting discounts, selling
----------------
commissions and transfer taxes applicable to the sale of securities by the
Holders, Key Management and Common Shareholders, as the case may be, in an
offering pursuant to this Agreement.
2
<PAGE>
(i) "Key Management" means shareholders of the Company who are (i)
--------------
officers or key employees of the Company and (ii) identified in good faith from
time to time by the Board of Directors as "Key Management" for purposes of this
Agreement.
(j) Certain other capitalized terms used but not defined herein,
shall have the respective meanings ascribed to such terms in the Series E
Purchase Agreement.
Section 1.2 Piggyback Registrations.
-----------------------
(a) If the Company shall determine to register any of its
securities under the Securities Act, either for its own account or the account
of a security holder or holders exercising their registration rights, other than
pursuant to (1) Section 1.3 below; (2) a registration statement relating solely
to employee benefit, stock option or purchase plans, or a transaction pursuant
to Rule 145 promulgated under the Securities Act; or (3) an offering on any
registration form which does not permit secondary sales or does not include
substantially the same information as would be required to be included in a
registration statement covering the sale of Registrable Securities, the Company
will:
(i) promptly give to (x) each Holder, (y) each member of Key
Management, and (z) each Common Shareholder, written notice thereof (which shall
include the number of shares the Company or other security holder proposes to
register and, if known, the name of the proposed underwriter); and
(ii) use its reasonable best efforts to include in such
registration statement all of the Registrable Securities and Common Stock
specified in a written request or requests, made by the Holders, Key Management
and Common Shareholders within twenty (20) days after receipt of the written
notice from the Company described in clause (i) above. If the underwriter
advises the Company that marketing considerations require a limitation on the
number of shares offered pursuant to any registration statement, such limitation
shall be imposed in the following order: (x) first, the shares of the Company
sought to be included therein by the Company shall be included to the extent
allowed by the underwriter, (y) second, the shares sought to be included therein
by the Common Shareholders shall be cut back pro rata, in proportion to the
shares sought to be included therein by each, and (z) third, the shares sought
to be included therein by the Holders and Key Management shall be cut back pro
rata, in proportion to the shares sought to be included therein by each.
(b) If any Holder, any member of Key Management or any Common
Shareholder disapproves of the terms of any Company underwriting in which his or
its shares are to be included under this Section 1.2, he or it may elect to
withdraw therefrom by written notice to the Company and the underwriter
delivered at least seven days prior to the effective date of the registration
statement.
Section 1.3 Demand Registrations.
--------------------
(a) From and after the earlier of (1) the fourth anniversary date
of the Closing of the Series E Purchase Agreement or (2) 180 days after the
effective date of the initial public offering of the Company's Common Stock, if
the Company receives in writing a first request from the Holders of an aggregate
of not less than a majority of the Registrable Securities then
3
<PAGE>
outstanding, or a second request from the Holders of an aggregate of not less
than 25% of the Registrable Securities then outstanding, that the Company effect
the registration under the Securities Act of Registrable Securities, of which at
least 20% of the then outstanding Registrable Securities shall be included in
such registration (which offering must have a per share price of not less than
$34.02 per share (as adjusted for stock dividends, splits, combinations,
reclassification and the like)), the Company will:
(i) promptly give written notice of the proposed registration to
all other Holders, Key Management and the Common Shareholders; and
(ii) as soon as practicable, prepare and file and use its
reasonable best efforts to cause to become effective such registration statement
as may be so requested and as would permit or facilitate the sale and
distribution of such portion of the Registrable Securities as is specified in
such request, together with such additional portion of the Registrable
Securities of any Holder(s) and shares of Common Stock held by Key Management
and Common Shareholders joining in such request as may be specified in a written
request given to the Company within thirty (30) days after receipt of the
written notice from the Company specified in clause (i) above.
(b) If the underwriter managing the offering advises the Holders, Key
Management and Common Shareholders who have requested inclusion of their
Registrable Securities or Common Stock, as the case may be, in such registration
statement that marketing considerations require a limitation on the number of
shares offered, such limitation shall be imposed in the following order: (1)
first, excluding shares to be registered by the Common Shareholders pro rata
according to the number of shares of Common Stock requested to be included by
each; (2) second, excluding shares to be registered by Key Management pro rata
according to the number of shares of Common Stock requested to be included by
each; and (3) third, pro rata among such Holders who requested inclusion of
Registrable Securities in such registration statement according to the number of
shares of Registrable Securities owned by each. Except for shares of Common
Stock held by Key Management, neither the Company nor any other shareholder may
include shares in such registration statement without the consent of Holders of
a majority of the Registrable Securities included therein if the underwriter
managing such offering advises the Holders who have included Registrable
Securities in such registration statement that the inclusion of such additional
shares may either limit the number of Registrable Securities which can be sold
or adversely affect the price at which such Registrable Securities can be sold.
(c) Notwithstanding Section 1.3(b) above, the Company shall have the
right, exercisable by written notice to the initiating Holders within thirty
(30) days after receipt of their request to effect a registration under the
Securities Act, to include the Company's shares in such registration, in which
event such registration shall be deemed to be a Company-initiated registration,
and the Holders, Key Management and Common Shareholders shall have the right to
include their Registrable Securities and shares of Common Stock, as the case may
be, therein to the extent permitted under Section 1.2 above.
(d) The Company shall not be obligated to effect more than two (2)
registrations under this Section 1.3. No registration statement initiated by
Holders hereunder
4
<PAGE>
shall count as a registration under this Section 1.3 unless and until it shall
have been declared effective. Any registration requested under this Section 1.3
which shall not become effective solely by reason of the refusal of the Holders
participating therein to proceed with the registration shall count as a
registration effected under this Section 1.3 unless the Company shall have been
reimbursed for the Registration Expenses incurred by it in connection therewith.
Section 1.4 Registrations on Form S-3. In addition to the registrations
-------------------------
provided in Sections 1.2 and 1.3 above, in the event the Company is qualified to
file a registration statement on Form S-3 (or similar short form registration)
under the Securities Act, the Company shall give written notice of such fact to
the Holders. Holders of the Registrable Securities may, by written notice to the
Company, require the Company to file a registration statement on Form S-3 to
effectuate registration of such Holders' Registrable Securities. Following the
initial public offering of its securities, the Company will use its reasonable
best efforts to qualify for registration on Form S-3 or any similar short form
registration within the time prescribed by the Securities Act. The Company may
be required to file up to six (6) registrations on Form S-3 upon demand, each
with respect to an aggregate offering of not less than $500,000 (as determined
with reference to the number of shares proposed to be sold in such registration
multiplied by the average closing price, or if no closing price is available,
the mean of the bid and asked prices, over the fifteen trading days preceding
the date of such demand), but it shall not be obligated to file more than one
registration statement on Form S-3 in any six month period.
Section 1.5 Registration Procedures. In the case of each registration
-----------------------
statement filed by the Company pursuant to this Agreement, the Company will, at
its expense, do the following for the benefit of the Holders, Key Management and
Common Shareholders (sometimes referred to collectively as the "Beneficiaries"):
-------------
(a) Use its reasonable best efforts to keep such registration
statement effective for a period of 180 days or until the Beneficiaries have
completed the distribution described in the registration statement relating
thereto, or such shorter period of time as is specified by Rule 174 promulgated
under the Securities Act, whichever first occurs, and amend or supplement such
registration statement and the prospectus contained therein from time to time to
the extent necessary to comply with the Securities Act and applicable state
securities laws;
(b) Use its reasonable best efforts to register or qualify the
securities to be sold by the Beneficiaries under such registration under the
applicable securities or "blue sky" laws of such jurisdictions as the
underwriter of such offering shall reasonably deem necessary in order to ensure
a successful offering; provided, that the Company shall not be obligated to
--------
qualify to do business in any jurisdiction where it is not then so qualified or
otherwise required to be so qualified or to take any action which would subject
it to the service of process in suits other than those arising out of such
registration;
(c) Furnish such number of prospectuses, including a preliminary
prospectus, in conformity with the requirements of the Securities Act, and such
other documents incident thereto as a Beneficiary from time to time may
reasonably request in order to facilitate the disposition of Registrable
Securities;
5
<PAGE>
(d) In connection with any underwritten offering pursuant to a
registration statement filed pursuant to Section 1.3 hereof, the Company will
enter into an underwriting agreement necessary to effect the offer and sale of
Common Stock, provided such underwriting agreement contains usual and customary
underwriting provisions and is entered into by the Beneficiaries and provided
further that if the underwriter so requests, the underwriting agreement will
contain customary contribution provisions on the part of the Company; and
(e) Permit each selling shareholder and such shareholder's
counsel or other representatives to inspect and copy such corporate documents as
he may reasonably request, subject to receipt of such written confidentiality
undertaking as the Company may reasonably request.
Section 1.6 Expenses of Registration. In the event of a registration in
------------------------
which securities held by Beneficiaries are included under this Agreement, the
Company shall pay all Registration Expenses, but shall not be required to pay or
otherwise assume responsibility for Selling Expenses, which shall be the sole
responsibility of the selling shareholders.
Section 1.7 Underwritten Registrations.
--------------------------
(a) The Company shall have the right to select the managing
underwriter or underwriters for any underwritten offering made pursuant to a
registration under Section 1.2 or Section 1.4 hereof. The Company also, shall
have the right to select the managing underwriter or underwriters in any
registration under Section 1.3 hereof, provided that such managing underwriter
or underwriters shall be reasonably acceptable to the Holders owning a majority
of Registrable Securities included in such registration.
(b) In connection with the initial public offering by the
Company, the Holders, members of Key Management and the Common Shareholders
shall, if requested by the managing underwriter or underwriters thereof, agree
not to sell any of their Registrable Securities or any other securities of the
Company owned by such shareholders in any transaction other than pursuant to
such underwritten offering for a period beginning 60 days prior to the date the
Company and the underwriter reasonably expect the registration statement to
become effective, and for such period not to exceed 180 days as determined in
the discretion of the Board of Directors of the Company (such agreement shall be
pursuant to the standard form of lock-up agreement of the managing underwriter
or underwriters of such initial public offering); provided, however, (i) that,
if reasonably satisfactory to the underwriters, such agreement shall permit the
Holders, members of Key Management and the Common Shareholders to make permitted
transfers (as such term is used in Section 4 of the Fourth Amended and Restated
Shareholders Agreement) of their Registrable Securities, which agreement shall
be expressly conditioned on any such transferees similarly agreeing to be bound
by this Section 1.7, and (ii) that all officers and directors of the Company and
all individual holders of at least one percent (1%) of the total voting power of
the Company enter into similar agreements.
(c) The Company may delay for a maximum of six months any
underwritten offering pursuant to Section 1.2 or Section 1.3 when, in the good
faith judgment of the Board of Directors, (i) a condition or pending transaction
exists, the disclosure of which would reasonably
6
<PAGE>
be expected to have a material adverse effect on the Company, or (ii) a delay in
such offering would be in the best interests of the Company.
Section 1.8 Rule 144 Requirements; Termination of Registration Rights.
---------------------------------------------------------
(a) At any time and from time to time after the close of business
on the earliest of the date that (i) a registration statement filed by the
Company under the Securities Act becomes effective; (ii) the Company registers a
class of securities under Section 12 of the Exchange Act; or (iii) the Company
issues an offering circular meeting the requirements of Regulation A under the
Act, the Company shall undertake to make publicly available, and available upon
request to the Holders of Registrable Securities, such information as is
necessary to enable Holders to make sales of their stock pursuant to Rule 144.
The Company shall furnish to any such Beneficiary, upon request, a written
statement executed by the Company setting forth the steps it has taken to comply
with the current public information requirements of Rule 144.
(b) The rights of a Beneficiary to demand or participate in any
registration effected under this Agreement shall terminate as to such
Beneficiary at such time as such Beneficiary (i) holds less than three percent
(3%) of the fully diluted shares of Common Stock then outstanding and (ii) such
Beneficiary is eligible to dispose of his shares pursuant to Rule 144(k), as in
effect at such time.
Section 1.9 Information by Holder. Each Beneficiary included in any
---------------------
registration shall furnish to the Company such information regarding such
Beneficiary and the distribution proposed by such Beneficiary as the Company may
reasonably request in writing and as shall be reasonably required in connection
with any registration, qualification or compliance referred to in this
Agreement.
Section 1.10 Prospectus Delivery Requirement. In the event that any
-------------------------------
Beneficiaries propose to distribute any Registrable Securities in a registered
offering which is not underwritten, such Beneficiaries severally agree to comply
with the prospectus delivery requirements of the Securities Act with respect to
such distribution and to furnish evidence of such compliance to the extent
reasonably requested by the Company in connection with such distribution.
Section 1.11 Rule 144 Reporting. With a view to making available the
------------------
benefits of certain rules and regulations of the SEC that permit the sale of
restricted securities (as that term is defined in Rule 144 promulgated under the
Securities Act) to the public without registration, the Company agrees to:
(a) use its reasonable best efforts to make and keep public
information from and after ninety days following the effective date of the first
registration under the Securities Act filed by the Company for an offering of
its securities to the general public;
(b) use its reasonable best efforts to file with the SEC in a
timely manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act at any time after it has become subject to
such reporting requirements; and
7
<PAGE>
(c) so long as the Beneficiaries own any shares of Common Stock,
furnish each of the Beneficiaries promptly upon its request, (i) a written
statement by the Company as to its compliance with the reporting requirements of
Rule 144 (at any time from and after ninety days following the effective date of
the first registration statement filed by the Company for an offering of its
securities to the general public), and of the Securities Act and Exchange Act
(at any time after it has become subject to such reporting requirements); (ii) a
copy of the most recent annual or quarterly report of the Company; and (iii)
such other reports and documents so filed as the Beneficiary may reasonably
request in availing itself of any rule or regulation of the SEC allowing the
Beneficiary to sell any such securities without registration.
Section 1.12 Other Registration Rights. From and after the date of this
-------------------------
Agreement, the Company shall not enter into any agreement with any holder or
prospective holder of any securities of the Company giving such holder or
prospective holder the right to require the Company to initiate any registration
of any securities of the Company prior to the date on which the Holders may
initiate a registration or to initiate a registration in which the Holders may
not participate in proportion to their stock ownership, provided that this
--------
Section shall not limit the right of the Company to enter into any agreement
with any holder or prospective holder of any securities of the Company giving
such holder or prospective holder the right, upon any registration of any of the
Company's securities, to include, among the securities which the Company is then
registering, securities owned by such holder. Any right given by the Company to
any holder or prospective holder of the Company's securities in connection with
the registration of securities shall be conditioned such that it shall be
consistent with the rights of the Holders as provided in this Agreement.
Section 1.13 Listing Application. If shares of any class of stock of the
-------------------
Company shall be listed on a national securities exchange or qualified for
inclusion on any interdealer quotation system, the Company shall, at its
expense, include in its listing application all of the shares of the listed
class then owned by the Beneficiaries.
Section 1.14 Damages; Injunctive Relief. The Company recognizes and agrees
--------------------------
that the Holders of Registrable Securities shall not have an adequate remedy if
the Company fails to comply with the provisions of this Agreement, and that
damages will not be readily ascertainable, and the Company expressly agrees that
in the event of such failure damages shall not be an exclusive remedy and the
Holders, or any of them, may seek specific performance of the Company's
obligations hereunder.
Section 1.15 Indemnification.
---------------
(a) The Company will, and hereby does, agree to indemnify and hold
harmless each Beneficiary whose securities of the Company are included in any
registration statement, each of its officers, directors, agents, employees and
partners, and each person controlling such Beneficiary (within the meaning of
the Securities Act), with respect to which registration, qualification or
compliance has been effected pursuant to this Agreement, and each underwriter,
if any, and each person who controls such Beneficiary or underwriter within the
meaning of the Securities Act, against all claims, losses, damages, and
liabilities (joint or several) or actions in respect thereof arising out of or
based on any untrue statement (or alleged untrue statement) of a material fact
contained in any prospectus, offering circular or other
8
<PAGE>
document (including any related registration statement, including any
preliminary prospectus or final prospectus contained therein, notification or
the like, and all amendments and supplements thereto) incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omissions) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Company of the Securities Act or the Exchange Act or the securities laws of any
state or any rule or regulation under the Securities Act or the Exchange Act or
the securities laws of any state applicable to the Company and relating to
action or inaction required of the Company in connection with any such
registration, qualification or compliance, and, subject to compliance with the
provisions of paragraph (c) below, will promptly reimburse each such
Beneficiary, each of its officers, directors, agents, employees and partners,
and each person controlling such Beneficiary, each such underwriter and each
person who controls any such underwriter, for any legal and any other expenses
reasonably incurred in connection with investigating and defending any such
claim, loss, damage, liability or action, whether or not resulting in any
liability, provided that the Company will not be liable in any such case to the
--------
extent that any such claim, loss, damage, liability or expense arises out of or
is based on any untrue statement (or alleged untrue statement) or omission (or
alleged omission) in reliance upon and in conformity with written information
furnished to the Company by such Beneficiary or underwriter and stated to be
expressly for use therein.
(b) Each Beneficiary will, if securities held by such Beneficiary are
included in the securities as to which such registration, qualification or
compliance is being effected, indemnify and hold harmless the Company, each of
its directors, officers, employees and agents and each underwriter, if any, of
the Company's securities covered by such a registration statement, each person
who controls the Company or such underwriter within the meaning of the
Securities Act and the rules and regulations thereunder, each other such
Beneficiary and each of their officers, directors, employees, agents and
partners, and each person controlling such Beneficiary, against all claims,
losses, damages and liabilities (or actions in respect thereof) arising out of
or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any such registration statement, prospectus, offering circular
or other document (and all amendments and supplements thereto), or any omission
(or alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or any
violation by such Beneficiary of the Securities Act or the Exchange Act or any
rule or regulation under the Securities Act or the Exchange Act or the
securities laws of any state applicable to such Beneficiary, and will promptly
reimburse the Company and such other Beneficiaries' directors, officers,
partners, persons, underwriters or control persons for any legal or other
expenses reasonably incurred in connection with investigating or defending any
such claim, loss, damage, liability or action, whether or not resulting in
liability, in each case to the extent, but only to the extent, that such untrue
statement (or alleged untrue statement) or omission (or alleged omission) is
made in such registration statement, prospectus, offering circular or other
document in reliance upon and in conformity with written information furnished
to the Company by such Beneficiary and stated to be expressly for use therein;
provided that in no event shall any indemnity under this paragraph exceed the
net proceeds from the offering received by such Beneficiary if such Beneficiary
(i) is not, individually or through its affiliates or controlling persons, a
director, executive officer or beneficial holder of in excess of 10% of the
outstanding voting stock of the Company and (ii) had no knowledge regarding the
untruth of any statement (or alleged untrue statement), or any omission (or
alleged omission) upon which any
9
<PAGE>
indemnity stated in this paragraph (b) is a condition precedent to the Company's
obligation to include securities of the Beneficiary in any registration
statement; that the Company will be relying upon this indemnity as an inducement
in doing so; that the Company may, at its option, require an instrument executed
by the Beneficiary and expressly reaffirming this indemnity as a precondition to
proceeding with the registration of any securities under this Agreement; and
that even in the absence of such instrument, the decision of the Beneficiary to
proceed with such registration shall be deemed a reaffirmation of the provision.
(c) Each party entitled to indemnification under this Section 1.5 (the
"Indemnified Party") shall give notice to the party required to provide
-----------------
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
------------------
has actual knowledge of any claim as to which indemnity may be sought, but the
failure of any Indemnified Party to give such notice shall not relieve the
Indemnifying Party of its obligations under this Agreement (except and to the
extent the Indemnifying Party has been prejudiced as a consequence thereof). The
Indemnified Party will be entitled to participate in, and to the extent that it
may elect by written notice delivered to the Indemnifying Party promptly after
receiving the aforesaid notice from such Indemnifying Party, at its expense to
assume, the defense of any such claim or any litigation resulting therefrom,
with counsel reasonably satisfactory to such Indemnified Party; provided that
--------
the Indemnified Party may participate in such defense at its expense,
notwithstanding the assumption of such of defense by the Indemnifying Party, and
provided, further, that if the defendants in any such action shall include both
- -------- -------
the Indemnified Party and the Indemnifying Party, and the Indemnified Party
shall have reasonably concluded that there may be legal defenses available to it
and/or other Indemnified Parties which are different from or additional to those
available to the Indemnifying Party, the Indemnified Party or Parties shall have
the right to select separate counsel to assert such legal defenses and to
otherwise participate in the defense of such action on behalf of such
Indemnified Party or Parties and the reasonable fees and expenses of such
counsel shall be paid by the Indemnifying Party unless such different or
additional defenses are determined by a court of competent jurisdiction to be
invalid or such court bases its decision on common defenses, in which cases the
Indemnified Party or Parties shall pay the fees and expenses of such separate
counsel.
(d) No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment against or enter into any settlement concerning any
Indemnified Party which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release from
all liability in respect of such claim or litigation. Each Indemnified Party
shall provide such reasonable cooperation and shall furnish such information
regarding itself or the claim in question as an Indemnifying Party may
reasonably request in writing and as shall be reasonably required in connection
with defense of such claim and litigation resulting therefrom.
(e) If the indemnification provided for in this Section 1.15 is held
by a court of competent jurisdiction to be unavailable to an Indemnified Party
with respect to any losses, claims, damages or liabilities referred to herein,
the Indemnifying Party, in lieu of indemnifying such Indemnified Party
thereunder, shall to the extent permitted by applicable law contribute to the
amount paid or payable by such Indemnified Party as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect the
relative fault of the Indemnifying Party
10
<PAGE>
on the one hand and of the Indemnified Party on the other in connection with the
violation(s) that resulted in such loss, claim, damage or liability, as well as
any other relevant equitable considerations. The relative fault of the
Indemnifying Party and of the Indemnified Party shall be determined by a court
of law by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact relates to
information supplied by the Indemnifying Party or by the Indemnified Party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission; provided that in no event
shall any contribution under this paragraph exceed the net proceeds from the
offering received by such Beneficiary if such Beneficiary (i) is not,
individually or through its affiliates or controlling persons, a director,
executive officer or beneficial holder of in excess of 10% of the outstanding
voting stock of the Company and (ii) had no knowledge regarding the untruth of
any statement (or alleged untrue statement), or any omission (or alleged
omission) upon which any contribution is sought under this paragraph.
(f) Neither the Company nor any Holder shall be required to
participate in a registration pursuant to which it would be required to execute
an underwriting agreement in connection with a registration effected under
Section 1.2 or Section 1.3 which imposes indemnification or contribution
obligations on the Company or such Holder, as the case may be, more onerous than
those imposed hereunder.
Section 1.16 Assignment of Registration Rights. The rights to cause the
---------------------------------
Company to register Registrable Securities pursuant to this Article I may be
assigned by a Beneficiary to a transferee or assignee of Registrable Securities
which (i) is a subsidiary, affiliate, member, parent, general partner, limited
partner, trust grantor or beneficiary, or retired partner of a Beneficiary, (ii)
is a Beneficiary's family member or trust for the benefit of an individual
Beneficiary, (iii) is already a Beneficiary of Registrable Securities or (iv)
acquires at least one hundred thousand (100,000) shares of Registrable
Securities (as adjusted for stock splits and combinations); provided, such
transfer shall be subject to the following: (A) the transferor shall, within ten
(10) days after such transfer, furnish to the Company 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 and (B) such transferee shall
agree to be subject to all restrictions set forth in this Agreement.
ARTICLE II
COVENANTS OF THE COMPANY
Section 2.1 Affirmative Covenants.
---------------------
(a) Fulfillment of Obligations. The Company will observe and
--------------------------
comply fully with all the terms, conditions and covenants of this Agreement, the
Related Documents, and any other instruments or documents to be entered into by
the Company pursuant hereto and thereto, and its Articles of Incorporation, as
amended through the date hereof (the "Articles of Incorporation").
-------------------------
11
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(b) Accounts and Reports.
--------------------
(i) The Company will maintain a standard system of accounts
on a basis in accordance with generally accepted accounting principles and will
keep proper financial records. In addition, prior to a Qualified Public Offering
(as defined below), the Company will furnish to (1) each Investor (so long as
such Investor holds, in the aggregate, at least 100,000 outstanding shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock or Underlying Shares, or any
combination thereof, as adjusted for any stock dividends, combinations, splits
or reclassifications with respect to such shares) and (2) to each other holder
of at least 100,000 outstanding shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock or Underlying Shares in the aggregate whose primary business is
not directly competitive to the business engaged in by the Company, or employed
by such a competitor (each, a "Qualified Holder"), the following:
----------------
A. within 90 days after the end of each fiscal year, a
copy of the consolidated balance sheet for the Company and its subsidiaries as
at the end of such year, consolidated statements of income, retained earnings
and cash flows of the Company and its subsidiaries for such year, all in
reasonable detail, and prepared and certified by an independent public
accounting firm;
B. as soon as practicable prior to the end of each
fiscal year, an annual budget and operating plan for the Company for the coming
fiscal year, broken down on a monthly basis;
C. as soon as practicable after the end of each month,
and, in any event, within 30 days after the end of each month, a copy of the
consolidated balance sheet of the Company and its subsidiaries as at the end of
such month and a consolidated statement of income for such month and the portion
of the fiscal year ending on the last day of such month, with variation analysis
from budget, prepared in reasonable detail setting forth in each case
comparisons to the annual budget and certified as to accuracy in all material
respects, subject to year-end audit adjustments, by the principal financial
officer of the Company;
D. copies of all financial statements and reports that
the Company sends to its shareholders generally or files with the Securities and
Exchange Commission or any stock exchange on which any securities of the Company
may be listed;
E. promptly upon receipt thereof, any additional reports
or management letters given to the Company by its independent public accountants
(and not otherwise contained in other materials furnished to such Investor); and
F. such other financial and other information as such
Investor and any Qualified Holder may reasonably request, including monthly
executive summaries of the Company's activities; provided that in each of the
foregoing instances, such information to the extent it is not generally
disclosed to the public shall by maintained in confidence by the Investors.
12
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For purposes of this Agreement, a "Qualified Public Offering" means
-------------------------
the sale of the Company's Common Stock in a firm commitment, underwritten public
offering registered under the Securities Act other than a registration statement
relating solely to a transaction under Rule 145 under the Securities Act or to
an employee benefit plan of the Company, at a public offering price (prior to
underwriter's commissions and expenses) per share of Common Stock (as adjusted
for stock dividends, splits, combinations, reclassification and the like) per
share equal to or exceeding $34.02 and with aggregate gross proceeds to the
Company and any selling shareholders therein (before deduction for underwriter's
commissions and expenses relating to such registration) of at least $20,000,000,
as adjusted.
(ii) Prior to a Qualified Public Offering, the Company will
also permit each Qualified Holder and its authorized representatives, at all
reasonable times and, upon one business days' prior notice to the Company, as
often as reasonably requested, to visit and inspect, at the expense of such
Qualified Holder, any of the properties of the Company, to inspect its books and
records and to make extracts therefrom, and to discuss the affairs, finances and
accounts of the Company with its officers; provided that such Qualified Holder
shall at all times maintain the confidentiality of any proprietary information
of the Company and their respective clients.
(c) Board of Directors Elections; Meetings; Actions. Prior to a
-----------------------------------------------
Qualified Public Offering:
(i) The Company shall take any and all action necessary to
ensure that members of the Board of Directors are elected annually by the non-
cumulative vote of the shareholders of the Company, voting in the manner
provided in the Third Amended and Restated Articles of Incorporation and the
Fourth Amended and Restated Voting Agreement.
(ii) The Company will use its reasonable best efforts to give
each Qualified Holder written notice at one week in advance of all meetings of
the Board of Directors and all meetings of committees of the Board of Directors,
which notice may be waived in writing or by attendance at the meeting, and will
permit a representative of such Qualified Holder to attend and observe meetings
of the Board of Directors; provided, however that the Company reserves the right
to exclude the representative of such Qualified Holder from access to any
meeting or portion thereof:
A. if the Company believes, upon advice of counsel, that
such exclusion is reasonably necessary to preserve the attorney-client
privilege;
B. to avoid the disclosure of highly confidential
proprietary information to such representative if such representative represents
a Qualified Holder that is a potential competitor, customer or prospective
customer of the Company, and the attendance of such representative would give
the Qualified Holder a competitive advantage or cause the Company to lose a
competitive advantage, or for other similar reasons; or
C. if in the judgment of a majority of the Directors,
such access would materially impair the due consideration by the Board of
Directors of any matter;
13
<PAGE>
(iii) The Company will promptly reimburse each Director for
all reasonable costs incurred by such Director in connection with his or her
attendance at meetings of the Board of Directors or of any committees thereof.
Meetings of the Board shall be held at least quarterly.
(iv) The Company shall furnish each Qualified Holder with a
copy of the minutes, written consents and other records of all meetings and
other actions taken by the Board of Directors and its committees and all written
material given to members of the Board of Directors in connection with such
meeting at the same time such materials and information are given to the Board
of Directors; provided, however, that the Company reserves the right to exclude
such Qualified Holder from access to any such material:
A. if the Company believes, upon advice of counsel, that
such exclusion is reasonably necessary to preserve the attorney-client
privilege; or
B. to avoid the disclosure of highly confidential
proprietary information to Qualified Holder if such Qualified Holder is a
potential competitor, customer, or prospective customer of the Company, and the
disclosure of such information would give the Qualified Holder a competitive
advantage or cause the Company to lose a competitive advantage, or for other
similar reasons;
(v) If the Company proposes to take any action by written
consent in lieu of a meeting of its Board of Directors or any committee thereof,
the Company shall give written notice thereof to each Qualified Holder prior to
or concurrently with the time such consent is distributed to directors for
signature, together with any description of the nature and substance of such
action as may be provided to the Directors of the Company.
(d) Payment of Taxes, etc. Prior to a Qualified Public Offering,
---------------------
the Company will pay and discharge or cause to be paid and discharged, all
taxes, assessments and governmental charges or levies imposed upon it or upon
its respective income or properties before the same shall become in default, as
well as all lawful claims for labor, materials and supplies that, if not paid
when due, might result in the imposition of a lien or charge upon any of its
properties; provided, however, that the Company shall not be required to pay and
-------- -------
discharge any such tax, assessment, charge, levy or claim so long as the
validity thereof is being contested by the Company in good faith by appropriate
proceedings and an adequate reserve therefor has been established.
(e) Dealings with Related Parties. Prior to a Qualified Public
-----------------------------
Offering, each transaction (other than expense reimbursements or payments to
employees or Directors in the ordinary course of the Company's business) by and
between the Company on the one hand, and any shareholder, Director, officer or
employee of the Company, or entities controlled by or affiliated with any such
persons, on the other hand, shall be approved by the unanimous consent of all
Directors of the Company who are not interested in such transaction (it being
acknowledged and agreed that the purchase and sale of the Series E Preferred
Stock pursuant to the Series E Purchase Agreement and the transactions related
thereto were the subject of arms'-length negotiations and have received such
approval).
14
<PAGE>
(f) Use of Proceeds. The proceeds to the Company from the sale of
---------------
the Series E Preferred Stock shall be used by the Company for costs associated
with the preparation of applications for patent and patent prosecution,
development and engineering expenses for product development, expansion of
marketing and sales activities and other general corporate and working capital
purposes.
(g) Key Man Insurance. The Company will, until consummation of a
-----------------
Qualified Public Offering, use its reasonable best efforts to maintain, at its
expense, "key man" life insurance insuring the life of Joseph F. Pinkerton, III
and designating the Company as the beneficiary of a death benefit of at least
$2,000,000. Joseph F. Pinkerton, III is in satisfactory health and the Company
and Joseph F. Pinkerton, III are not aware of any condition that would prevent
the Company from obtaining such life insurance at normally prevailing rates for
persons in good health.
(h) Conduct of Business. Unless otherwise approved by the
-------------------
unanimous vote or consent of all directors then serving on the Company's Board
of Directors, prior to a Qualified Public Offering, the Company will engage only
in businesses relating to the development, research, marketing, distribution and
sales of proprietary technologies, and products based on such technologies,
utilizing magnetic forces and energy conversion processes.
(i) Section 1202. As of and immediately following the date hereof,
------------
the Company meets all of the requirements for qualification as a "qualified
small business" set forth in Section 1202(d) of the Internal Revenue Code of
1986, as amended (the "Code"), including without limitation the following: (1)
----
the Company will be a domestic C corporation and (2) the Company's (and any
predecessor's) aggregate gross assets, as defined by Code Section 1202(d)(2), at
no time between August 10, 1983 through the date hereof, have exceeded $50.0
million, taking into account the assets of any corporation required to be
aggregated with the Company in accordance with Code Section 1202(d)(3). In
addition, the Company has not made any purchases of its own stock described in
Code Section 1202(c)(3)(B) during the one year period preceding the date hereof.
Finally, as of the date hereof, the Company is an eligible corporation, as
defined by Code Section 1202(e)(4), and the Company hereby agrees that it shall
continue to do the following:
(i) use its reasonable best efforts to comply with the
reporting and record keeping requirements of Section 1202 of the Code and any
regulations promulgated thereunder;
(ii) use its reasonable best efforts to provide the Investors
with notice at least ten (10) business days prior to taking any of the following
actions:
A. Within the two-year period ending one year from the
date hereof, purchase an amount of its own stock (within the meaning of Section
1202(c)(3) of the Code) having an aggregate value at the time(s) of purchase
exceeding five percent of the aggregate value of all of its outstanding stock
determined as of the start of such period;
B. Conduct any of the following businesses (as defined
for purposes of Section 1202(e)(3) of the Code):
15
<PAGE>
(1) any business involving the performance of
services in the fields of law, accounting, actuarial science, performing arts,
athletics, or brokerage services;
(2) any banking or insurance business;
(3) any farming business (including the business of
raising or harvesting trees);
(4) any business involving the production or
extraction of natural resources with respect to which a deduction is allowable
under Section 613 or 613A of the Code; or
(5) any business of operating a hotel, motel,
restaurant or similar establishment;
(iii) Knowingly permit more than 10 percent (10%) of the value
of its assets to consist of stock issued by other companies (other than stock of
companies that qualify as subsidiaries of the Company within the meaning of
Section 1202(e)(5) of the Code or stock that is held as working capital or
reasonably expected to be sold within two years to finance research and
experimentation within the meaning of Section 1202(e)(6) of the Code);
(iv) Knowingly permit more than 10 percent (10%) of the value
of its assets to consist of real property which is not used in the active
conduct of a qualified trade or business within the meaning of Section
1202(e)(7) of the Code;
(v) Make an election under Section 936 of the Code (relating
to the Puerto Rico and possessions tax credit) or permit a subsidiary to make
such an election; or
(vi) In a single transaction or series of related
transactions, raise capital of more than $1 million through the issuance of
securities or the incurrence of indebtedness if such transaction or series of
related transactions likely would cause the Company to fail to satisfy the
active business requirement set forth in Section 1202(e)(1) of the Code by
virtue of holding excess cash or investment assets.
For purposes of the foregoing, any valuation or other determination
(including, without limitation, a determination that a specific course of action
does not constitute the conduct of a business described in subsection (i), (ii)
or (iii) above) made by the Company's Board of Directors in good faith or for
which there was, at the time made, a reasonable basis in law or fact shall be
conclusive.
(j) The Company shall require all Directors, officers, consultants
and employees of the Company to execute and deliver a proprietary information
and inventions assignment agreement.
(k) The Company shall operate in a manner such that it will not
become a "United States real property holding corporation" ("USRPHC") as that
------
term is defined in Section 897(c)(2) of the Code, and the regulations
promulgated thereunder. The Company agrees to
16
<PAGE>
make determinations as to its status as a USRPHC, and will file statements
concerning those determinations with the Internal Revenue Service, in the manner
and at the times required under Treas. Reg. (S) 1.897-2(h), or any supplementary
or successor provision thereto. Within thirty (30) days of a request from an
Investor or any of its partners, shareholders, members or affiliates, the
Company will inform the requesting party, in the manner set forth in Treas. Reg.
(S) 1.897-2(h)(1)(iv), or any supplementary or successor provision thereto,
whether that party's interest in the Company constitutes a United States real
property interest (within the meaning of Section 897(c)(1) of the Code, and the
regulations promulgated thereunder) and whether the Company has provided to the
Internal Revenue Service all required notices as to its USRPHC status.
Section 2.2 Negative Covenants.
------------------
(a) Negative Covenants Generally. Until the effective date of a
----------------------------
Qualified Public Offering, or for so long as at least 200,000 shares of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock are outstanding, the
Company further covenants and agrees with the Investors that it will not,
without the prior authorization of at least a majority (or such higher
percentage required in the Company's Articles of Incorporation, Bylaws or the
Texas Business Corporation Act, or other agreement by which the parties hereto
may be bound) of the holders of outstanding shares entitled to vote on such
matters of each of (1) the Common Stock, voting as a single class, and (2) the
outstanding Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Underlying Shares then held by the Investors and each Qualified Holder, voting
as single class, do any of the following:
(i) Declare or pay any dividends on Common Stock or 1992
Preferred Stock, or repurchase, redeem or offer to acquire any of its Preferred
Stock or Common Stock (except for buy-backs under employee stock purchase plans,
the exercise of put rights as provided in the Warrants, the redemptions
contemplated by the Articles of Incorporation, or the Company's right to
repurchase certain shares of Common Stock as set forth in the Prior Restated
Agreement);
(ii) Make any loans or advances to employees, except in the
ordinary course of business as part of travel advances or salary (except that
promissory notes for purchase of shares shall be permitted without any such
consent);
(iii) Make or enter into any guarantees except in ordinary
course of business; or
(iv) Own, or permit any subsidiary of the Company to own, any
stock or other securities of any corporation, partnership or other entity unless
it is wholly owned by the Company or another such subsidiary;
(v) Issue any shares of its capital stock, any warrants,
options or other rights to purchase such shares or any securities convertible
into or exchangeable for such shares, except in the following circumstances:
A. as a dividend or distribution payable pro rata to all
shareholders;
17
<PAGE>
B. issuances of shares of Common Stock pursuant to the
conversion of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock or upon
exercise of the Warrants;
C. issuances of not in excess of an aggregate of 1,260,000
shares of Common Stock to employees, officers, directors or consultants of the
Company upon the exercise of options granted by the Company pursuant to the 1993
Plan with the approval of the Board of Directors of the Company or a duly
appointed committee thereof;
D. issuances of shares of Common Stock pursuant to warrants
issued to ECT Merchant Investments Corp. or its affiliates, Stephens Group, Inc.
or its affiliates, or General Electric Corporation or its affiliates in
connection with certain strategic relationships entered into in connection with
the Series E Preferred Stock financing; or
E. an issuance for cash (other than as described in clauses
(B), (C) and (D) above) or marketable securities, provided that prior to such
issuance:
(1) The Company shall have first offered such securities
to each Qualified Holder in the manner provided below;
(2) The Company shall have given to each such Qualified
Holder written notice stating the name and address of the proposed Investor and
the principal terms and conditions of such offer, which notice will contain an
offer by the Company to sell to each such Qualified Holder that portion of the
securities to be issued that reflects the same proportionate interest of each
such Qualified Holder's interest in the Company's outstanding Common Stock
(assuming the conversion of all shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock), at the same price and upon the same terms that such securities
are proposed to be issued to others;
(3) Each such Qualified Holder shall, within fifteen
(15) days of receiving such notice, have mailed or otherwise delivered to the
Company written notice indicating its intention to purchase the securities
offered to it. In the event that any such holder elects to purchase the
securities offered to it, the consideration therefor shall be paid to the
Company and validly issued stock or other securities shall be delivered to such
holder on or before noon on the fifth day (or next succeeding business day)
after the receipt by the Company of all such notices of election to purchase. If
such a Qualified Holder has not notified the Company (the "Under Subscribing
-----------------
Holder") of its intent to purchase all of the securities offered to it by the
- ------
expiration of the 15-day period described in the first sentence of this
subparagraph (3), the Company shall immediately notify the subscribers that have
elected to purchase all of the securities offered to them, and each such
subscriber shall have the option to purchase, until the expiration of ten days
following the expiration of such 15-day period, its pro rata portion of the
shares or other securities not so purchased by the Under Subscribing Holder. Any
shares or other securities not purchased by the Qualified Holders may be sold by
the Company to others on the terms and conditions identified in the notice
delivered pursuant to subparagraph (2) above for a period of forty-five days
following the expiration of the 15-day period described in the first sentence of
this subparagraph (3).
18
<PAGE>
(vi) increase the authorized number of the shares of its capital
stock; or
(vii) except to the extent that all such indebtedness or
obligations with respect to such indebtedness do not exceed $250,000 in the
aggregate (A) create or assume any long-term debt (including obligations in
respect of capital leases or, except in the ordinary course of business under
existing lines of credit, create, incur or assume any short-term debt for
borrowed money, or (B) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the obligations of
any other person, except in the ordinary course of business and consistent with
past practice; provided, however, this limitation shall not apply to the
incurrence of indebtedness in the manner provided in clauses (A) and (B) above
if (1) the proceeds of such borrowing are used to finance working capital
requirements of the Company or capital asset acquisitions for use in the
Company's then permitted lines of business, or (2) the incurrence of such
indebtedness is approved by at least two-thirds of the members of the Board.
(b) Negative Covenants with Respect to Preferred Stock. So long as at
--------------------------------------------------
least 100,000 shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock
are outstanding, the Company further covenants and agrees with the Investors
that it will not, without the prior authorization of at least a majority of the
outstanding shares of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock,
together with any outstanding Underlying Shares, voting collectively as a single
class and entitled to vote on such matters (or such higher percentage as
required in the Company's Articles of Incorporation or Bylaws or the Texas
Business Corporation Act, or in any other agreement or state corporation law by
which the Company and the holder of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Underlying Shares may be bound), do any of the following:
(i) make any change in its Articles of Incorporation or Bylaws
which alters, changes or amends the preferences, rights or privileges of the
holders of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock; provided,
that any such change which would adversely affect the rights of the holders of
any individual series of Preferred Stock, or otherwise require the vote of a
single series of Preferred Stock under applicable law, shall in addition require
the consent of a majority in interest (or such higher percentage as may be
required by law) of the holders of such class of Preferred Stock;
(ii) create any class or series of equity security with rights
which are prior or preferential to or which ranks pari passu to the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock; or
(iii) change the number of members of Board of Directors or the
procedures for electing directors, whether by amendment to its Bylaws or
otherwise.
19
<PAGE>
ARTICLE III
MISCELLANEOUS
Section 3.1 Successors and Assigns. Except as otherwise provided herein,
----------------------
the terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any shares of Registrable Securities). Nothing in this Agreement,
express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.
Section 3.2 Governing Law. This Agreement shall be governed by and
-------------
construed under the laws of the State of Texas, without giving effect to
conflicts of laws principles, unless the Company reincorporates in Delaware (or
another state), in which case the law of the State of Delaware (or such other
state) shall apply.
Section 3.3 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 3.4 Titles and Subtitles.
--------------------
The titles and subtitles used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement.
Section 3.5 Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed given if delivered personally or by
commercial delivery service, or mailed by registered or certified mail (return
receipt requested) or sent via facsimile (with confirmation of receipt) to the
parties at the address for each party set forth beneath each party's as follows
(or at such other address for a party as shall be specified by like notice):
(i) if to the Company:
Active Power, Inc.
11525 Stonehollow Drive
Suite 135
Austin, Texas 78758
Attention: Mr. Joseph F. Pinkerton, III
Fax: (512) 836-4511
with a copy to:
Brobeck, Phleger & Harrison LLP
301 Congress Avenue, Suite 1200
Austin, Texas 78701
20
<PAGE>
Attn: J. Matthew Lyons, Esq.
Fax: (512) 477-5813
(ii) if to Key Management:
Addressed to the appropriate person c/o the Company.
(iii) if to the Investors:
At the address set forth on Schedule B hereto.
(iv) if to the Common Shareholders, the Independent Series
A Holders or the Series D Preferred Shareholders:
At the most recent address on the Company's books
with respect to such Common Shareholder, Independent
Series A Holder or Series D Preferred Shareholder.
Notice given by personal delivery, courier service or mail shall be
effective upon actual receipt. Notice given by telecopier shall be confirmed by
appropriate answer back and shall be effective upon actual receipt if received
during the recipient's normal business hours, or at the beginning of the
recipient's next business day after receipt if not received during the
recipient's normal business hours. Any party may change any address to which
notice is to be given to it by giving notice as provided above of such change of
address.
Section 3.6 Expenses. If any action at law or in equity is necessary to
--------
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
Section 3.7 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
at least a majority of the Registrable Securities then outstanding; provided,
however, that (i) the registration rights of the holders of any individual class
of Preferred Stock, Common Shareholders or Key Management, as the case may be,
and (ii) this proviso may not be amended without the consent of (x) in the case
of an amendment affecting an individual class of Preferred Stock, the holders of
a majority of the outstanding shares of such class of Preferred Stock and
Underlying Shares with respect to such class of Preferred Stock or (y) in the
case of an amendment with respect to Common Shareholders or Key Management, the
holders of a majority of the outstanding shares held by Common Shareholders and
Key Management. Any amendment or waiver effected in accordance with this Section
shall be binding upon each holder of any Registrable Securities then
outstanding, each future holder of all such Registrable Securities and the
Company.
Section 3.8 Severability. If one or more provisions of this Agreement
------------
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement
21
<PAGE>
and the balance of the Agreement shall be interpreted as if such provision were
so excluded and shall be enforceable in accordance with its terms.
Section 3.9 Aggregation of Stock. All shares of Registrable Securities
--------------------
held or acquired by affiliated entities or persons shall be aggregated together
for the purpose of determining the availability of any rights under this
Agreement.
Section 3.10 Entire Agreement; No Waiver. This Agreement (including the
---------------------------
Exhibits hereto, if any) constitutes the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof and
does hereby supersede the Previous Agreement. No course of dealing between or
among the parties hereto or any delay in exercising any rights hereunder shall
operate as a waiver of any rights of any such party.
[The remainder of this page has been intentionally left blank.]
22
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Second Amended and
Restated Investors' Rights Agreement as of the date first above written.
COMPANY:
-------
ACTIVE POWER, INC.
By:/s/ Joseph F. Pinkerton, III
Joseph F. Pinkerton, III
President
INVESTORS:
---------
STEPHENS-ACTIVE POWER, LLC
By: Stephens Group, Inc.
As Manager
By: /s/ Jackson Farrow, Jr.
Name: Jackson Farrow, Jr.
Title: Vice-President
ECT MERCHANT INVESTMENTS CORP.
By: /s/ Stephen Horn
Name: Stephen Horn
Title: Vice-President
RHO MANAGEMENT TRUST I
By: Rho Management Company, Inc.
As Investment Advisor
By: /s/ Joshua Ruch
Name: Joshua Ruch
Title: President and CEO
[SIGNATURE PAGE TO SECOND AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
CENTERPOINT VENTURE FUND II, L.P.
By: CENTERPOINT ASSOCIATES II, L.P.
its General Partner
By: CENTERPOINT ASSOCIATES
MANAGEMENT II, L.L.C.
its General Partner
By: /s/ Robert J. Paluck
Robert J. Paluck
Managing Member
SSM VENTURE PARTNERS, L.P.
By: SSM I, L.P., its General Partner
By: SSM Corporation, its General Partner
By: /s/ Wm. F. Harrison
Name:William F. Harrison
Vice President
SSM VENTURE PARTNERS II, L.P.
By: SSM II, L.P., its General Partner
By: SSM Corporation, its General Partner
By: /s/ Wm. F. Harrison
Name:William F. Harrison
Vice President
SSM VENTURE ASSOCIATES, L.P.
By: SSM II, L.P., its General Partner
By: SSM Corporation, its General Partner
By: /s/ Wm. F. Harrison
<PAGE>
Vice President
[SIGNATURE PAGE TO SECOND AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
AUSTIN VENTURES IV-A, L.P.
By: AV Partners IV, L.P., its General Partner
By: /s/ John D. Thornton
John D. Thornton
Authorized Signatory
AUSTIN VENTURES IV-B, L.P.
By: AV Partners IV, L.P., its General Partner
By: /s/ John D. Thornton
John D. Thornton
Authorized Signatory
ADWEST LIMITED PARTNERSHIP
By: Advent International Partnership, its
General Partner
By: Advent International Corporation, its
General Partner
By: /s/ Lindsay R. Jones
Lindsay R. Jones
Vice President
[SIGNATURE PAGE TO SECOND AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
ENVIROTECH INVESTMENT FUND I LIMITED PARTNERSHIP
By: Advent International Limited Partnership, its
General Partner
By: Advent International Corporation, its
General Partner
By: /s/ Lindsay R. Jones
Lindsay R. Jones
Vice President
ADVENT INTERNATIONAL INVESTORS II LIMITED
PARTNERSHIP
By: Advent International Corporation, its
General Partner
By: /s/ Lindsay R. Jones
Lindsay R. Jones
Vice President
[SIGNATURE PAGE TO SECOND AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
KEY MANAGEMENT:
--------------
/s/ Joseph F. Pinkerton, III
Joseph F. Pinkerton, III
/s/ David B. Clifton
David B. Clifton
/s/ Bryan B. Plater
Bryan B. Plater
/s/ Eric L. Jones
Eric L. Jones
[SIGNATURE PAGE TO SECOND AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
[signature block for individuals:]
___________________________________________
Print Name:________________________________
Number and class of Shares:________________
[signature block for entities:]
___________________________________________
[print name of entity in the line above]
By:________________________________________
Name:______________________________________
Title:_____________________________________
Number and class of Shares:________________
[SIGNATURE PAGE TO SECOND AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT]
<PAGE>
Schedule A
----------
Key Management
--------------
Joseph F. Pinkerton, III
David B. Clifton
Bryan B. Plater
Eric L. Jones
<PAGE>
Schedule B
----------
Investors
---------
Stephens-Active Power, LLC
111 Center Street
Suite 2500
Little Rock, Arkansas 72201-4430
Attention Mr. Robert Janes
Fax: (501) 377-8027
with a copy to:
Stephens Group, Inc. (Legal)
111 Center Street
Suite 2500
Little Rock, Arkansas 72201-4430
Attention Mr. Jackson Farrow
ECT Merchant Investments Corp.
c/o Enron Corporation
1400 Smith Street
Houston, Texas 77002-9140
Attention: Mr. Robert Greer
Fax: (713) 646-4043
Rho Management Trust I
c/o Rho Management
767 5/th/ Avenue, 43/rd/ Floor
New York, New York 10153
Attn: Ms. Danielle Bodor
Fax: (212) 751-3613
with a copy to:
Rho Management (Legal)
888 7/th/ Avenue, Suite 4500
New York, New York 10019
Attn: Gregory Todd, Esq.
Austin Ventures IV-A, L.P.
Austin Ventures IV-B, L.P.
1300 Norwood Tower
114 West Seventh Street
Austin, Texas 78701
Attn: Mr. John D. Thornton
Fax: (512) 476-3952
<PAGE>
SSM Venture Partners, L.P.
SSM Venture Partners II, L.P.
SSM Venture Associates, L.P.
845 Crossover Lane, Suite 140
Memphis, Tennessee 38117
Attn: Mr. Bill Harrison
Fax: (910) 767-1135
with a copy to:
SSM Venture Partners, L.P.
11525 Stonehollow Dr.,
Suite 135
Austin, Texas 78758
Attn: Mr. Eric L. Jones
Fax: (512) 836-4511
Adwest Limited Partnership
EnviroTech Investment Fund I
Limited Partnership
Advent International Investors II
Limited Partnership
c/o Advent International
Corporation
101 Federal Street
Boston, Massachusetts 02110
Attn: Ms. Lindsay R. Jones
Fax: (617) 951-0566
CenterPoint Venture Fund, L.P.
Two Galleria Tower
Suite 1670
13455 Noel Rd.
Dallas, Texas 75240
Attn: Mr. Terrence L. Rock
Mr. Robert J. Paluck
Fax: (972) 702-1103
<PAGE>
Schedule C
----------
Independent Series A Holders
----------------------------
Richard Hill
Stan Erwin
David D. Plater
Gary Farmer
Stuart M. Benjamin
Edward W. Benjamin
Succession of Richard B. Montgomery, Jr.
McGrede Partnership
TX/AR MBT Joint Venture
Winston-Brookview MBT JV
KCR Family Limited Partnership
K&E Partnership
SHWMM Partnership
Richard A. Houstoun
Huneke Family Trust U/D/T
W. Allen Custard III
<PAGE>
Schedule D
----------
Series D Preferred Shareholders
-------------------------------
Benjamin Rosen
L.J. Sevin
Harvey B. Cash
Thomas H. Aschenbrenner
John V. Jaggers
Dennis J. Gorman
Steven J. Wallach
W. Scott Hendrick
Dietrich Erdman
Jan E. Lindelow
Robert B. Palmer
<PAGE>
Schedule E
----------
Common Shareholders
-------------------
Richard E. Anderson
C.A. Anderson Family, L.P.
Robert I. Bogin
Vicki Covert Buchanan
Hill Financial Ltd. Partnership
D. Kent Lance
Hal E. Puthoff
The Walter R. Johnson and Hollyce R. Johnson Revocable Living Trust
Agreement
John M. Meadows
John Gray
Jody Frank
Stan Erwin
Andrew Mohr
David D. Plater
Gary Farmer
Stogie Investments
Donna Reisenbigler
Robert Buchanan
Stuart M. Benjamin
Edward W. Benjamin
Charles and Betty Moreton Family Trust
W. J. McAnelly, Jr.
H. H. Prewett
Walter C. Flower III
Krasna B. Vojkovich
Succession of Richard B. Montgomery, Jr.
Elizabeth F. Dumas
Kleinfeld Family Irrevocable Trust #1
Ira Zucker
Mark B. Kleinfeld
Russell G. Bogin
Richard O. Bogin
Robert S. Valenstein
Isaac Luski
Scott R. Little
David Wehrlen (transferee of Joseph F. Pinkerton, III)
<PAGE>
EXHIBIT 10.5
CONSULTING SERVICES AGREEMENT
-----------------------------
This Consulting Services Agreement dated May 6, 1996 (the "Agreement") is
made and entered into by and between Magnetic Bearing Technologies, Inc., a
Texas corporation (the "Company"), and Eric L. Jones ("Consultant").
1. Term of the Agreement. The Company hereby engages Consultant to
---------------------
perform certain consulting services described herein, and Consultant hereby
accepts such engagement with the Company for an initial term of one year,
commencing on the date hereof (the "Initial Term"). Upon the expiration of the
Initial Term, unless either party shall have given the other notice of its
intent to terminate the Agreement in the manner provided in Section 6, the
Agreement shall renew and extend for successive one month terms until terminated
in the manner provided in Section 6.
2. Duties and Obligations.
----------------------
a. Consultant initially shall be Chairman of the Board of Directors
of the Company (the "Board") and shall have such powers and duties customarily
associated with his position as a member of the Board. In his capacity as a
consultant and as Chairman of the Board, Consultant shall advise the Company
with respect to general corporate strategy, as well as, but not limited to,
finance, budgeting, marketing, administration, acquisitions and corporate
partnering.
b. During the term of this Agreement, Consultant shall devote an
average of approximately ten hours per week to the provision of services
hereunder.
c. Consultant currently is subject to a Proprietary Information and
Nondisclosure Agreement with the Company and agrees to remain subject to such
agreement or to such other similar agreement as the Company and Consultant may
later agree during the term of the Agreement.
3. Compensation. As partial compensation for the services of Consultant,
------------
during the Initial term, the Company shall pay to Consultant a fee of $6,250 per
month (prorated for any partial month in which services are rendered), resulting
in a fee of $75,000 during the Initial Term. Compensation for additional terms
during which this Agreement is in effect shall be agreed to by Consultant and
the Company's Board of Directors.
4. Equity Interest in the Company. As additional compensation for the
------------------------------
services of Consultant, Consultant shall be granted, concurrent with the
execution of this Agreement, options to purchase 50,000 shares of the Company's
Common Stock at an exercise price of $0.40 per share, which options shall be
governed exclusively by the Stock Option Agreement substantially in the form
attached hereto as Exhibit A (the "Option Agreement").
<PAGE>
Any subsequent option grants to Consultant, in his capacity as consultant or
otherwise, shall be at the discretion of the Board of Directors.
5. Expenses. The Company shall promptly reimburse Consultant for all
--------
reasonable out-of-pocket expenses incurred in connection with the provisions of
consulting services to the Company, including costs Consultant incurs in
attending Board meetings. Consultant shall provide the Company with monthly
invoices detailing expense reimbursements which Consultant believes are due
under this Agreement, and shall itemize and provide receipts for expenses upon
request.
6. Termination of Consulting Services. Consultant may terminate this
----------------------------------
Agreement at any time, including during the Initial Term, by delivery to the
Company of 30 days prior notice. During any period in which the Agreement is in
effect, including the Initial Term, the Company may terminate this Agreement for
"Cause." After the Initial Term, either party may terminate the Agreement upon
30 days prior notice. For purposes of this Agreement, "Cause" shall mean any of
the following: gross misconduct or acts of commission or omission that involve
a conviction for fraud, embezzlement or misappropriation of any property or
proprietary information of the Company.
7. Miscellaneous.
-------------
a. Independent Contractor. Consultant is an independent contractor
----------------------
and is solely responsible for all taxes, withholdings, and other similar
statutory obligations, including, but not limited to, workers' compensation
insurance, if any be required.
b. Governing Law. This Agreement shall be interpreted, construed,
-------------
governed and enforced according to the laws of the State of Texas.
c. Severability. If any provision of this Agreement is determined by
------------
a court of law to be illegal or unenforceable, then such provision will be
enforced to the maximum extent possible and the other provisions will remain in
full force and effect.
d. Successors and Assigns. The rights and obligations of the Company
----------------------
under this Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of the Company. Consultant shall not be entitled to
assign any of his rights or obligations under this Agreement.
e. Entire Agreement. This Agreement, together with the Stock Option
----------------
Agreement and the Proprietary Information and Nondisclosure Agreement,
constitutes the entire agreement between the parties with respect to the subject
matter hereof. This Agreement may be amended or modified only pursuant to a
writing signed by Consultant and an authorized representative of the Company.
f. Notices. Any notice or other communication required or permitted
-------
to be given hereunder shall be in writing and shall be given by U.S. mail,
certified and postage prepaid, by overnight courier or by hand delivery at the
address set forth below such party's name on the signature page hereto. Any
notice shall be deemed to have been received at the time
2
<PAGE>
it is delivered. Notice of change of address shall also be governed by this
section or may be delivered by first-class mail or by facsimile.
g. Counterparts. This Agreement may be executed in multiple
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Consulting Services
Agreement as of the date set forth above.
CONSULTANT
/s/ ERIC L. JONES
Eric L. Jones
10528 Glass Mountain Trail
Austin, TX 78750
Fax: 512.258.9433
MAGNETIC BEARING TECHNOLOGIES, INC.
By: /S/ Joseph F. Pinkerton, III
-----------------------------
Joseph F. Pinkerton, III
President
11525 Stonehollow Drive, Suite 135
Austin, TX 78758
Fax: 512.836.4511
<PAGE>
EXHIBIT 10.6
PHASE II DEVELOPMENT AND PHASE III FEASIBILITY STUDY AGREEMENT
This DEVELOPMENT AGREEMENT ("Agreement") is effective as of
January 22, 1999, ("Effective Date") by and between Active Power, 11525
Stonehollow Drive, Suite 135, Austin, Texas 78758 ("ACTIVE POWER") and
Caterpillar Inc., 100 N.E. Adams Street, Peoria, Illinois 61629-6490
("CATERPILLAR").
1. DEFINITIONS
-----------
For purposes of this AGREEMENT, the following definitions shall apply:
a) "AFFILIATE" means any company, corporation, partnership or
other business entity which is more than fifty percent (50%) or more owned,
directly or indirectly, by a party to this AGREEMENT.
b) "BACKGROUND INTELLECTUAL PROPERTY" shall be all INTELLECTUAL
PROPERTY incorporated into the PHASE II PRODUCT other than that which is defined
as PROGRAM INTELLECTUAL PROPERTY.
c) "FIELD OF USE" shall mean earth-moving equipment,
construction equipment, mining equipment, forestry equipment, engines, engine
generator sets, agricultural equipment, paving equipment, components for all
such equipment and all reasonable extensions thereof which are mutually agreed
in writing by the parties hereto.
d) "INTELLECTUAL PROPERTY" includes, without limitation,
inventions, whether or not patentable, copyrights, computer software and
accompanying documentation, specifications, know how and original works of
authorship. INTELLECTUAL PROPERTY includes PROPRIETARY INFORMATION.
e) "PROGRAM INTELLECTUAL PROPERTY" means INTELLECTUAL PROPERTY
that is created, made, conceived or reduced to practice in performance of work
under the PROGRAM with respect to UPS electronics (identified as such in Exhibit
E) or UPS packaging.
f) "PROGRAM" shall mean the efforts of CATERPILLAR or ACTIVE
POWER to develop PHASE II PRODUCTS.
2. PROGRAM
-------
CATERPILLAR and ACTIVE POWER have agreed to a PHASE I program under a
separate agreement governing the purchase of certain PHASE I products. This
Agreement governs Phase II development and preliminary Phase III discussions.
Notwithstanding anything contained in this Agreement and subject to the
restrictions in the PHASE I Purchase Agreement, nothing contained herein shall
preclude ACTIVE POWER from selling or otherwise disposing of ACTIVE POWER'S
CleanSource flywheel energy storage system.
a) PHASE II
(i) The parties shall cooperate to develop a PHASE II
PRODUCT which shall include an industrial duty uninterruptible power supply
("UPS") and a CleanSource flywheel. The PHASE II PRODUCT specification and
requirements are detailed in Exhibit A ("Specifications").
1
<PAGE>
(ii) The parties will cooperate with one another to
design, develop and test the PHASE II PRODUCT for possible use with CATERPILLAR
generator sets. ACTIVE POWER will make one prototype that conforms with the
Specifications. If the parties mutually agree on any changes to the
Specifications during the development process, such changes shall be
incorporated into the Specifications and be attached to,and become part of, this
Agreement. The parties will test this prototype, at a mutually, reasonably
agreed upon site, for compliance with the Specifications (except for the
Specification relating to reliability target) stated in Exhibit A. Each party
will document and report to the other party the results of such tests performed
on such prototype together with any comments concerning design changes, further
development, and the like. CATERPILLAR will accept or reject the PHASE II
PRODUCT prototype within thirty (30) calendar days after testing begins at the
site selected by CATERPILLAR (however, if CATERPILLAR fails to indicate a
testing location within sixty (60) days after ACTIVE POWER has completed
Milestone 2 (as set forth in Exhibit C), the testing site shall be ACTIVE
POWER's site in Austin Texas); failure to give notice of acceptance or rejection
will constitute acceptance. CATERPILLAR may reject the PHASE II PRODUCT only if
it fails in some respect to meet the Specifications (except for the
Specification relating to reliability target) stated in Exhibit A. If
CATERPILLAR properly rejects the PHASE II PRODUCT, ACTIVE POWER may correct the
failures and when it believes that it has made the necessary corrections and has
notified CATERPILLAR, the parties will again test the PHASE II prototype and the
acceptance/rejection/correction provisions above shall be reapplied until the
PHASE II PRODUCT is accepted; provided, however, if a correction to a
deliverable that is rejected by CATERPILLAR for failure to meet a Specification
(except for the Specification relating to reliability target) set forth in
Exhibit A is not accepted, Caterpillar may terminate this Agreement. The day on
which CATERPILLAR accepts the PHASE II PRODUCT shall be deemed the "Acceptance
Date". After the Acceptance Date, CATERPILLAR may purchase additional prototypes
at a price per prototype defined by the pricing for Phase II Product in Exhibit
B. Any prototypes shall be provided to CATERPILLAR on an "AS IS" basis.
(iii) Within ninety (90) days following the Acceptance
Date, CATERPILLAR shall have the option of purchasing such PHASE II PRODUCTS
pursuant to the provisions of the Phase II Purchase Agreement Terms and
Conditions ("Phase II Purchase Option") as specified in Exhibit B hereto. In the
event of conflict between this Agreement and the Phase II Purchase Agreement
Terms and Conditions, this Agreement shall control. Caterpillar may exercise
such Phase II Purchase Option by providing written notice to Active Power of
such exercise within the aforesaid 90 day period. ACTIVE POWER will cooperate
with CATERPILLAR during reliability testing to meet the reliability targets.
b) PHASE III
(i) CATERPILLAR and ACTIVE POWER will negotiate
reasonably and in good faith towards a PHASE III development program ("PHASE III
PROGRAM"), which presently contemplates the activities specified below in
paragraph 2(b)(iii).
(ii) CATERPILLAR and ACTIVE POWER may agree to jointly
fund any PHASE III PROGRAM.
(iii) The PHASE III PROGRAM development will include a
jointly completed feasibility study [****] that is based on the PHASE II PROGRAM
developments, ACTIVE POWER's flywheel technology, and CATERPILLAR's knowledge of
the generator set market. The parties will also explore other opportunities for
application of the PHASE II PRODUCT and opportunities for further joint
development efforts to expand the PHASE II PRODUCT's capabilities. The study
will identify the scope
2
**Confidential treatment has been requested for the portions of this agreement
marked by asterisks. Omitted material for which confidential treatment has been
requested has been filed separately with the Securities and Exchange
Commission.**
<PAGE>
of the market opportunity, required resources, technical risk, and an initial
application. [****] It is envisioned that the feasibility study will provide
ACTIVE POWER and CATERPILLAR with necessary information to complete a long-term
[****] alliance agreement.
3. PHASE II COSTS
--------------
a) Unless otherwise stated in this Agreement or later mutually
agreed to in writing specifically referencing this Agreement, each party will
bear its own costs incurred in the PROGRAM.
b) Caterpillar agrees to pay Active Power for co-ownership of
PROGRAM INTELLECTUAL PROPERTY the sum of $5,000,000 (five million dollars). The
payments shall be made in installments, each installment being due and payable
upon the objective satisfaction of each of the five milestones in the payment
schedule listed in Exhibit C ("Payment Milestones"). Other than the payments
specified above, Caterpillar shall not be responsible for any other payments or
funding, and Active Power shall bear all its costs for participating in this
Program, or any part thereof. Caterpillar shall bear its own costs for
participating in this program, or any part thereof.
c) Upon receipt of ACTIVE POWER'S correct itemized invoice(s)
and after objective satisfaction of each Milestone, CATERPILLAR will pay ACTIVE
POWER in accordance with such invoice.
4. CONFIDENTIALITY
---------------
a) In connection with work under this Agreement, a party
("TRANSMITTING PARTY") may deliver PROPRIETARY INFORMATION relating directly to
the PHASE II or PHASE III development to the other party ("RECEIVING PARTY").
The RECEIVING PARTY may not use the PROPRIETARY INFORMATION except for work
performed according to this Agreement, will protect the confidentiality of the
PROPRIETARY INFORMATION with at least the same degree of care as it protects its
own confidential information and will not disclose any such PROPRIETARY
INFORMATION, without the express written consent of the TRANSMITTING PARTY.
"PROPRIETARY INFORMATION" includes any process, system, formula, pattern, model,
device compilation, or other information: (i) not known by the RECEIVING PARTY
prior to this Agreement or known by the RECEIVING PARTY prior to this Agreement
but having restriction on its use or disclosure; and (ii) not generally known by
others (unless so know through some fault of the RECEIVING PARTY). PROPRIETARY
INFORMATION does not include knowledge, skills or information which is generally
known in ACTIVE POWER's or CATERPILLAR's trade or profession.
b) Each party agrees that it will neither (i) disclose to the
other party or any of its employees information in confidence belonging to a
third party; nor (ii) knowingly in the performance of the work hereunder produce
anything that embodies information under confidential restriction, or is covered
by a patent, patent application, copyright, trade secret, or other intellectual
property right owned by a third party.
c) Nothing in this Agreement shall be construed as preventing
either party from independent development, provided that PROPRIETARY INFORMATION
is handled in accordance with paragraph 4(a).
d) Should the RECEIVING PARTY be required to disclose
PROPRIETARY INFORMATION by governmental or judicial order, the RECEIVING PARTY
will give the TRANSMITTING PARTY prompt notice of any such order and will comply
with any protective order imposed on such disclosure.
3
**Confidential treatment has been requested for the portions of this agreement
marked by asterisks. Omitted material for which confidential treatment has been
requested has been filed separately with the Securities and Exchange
Commission.**
<PAGE>
5. INTELLECTUAL PROPERTY
---------------------
a) BACKGROUND INTELLECTUAL PROPERTY shall remain the property
of the party who created, made, conceived and reduced it to practice.
b) All PROGRAM INTELLECTUAL PROPERTY shall be jointly owned by
the parties and may be exploited and/or nonexclusively licensed by either party
without further consent or accounting to the other party. With respect to all
rights and ownership in such PROGRAM INTELLECTUAL PROPERTY, the parties will
mutually discuss whether to obtain or maintain such rights, including without
limitation, any patents, trademarks, copyrights, trade secrets, CONFIDENTIAL
INFORMATION, and any other proprietary rights therein, and if one refuses to
take any such joint action requested by the other, the other may proceed at its
own expense; no such action will change the foregoing ownership provision. A
party will execute all documents the other may request for such purposes and to
otherwise assist the other (at the other's expense) for such purposes.
c) Each of CATERPILLAR and ACTIVE POWER grant to the other
party an irrevocable, perpetual, nonexclusive, worldwide, royalty free license
(including the right to sublicense to such other party's Affiliates) to make,
have made, use, sell and otherwise exploit during and/or after the term of this
Agreement any modifications, improvements, inventions, know how, ideas or
suggestions made with respect to the other party's Proprietary Information by
such party's employees who have had access to such Proprietary Information. If
something ceases to be considered Proprietary Information, licenses granted with
respect thereto while such information was deemed Proprietary Information, will
be unaffected.
d) Except as provided in this Agreement or the Exhibits,
nothing in this Agreement shall be construed as a grant of, or agreement to
grant, to either party any licenses under intellectual property rights of the
other party, regardless of whether they are dominant of or subordinate to those
provided herein.
6. LICENSING JOINTLY OWNED INTELLECTUAL PROPERTY
---------------------------------------------
a) Unless otherwise agreed to by the parties, all licensing
revenues generated by licensing PROGRAM INTELLECTUAL PROPERTY to third parties
shall be retained by the licensor of such PROGRAM INTELLECTUAL PROPERTY.
b) In the event that one party chooses to enforce PROGRAM
INTELLECTUAL PROPERTY rights against a third party, the other party shall be
given the opportunity to join in such enforcement prior to its commencement and
in the event the other party chooses to join, both parties shall equally share
all costs, including attorneys' fees and share equally all revenues generated by
the enforcement, including licensing fees, if any. If the other party chooses
not to join such enforcement, such party shall nevertheless reasonably cooperate
with the one party in such enforcement (at the other party's expense), including
joining as a nominal party subject to indemnification by such party , but will
not be entitled to any proceeds of such enforcement activity.
7. NOTICES
-------
All notices and invoices pursuant to this Agreement shall reference
this Agreement and be given in writing to the respective party at its address
designated below or to such other address as may be substituted in writing by
that party to the other. All notices shall be deemed to be fully given and
received if sent by registered or certified mail, postage prepaid, return
receipt requested.
4
<PAGE>
Notice to ACTIVE POWER:
Active Power
11525 Stonehollow Drive, Suite 135
Austin, Texas 78758
Notices to CATERPILLAR: Invoices to CATERPILLAR:
Caterpillar Inc. Attn: Disbursements Div.
Intellectual Property Department LD235 Mailroom
Attn: Licensing Division 600 W. Washington Street
100 N.E. Adams Street East Peoria, Illinois 61630
Peoria, Illinois 61629-6490 Pontiac, Illinois 61764
8. INDEMNIFICATION
---------------
Each party shall indemnify, defend and hold harmless the other party,
its directors, officers, employees and agents, from all third party (including a
party's employees) claims, demands, liabilities, loss, damage, and expense,
including costs, and reasonable litigation expenses and counsel fees incurred in
connection therewith, arising out of injury to or death of any person or damage
to property proximately caused by the indemnifying party's gross negligence or
willful acts or omissions which arise in connection with the performance of work
hereunder while the indemnifying party is on premises of the other party. Such
indemnity shall be provided subject to (a) prompt written notifications of any
and all such threats, claims, or proceedings related thereto and the other party
giving reasonable assistance to the indemnifying party in the defense thereof,
(b) the indemnifying party having sole control of the defense and all related
settlement negotiations, and (c) such indemnifications shall be limited in the
case of real or tangible property to the reduction in value or replacement cost
of such property.
9. WARRANTY
--------
Each party warrants its right to enter into this AGREEMENT.
Warranties for production units of PHASE II PRODUCTS shall be as set forth in
Exhibit B. In addition, any hardware, software or firmware provided by ACTIVE
POWER to CATERPILLAR is warranted to accurately process properly formatted
date/time data (including, but not limited to, calculating, comparing, and
sequencing) from, into, and between the twentieth and twenty-first centuries,
and the years 1999 and 2000 and leap year calculations to the extent that other
hardware, software or firmware used in combination with the hardware, software
or firmware being provided by ACTIVE POWER, properly exchanges properly
formatted date/time data with it.
10. TERM AND TERMINATION
--------------------
a) This PROGRAM shall become effective on the Effective Date of
this Agreement and shall remain in effect unless terminated in writing by both
parties.
b) CATERPILLAR may terminate ACTIVE POWER's work under this
Agreement by giving ACTIVE POWER ninety (90) days written notice in which event
ACTIVE POWER shall be (i) reimbursed only for work performed and expenses
reasonably incurred prior to receipt of such notice and (ii) entitled to
immediate payment of the amount associated with the next milestone. In no event
shall the total amount paid to ACTIVE POWER exceed the price agreed to herein.
c) Upon termination of this Agreement, Paragraphs 4, 5,6,7, 8,
9, 10, 11, 12, 13, and 14, of this Agreement shall survive.
d) If the Agreement is terminated and upon and in accordance
with the written reasonable request of either party (provided such written
request is given within a reasonable
5
<PAGE>
period of time after such termination), but except for information covered by
the rights granted in Paragraph 5, the other party shall promptly return or
destroy any tangible information (including all copies thereof except as noted
below) provided under the PROGRAM by the requesting party. However the other
party's counsel may retain in a secure location one copy each of such tangible
information and use them only for ensuring compliance with the obligations of
Paragraph 5.
11. RELATIONSHIP
------------
Nothing herein is to imply an agency, joint venture or partner
relationship between the parties.
12. ASSIGNMENT AND GOVERNING LAW
----------------------------
Except to an entity that acquires all or substantially all the
business or assets of a party, this Agreement is not assignable by either party
without the written consent of the other party, which shall not be unreasonably
withheld, and will be governed by and construed in accordance with the laws of
the State of New York, without regard to the conflict of laws provisions
thereof.
13. ENTIRE UNDERSTANDING
--------------------
This Agreement and the Exhibits hereto constitute the entire agreement
and understanding between the parties with respect to the subject matters herein
and therein, and shall supersede and replace any conflicting terms and
conditions set forth in any purchase order, prior agreement, quotation,
proposal, correspondence, or oral discussion relating to the subject matter
hereof. This Agreement may only be amended by a writing signed by both parties
which makes specific reference to the provision(s) of this Agreement being
modified. Should any provision of this Agreement be held invalid, illegal, or
unenforceable, the validity of the remaining provisions shall not be affected by
such holding. This AGREEMENT shall be binding upon the heirs, successors, and/or
legal representatives of the parties.
14. Limitation of Liability
-----------------------
NEITHER PARTY SHALL BE LIABLE FOR (I) ANY SPECIAL, INCIDENTAL,
INDIRECT OR CONSEQUENTIAL DAMAGES ARISING OUT OF THE SUBJECT MATTER OF THIS
AGREEMENT OR (II) CATERPILLAR'S COST OF PROCUREMENT OF SUBSTITUTE GOODS OR
SERVICES.
The parties have caused this Agreement to be signed in duplicate by
their duly authorized representatives on the Effective Date.
ACTIVE POWER, Inc. CATERPILLAR INC
By: /s/ By: /s/
------------------------ -----------------------------
Name:______________________ Name:___________________________
Title:_____________________ Title:__________________________
Date:______________________ Date:___________________________
6
<PAGE>
EXHIBIT "A"
SPECIFICATIONS FOR PHASE II PRODUCT
In the event that ACTIVE POWER has developed and includes a CS2 flywheel
and associated components in the Prototype, then the Phase II Product shall
comply with the following specification entitled CS2-UPS Specification,
otherwise the Phase II Product shall comply with the following specification
entitled CS1-UPS Specification.
CS1-UPS Specification
12/14/98
Definition
CS1-UPS is a line-interactive UPS that employs Active Power's first generation
DC to DC flywheel energy storage system (flywheel system described in US patent
5,731,645).
(i) Ratings
. Maximum discharge time - 300 seconds
. Delivered energy - 3.0 MJ
. Maximum delivered power - 250KW for 12.5 seconds
(ii) Input
. Input voltage - 480Vrms +10%/-20%
. Interface - 3 phase, 4 wire (3 phase plus neutral and ground)
. Input frequency - 45Hz - 66Hz
. Walk-in time - 1 second minimum, variable to up to 15 seconds
(iii) Output
. Nominal output voltage: 480Vrms, matched to utility input +/- 5%
. Interface - 3 phase, 4 wire (3 phase plus neutral and ground)
. Output voltage regulation in Flywheel Mode:
. +/- 5 % of input nominal, static balanced
. +/- 5 % of input nominal, static asymmetrical
. +/- 5 % of input nominal, within 80 ms following 100% step load
. Output voltage harmonic distortion:
. 5% THD maximum and 3% any single harmonic with 100% linear load
. 10% THD maximum with 100% non-linear load
(iv) Recharge Time
. Recharge time - 2.5 minutes maximum
. Charge time from 0 RPM - 7.5 minutes maximum
. Adjustable to avoid overloading source
. Duty Cycle: 10% for 5 discharges
(v) Standby Losses
. 3% of rated power
(vi) Temperature rating
. Start-up - 0 to +40C
. Operating - -20 to 40C
. Storage - -25 to +70C
(vii) Humidity
7
<PAGE>
. Relative humidity - 95%, non-condensing
(viii) Barometric Pressure
. Full rating to 3000 feet; reduced by 5% /1000ft above 4000ft
(ix) Vibration
. 5g peak, 30ms pulse duration
(x) Acoustical Noise
. 70 dB, "A" weighting, at 3 feet from system
(xi) Dimensions
. Height 79" maximum
. Width 43" maximum
. Depth 36" maximum
(xii) Floor Loading
. 325 lbs./sq. ft. maximum
(xiii) System Features
. Bi-directional Inverters
. Flywheel energy storage for standby power
. Adjustable load walk-in
. Internal self-diagnostics
. Fault event logging
. Preheat capability
(xiv) Monitoring and Control
. Key switch for system control
. Local EPO (Emergency Power Off)
. LCD display - reports alarms & system state
. Monitor & alarms on critical components
. Programmable setup parameters
. External customer contacts (A-Type) dry contacts {six (6) input and
six (6) output
. RS232 or RS485 Serial Connection
. Ethernet Interface
(xv) System Options
. Automatic bypass
. Automatic restart following depletion of stored-energy and
restoration of AC source
. Remote monitoring capability
. Internal modem
. Remote EPO (Emergency Power Off)
. Input voltage other than 480VAC using optional external transformer
cabinet
. Output voltage other than 480VAC using optional external transformer
cabinet
(xvi) System Reliability
The reliability target of .039 failures per 100 hours is to be met with
a 75% confidence.
8
<PAGE>
[****]
9
**Confidential treatment has been requested for the portions of this agreement
marked by asterisks. Omitted material for which confidential treatment has been
requested has been filed separately with the Securities and Exchange
Commission.**
<PAGE>
[****]
10
**Confidential treatment has been requested for the portions of this agreement
marked by asterisks. Omitted material for which confidential treatment has been
requested has been filed separately with the Securities and Exchange
Commission.**
<PAGE>
EXHIBIT "B"
PURCHASE OF PHASE II PRODUCT TERMS AND CONDITIONS
The terms and conditions of the Phase II Purchase Agreement are
attached hereto and shall be incorporated herein by reference.
11
<PAGE>
PHASE II PURCHASE AGREEMENT TERMS AND CONDITIONS
------------------------------------------------
1. Products Covered by Agreement. This Agreement concerns the purchase
-----------------------------
and sale of the PHASE II PRODUCT (hereinafter called "Product"), manufactured to
the Specifications.
2. Purchase and Sale of Product. Subject to the terms and conditions of
----------------------------
this Agreement, Seller will, to the extent properly and accurately forecasted
and ordered by Buyer as provided in the next paragraph, use commercially
reasonable efforts to supply the Products to Buyer and Buyer agrees to purchase
ninety percent (90%) of Buyer's and its Affiliates ("Affiliate" means any
company of which Buyer holds a greater than fifty percent (50%) ownership
interest) requirements for an AC to AC flywheel-based UPS product for generator
set applications. Seller understands that Buyer makes no guarantee as to the
quantity of Product it will require, however, Buyer agrees that it will
undertake the Phase II activities set forth on Exhibit A ("Phase II
Activities").
Buyer's initial forecasted annual requirements will be attached hereto as
Exhibit B as of the Effective Date of this Phase II Purchase Agreement. Such
forecast of such requirements provided to Seller by Buyer shall be non-binding
and Seller acknowledges that it shall not be entitled to and shall not rely on
such forecasts/estimates as binding commitments unless they are expressly stated
as such by Buyer in writing. Seller shall not be obligated to supply Buyer with
more than one hundred fifty percent (150%) of the initial projection for a
particular quarter, unless agreed to in writing. Buyer's forecasts and orders
shall reflect its good-faith expectations of customer demand and Buyer shall act
in a commercially reasonable manner to schedule orders to avoid creating
production capacity problems for Seller.
3. Exclusive Caterpillar Rights. For a period of five years from the
----------------------------
Effective Date of this Phase II Purchase Agreement, and provided this Phase II
Purchase Agreement has not been terminated, ACTIVE POWER agrees not to license
any PROGRAM INTELLECTUAL PROPERTY nor ACTIVE POWER's BACKGROUND INTELLECTUAL
PROPERTY that is solely developed for a PHASE II PRODUCT, to [****] Before the
end of such five-year period, ACTIVE POWER will, at CATERPILLAR's option,
discuss the possibility of a mutually agreeable extension of such FIELD OF USE
exclusivity. During such five year period, if any, and provided this Phase II
Purchase Agreement has not been terminated, ACTIVE POWER shall, at CATERPILLAR's
option and provided that CATERPILLAR [****] However, nothing contained in this
Agreement, shall restrict ACTIVE POWER with respect to making, using, selling,
marketing, licensing or exploiting its flywheel energy storage systems or
technologies.
[****]
4. Price Containment. Both Seller and Buyer are committed to controlling
-----------------
and reducing costs, and both recognize that effective cost control is of the
essence to this Agreement, While this Agreement is in effect, Seller will
maintain a cost control and reduction program with respect to Product,
B-1
**Confidential treatment has been requested for the portions of this agreement
marked by asterisks. Omitted material for which confidential treatment has been
requested has been filed separately with the Securities and Exchange
Commission.**
<PAGE>
and will review costs on a regular basis for progress toward the objective of
maintaining or reducing Seller's prices to Buyer. A constant interaction between
Buyer's and Seller's engineering personnel is essential. All documented mutually
agreed cost savings, through the efforts of Buyer or Seller, will be shared on a
50-50 basis. Any cost savings gained without the efforts of Buyer and not
mutually agreed to in writing will be owned by Seller. Any cost increases must
be documented and approved by Buyer.
5. Product Prices. Prices are as shown in Exhibit E. After eighteen
---------------
months from the Effective date of this Agreement, Exhibit E may be modified from
time to time upon sixty (60) days written notice from the Seller; provided,
however, that Buyer may terminate this Agreement within thirty(30) days after
receipt of notice of such price increase if such increase is unacceptable to
Buyer. Seller agrees and acknowledges that should such prices exceed the lowest
Product prices provided to any other customer of Seller purchasing Product at
similar (or reduced) volume levels and making only similar or reduced
commitments (including, but not limited to time commitments), such prices to
Buyer shall be automatically adjusted to reflect any lower pricing provided to
such other customers.
6. Product Training and Support.
----------------------------
a. In order to provide sufficient warranty support for the Product,
Buyer's service training personnel will successfully complete Seller's certified
training course in order to become competent to a level equivalent to Seller's
certified service technicians. Seller shall provide such training for up to five
(5) scheduled classes and for a maximum of ten (10) students per class. Such
training shall be given at Seller's facilities free of charge for the first five
scheduled classes of the term of this Agreement and at Seller's published prices
for any remaining training. Buyer shall be responsible for its own travel
expenses as incurred for such training at Seller's facilities.
b. Seller will provide sales and marketing support to Buyer's key
dealers, as requested and identified by Buyer. Except as provided below, Seller
agrees to provide such support free of charge for three (3) man days per
identified dealer up to a maximum amount of thirty (30) man days which shall be
the cumulative total available for such dealers. Any dealer support services
requested beyond the thirty (30) day limit shall be charged to Buyer at a rate
of $1000 per man day. Buyer shall reimburse Seller for any travel expenses for
dealer support services requested outside of North America or such expenses
beyond the initial thirty (30) man days.
7. Term. The initial term of this Agreement shall be Five (5) years,
-----
commencing as of the date of completion of performance tests on Products and
shipment of first reliability test machines (the "Effective Date"). This
Agreement shall automatically be extended for additional terms of six (6) months
each unless either party gives written notice to terminate at least three (3)
months prior to the end of the initial term or any additional term, or unless
otherwise terminated pursuant to the provisions hereof.
8. Warranty.
--------
a. Seller warrants that each Product shall be in conformity with
the Specifications and shall be free from defects in material and workmanship.
In addition, any hardware, software or firmware provided by Seller to Buyer is
warranted to accurately process properly formatted date/time data (including,
but not limited to, calculating, comparing, and sequencing) from, into, and
between the twentieth and twenty-first centuries, and the years 1999 and 2000
and leap year calculations to the extent that other hardware, software or
firmware used in combination with the hardware, software or firmware being
provided by Seller, properly exchanges properly formatted date/time data with
it.
b. Except as provided below, Seller will provide Buyer with the
same warranty, under the same terms and conditions (including without
limitation, disclaimers), as Buyer provides to its customers procuring electric
power generation products (as attached as Exhibit G); provided, however,
B-2
<PAGE>
that Seller's warranty to Buyer shall be for a one year period from the date of
delivery to the end-user, notwithstanding any longer warranty period in Buyer's
warranty. If Buyer performs travel labor (up to four hours), Seller shall
reimburse such documented, customary and reasonable expenses incurred by Buyer
on behalf of the Product provided such labor is performed by an employee of
Buyer or one of its dealers that has been competently trained with respect to
the Product. A monthly written statement of Buyer's actual costs for providing
warranty services to its customers, including notice of specific Product
failures, and summary information on the causes of such failure, will be sent by
Buyer to Seller.
c. Within twelve (12) months from the Effective Date of this
Agreement, Buyer shall inventory and maintain appropriate spares to provide its
standard level of service.
d. Claims for Buyer's "Product Improvement Programs" (PIP), "Product
Support Programs" (PSP), "Extended Warranty" and other policy actions are to be
negotiated on a case-by-case basis by both parties and documented in writing as
signed by both parties. Participation in these programs will be based on an
amount mutually agreed to by Seller and Buyer.
THE FOREGOING WARRANTIES SHALL BE SELLER'S SOLE LIABILITY WITH REGARD TO
THE PRODUCTS.
9. Indemnification. Except to the extent covered by the indemnity from
---------------
Buyer below, Seller agrees to indemnify, defend, and hold Buyer harmless against
and from all claims, demands, liabilities, loss, damage, cost, and expense, of
whatsoever nature paid to a third party or incurred in the defense (i) arising
from a claim that the Product infringes an intellectual property right of a
third party or (ii) arising from the injury or death of any person or loss or
damage to property directly due to, any defect of design, material, or
workmanship of Product or failure of Product to conform with the
Specifications, provided Seller is promptly notified of any and all such
threats, claims or proceedings related thereto and given reasonable assistance
and the opportunity to assume sole control over defense and settlement; Seller
shall not be responsible for any settlement it does not approve of in writing.
The indemnity provided in this Section shall be Buyer's sole and exclusive
remedy for any claim of infringement related to the Product. Buyer agrees to
indemnify, defend, and hold Seller harmless against and from all claims,
demands, liabilities, loss, damage, cost, and expense, of whatsoever nature paid
to a third party or incurred in the defense of a claim arising on account of
Buyer's (i) misrepresentation of the Product or providing unauthorized
representations or warranties to its customers, (ii) modifications to the
Product or (iii) negligence or other fault of products or services of Buyer.
10. Indemnity Restrictions. SELLER MAKES NO WARRANTY OR REPRESENTATION
----------------------
WITH RESPECT TO, (a) determining whether the Product will achieve the results
desired by Buyer or any third person, (b) selecting, procuring, installing,
operating and maintaining complementary equipment to insure correct operation of
the Product, and (c) ensuring the accuracy of any configuration design or
implementation that utilizes the Product. In the event of any alteration or
attachment to the Product not authorized by Seller, Seller shall have no
liability or responsibility to Buyer for: (a) any hardware, software,
equipment, or services provided by any persons other than Seller; (b) the proper
functioning of the Product if the alteration or attachment is the cause of the
malfunction; or (c) damage caused by any alteration or attachment to the
Product.
11. Insurance. Seller agrees to keep in full force and effect, at its
----------
sole expense, during the term of this Agreement and for a period of ten (10)
years thereafter, at least the insurance coverage described below with insurance
companies acceptable to Buyer. The limits set forth are minimum limits and
shall not be construed to limit Seller's liability. All cost and deductible
amounts shall be for the sole account of Seller. All policies required by Buyer
pursuant to this Agreement shall name Buyer as an additional insured (per ISO
Endorsement #CG 2026 or its equivalent) and waive subrogation rights in favor of
Caterpillar. All policies required shall also be designated as primary coverage
to any similar coverage carried by Caterpillar.
B-3
<PAGE>
Seller shall not provide Product hereunder until all insurance as required
hereunder has been obtained, and certificates have been submitted to and
accepted by Buyer.
The required coverage shall be: Commercial General Liability Insurance
(Occurrence Coverage) including products, completed operations, contractual
liability coverage of indemnities contained in this contract, with a minimum
combined single limit of liability of $5,000,000 for each occurrence for bodily
injury and property damage. Such policy shall contain provisions that provide
at least thirty (30) days prior written notice of any cancellation, non-renewal,
or reduction in coverage to Buyer. Seller shall deliver Certificates of
Insurance in a form satisfactory to Buyer evidencing the existence of such
policy.
12. Termination by Buyer. Buyer may terminate this Agreement at any time,
--------------------
in the event:
a. Quality - Products consistently and materially fail to meet the
Specifications as defined herein or as hereafter agreed to by Buyer and Seller,
or fails to achieve status as a Caterpillar certified supplier within twenty-
four (24) months of the Effective Date of this Agreement.
b. Delivery - Seller is substantially and continuously failing to
meet Buyer's Firm Orders with respect to mutually agreed shipment dates. Seller
shall provide to Buyer a written schedule of Seller's standard lead times for
delivery of Products from the date Orders are accepted by Seller. Such schedule
for lead times shall be updated by Seller on a regular basis to reflect any
modifications thereto.
c. Competitiveness - Seller fails to be responsive to the market
place or fails to remain competitive on a world-wide basis with other
manufacturers of comparable parts in terms of price.
d. Default Generally - Material default by Seller in any material
obligation hereunder owed by Seller to Buyer.
Notwithstanding the above, Buyer may terminate pursuant to Subsections (a),
(b), (c) or (d) above only if Seller has failed to cure such default within
sixty (60) days after written notice thereof has been received by Seller.
13. Termination by Seller. Seller may terminate this Agreement at any
---------------------
time in the event Buyer breaches the Agreement and fails to cure such breach
within sixty (60) (or ten days in the case of non-payment) after written notice
thereof has been received by Buyer.
14. Licenses. As between the parties, Seller shall own all right, title
--------
and interest in and to the Product except as otherwise provided in the "Phase II
Development and Phase III Feasibility Study Agreement.". In the event that this
Agreement is terminated by Buyer pursuant to Section 12(b) and only while Buyer
remains in full compliance with the provisions of this Agreement prior to
termination and following termination as such surviving provisions shall apply,
Seller hereby grants to Buyer, effective as of such termination date, a
nonexclusive, worldwide, royalty bearing license (including the right to
sublicense to Buyer's Affiliates) to make, have made, use and/or sell Product.
The foregoing license shall only be effective for the 18 months beginning with
the date of termination and Buyer shall pay a royalty of one thousand two
hundred fifty dollars ( $1,250) per delivered megajoule per published rating by
Seller for each Product.
Each of Buyer and Seller grant to the other party an irrevocable,
perpetual, nonexclusive, worldwide, royalty free license (including the right to
sublicense to such other party's Affiliates) to make, have made, use, sell and
otherwise exploit during and/or after the term of this Agreement any
modifications, improvements, inventions, know how, ideas or suggestions made
with respect to the other party's Confidential Information by such party's
employees who have had access to such Confidential Information. If something
ceases to be considered Confidential Information, licenses granted with respect
thereto while such information was deemed Confidential Information, will be
unaffected.
B-4
<PAGE>
15. Parts Support. During the term of this Agreement or following any
-------------
termination hereof, other than termination by Seller due to a breach by Buyer,
Seller shall provide, or at its option cause to be provided, such quantities of
parts to Buyer as Buyer may request from time to time for a period of five (5)
years from the date of the last customer shipment made by Seller under this
Agreement of the applicable Product release, at a price not to exceed Seller's
then-current prices provided to other customers under similar terms and
conditions, provided such parts are reasonably and commercially available to
Seller. If for any reason Seller is unable to provide parts to Buyer pursuant
to its obligations under this section 14, Seller grants to Buyer a nonexclusive,
perpetual, worldwide royalty bearing license to make, have made, use and/or sell
such parts utilizing Seller's proprietary designs. The foregoing license is
subject to a royalty of 6% of the applicable price set forth in Seller's most
current Catalog Spares Pricing list.
16. Use of Other Supply Sources. Nothing in this Agreement shall prevent
---------------------------
Buyer from seeking other sources for alternatives to the Product to the extent
Seller's production capacity continuously and substantially fails to meet
Buyer's Firm Orders.
17. Change in Ownership and Control. During the life of this Agreement,
-------------------------------
if there is a change in the ownership and control of either party, the other
party shall have the option of terminating this Agreement immediately by giving
written notice thereof within ten days of being notified of the occurrence of
such change of control; provided that if a party provides advance notice of a
bona fide proposed change of control (including the identity of the principal
owners after such change of control occurs) the other party will within ten days
provide written notification to the first party as to whether it will exercise
such termination right if the change of control occurs. For purposes of this
Section 17, a change in the ownership and control of either Buyer or Seller or a
parent company of either party shall be deemed to have occurred if and only if
and when any one or more persons (excluding existing investors) acting in
concert individually or jointly is or becomes a beneficial owner, directly or
indirectly, of securities representing more than fifty percent (50%) of the
combined voting power of all then outstanding securities of Seller or Buyer or
the parent company of either party.
18. Shipping Instructions/Terms and Conditions. Orders will be placed
------------------------------------------
under Buyer's blanket purchase order(s). This agreement shall supersede Buyers
standard purchase order terms (other than the terms under the following
sections: "Work on Buyer's Premises" and "Property Furnished to Seller by
Buyer", which terms shall be deemed to be incorporated herein by reference and
made a part hereof) or any terms stated in any acknowledgment forms or other
forms utilized by Seller or Buyer. Such orders shall specify the quantity, part
number and description, unit price, requested ship date, destination, and
Buyer's freight carrier and account number with the carrier. Orders shall be
subject to acceptance by Seller ("Firm Orders"). No modification to this
Agreement will be stated on an order. All Products shall be shipped F.O.B.
Seller's facility in Austin, Texas. Title and risk of loss to Product shall
pass to Buyer upon delivery to the carrier at the F.O.B. point. Buyer shall
designate a carrier. Any special freight charges shall be Seller's
responsibility if necessary to meet not more than 115% of Buyer's projected
quarterly requirements.
19. Inspection. Product is subject to Buyer's inspection, testing and
----------
approval. Buyer, at its option, may reject or refuse to accept any Product
which does not meet the requirements of the warranty set forth herein. Buyer's
right to reject shall expire one (1) year after the date of shipment. Prior to
returning any Product, Buyer shall notify Seller of its intent to reject, and
Seller may within thirty (30) days correct any such defect. Items rejected by
Buyer will be returned to Seller at Seller's expense, and Seller agrees to
refund to Buyer any payments (including but not limited to shipment expense)
made by Buyer for such Product. Payment by Buyer for any Product shall not be
deemed an acceptance thereof. Acceptance of any Product shall not relieve
Seller from any of its obligations, representations or warranties hereunder or
with respect thereto.
20. Prices and Payments. Prices set forth in Exhibit E do not include
-------------------
installation, freight and handling charges, or applicable taxes, and Buyer shall
be responsible for all such charges and taxes with respect to the Products and
the shipment thereof. All payments shall be made by Buyer in accordance
B-5
<PAGE>
with the terms of Buyer's then-current standard settlement schedule. All
payments due hereunder shall be paid to Seller in United States dollars in the
United States. Unless Buyer furnishes a proper exemption certificate, Buyer
shall be charged for all taxes, however, designated, levied or based on this
Agreement or the Product.
21. Force Majeure. Neither Buyer nor Seller shall be liable for any delay
-------------
in or failure of performance of their respective obligations hereunder if such
performance is rendered impossible or impracticable by reason of fire,
explosion, earthquake, accident, breakdown, strike, drought, embargo, war, riot,
act of God or public enemy, an act of governmental authority, agency or entity,
shortage of raw materials, or other contingency, delay, failure or cause, beyond
the reasonable control of the part whose performance is affected, irrespective
of whether such contingency is specified herein or is presently occurring or
anticipated by either party. Upon the occurrence of any event covered by this
provision, Seller and Buyer shall make every effort to continue to maintain as
much as possible the supplier-customer relationship established under this
Agreement. However, in the event Buyer or Seller is unable to meet its
obligations hereunder because of the conditions described above and such
inability continued for a period of two (2) months, the other party shall have
the right to terminate this Agreement upon thirty (30) days prior written
notice.
22. Assignment/Applicable Law. Except to an entity that acquires all or
-------------------------
substantially all the business or assets of a party, this Agreement is not
assignable by either party without the written consent of the other party and
will be governed by and construed in accordance with the laws of the State of
New York without regard to the conflict of laws provisions thereof.
23. Entire Agreement. This Agreement and the Exhibits hereto constitute
----------------
the entire agreement and understanding between the parties with respect to the
subject matters herein and therein, and supersede and replace any prior
agreements and understandings whether oral or written, between them with respect
to such matters. Any additional or different terms of any related purchase
order, confirmation, acknowledgment, shipping instruction form or similar form
of Buyer or Seller even if signed by the parties after the date hereof, shall
have no force or effect.
24. Waiver. The provisions of this Agreement may waived, altered,
------
amended, or repealed in whole or in part upon the written consent of all parties
to this Agreement The waiver by party of any breach of this Agreement shall not
be deemed or construed as a waiver of any other breach, whether prior,
subsequent or contemporaneous, of this Agreement.
25. Severability. Invalidation of any of the provisions contained herein,
------------
or the application of such invalidation of thereof to any person, by
legislation, judgment or court order shall in no way affect any of the other
provisions hereof or the application thereof to any other person, and the same
shall remain in full force and effect, unless enforcement as so modified would
be unreasonable or grossly inequitable under all the circumstances or would
frustrate the purposes hereof.
26. Counterparts. Section headings contained herein are for ease of
------------
reference only and shall not be given substantive effect. This Agreement may be
signed in one or more counterparts, each to be effective as an original.
27. Limitation of Liability. NEITHER PARTY SHALL BE LIABLE FOR ANY
-----------------------
SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES ARISING OUT OF THE
SUBJECT MATTER OF THIS AGREEMENT, OR BUYER'S COST OF PROCUREMENT OF SUBSTITUTE
GOODS OR SERVICES.
28. Confidential Information.
------------------------
B-6
<PAGE>
a. In connection with work under this Agreement, a party
("TRANSMITTING PARTY") may deliver PROPRIETARY INFORMATION relating directly to
the business or technology of the other party ("RECEIVING PARTY"). The
RECEIVING PARTY may not use the PROPRIETARY INFORMATION except as necessary to
perform its obligations under this Agreement, will protect the confidentiality
of the PROPRIETARY INFORMATION with at least the same degree of care as it
protects its own confidential information and will not disclose any such
PROPRIETARY INFORMATION, without the express written consent of the TRANSMITTING
PARTY. "PROPRIETARY INFORMATION" includes any process, system, formula,
pattern, model, device compilation, or other information: (i) not known by the
RECEIVING PARTY prior to this Agreement or known by the RECEIVING PARTY prior to
this Agreement but having restriction on its use or disclosure; and (ii) not
generally known by others (unless so know through some fault of the RECEIVING
PARTY). PROPRIETARY INFORMATION does not include knowledge, skills or
information which is generally known in Seller's or Buyer's trade or profession.
b. Each party agrees that it will neither (i) disclose to the other
party or any of its employees information in confidence belonging to a third
party; nor (ii) knowingly in the performance of the work hereunder produce
anything that embodies information under confidential restriction, or is covered
by a patent, patent application, copyright, trade secret, or other intellectual
property right owned by a third party.
c. Nothing in this Agreement shall be construed as preventing either
party from independent development, provided that PROPRIETARY INFORMATION is
handled in accordance with paragraph 28(a).
d. Should the RECEIVING PARTY be required to disclose PROPRIETARY
INFORMATION by governmental or judicial order, the RECEIVING PARTY will give the
TRANSMITTING PARTY prompt notice of any such order and will comply with any
protective order imposed on such disclosure.
29. Compliance with Laws. Both parties represent that they have complied,
--------------------
and during the performance of this Agreement will continue to comply, with the
provisions of all applicable laws and regulations from which liability may
accrue to the other party for any violation thereof.
30. Confidentiality. Except with respect to potential investors and/or
----------------
acquirers, the terms of this Agreement as well as its existence shall be kept
confidential and not disclosed by either party without the express written
consent of the other party.
B-7
<PAGE>
Exhibit "A"
PHASE II MARKETING ACTIVITIES
. Buyer will conduct a product launch with appropriate marketing subsidiaries
and dealers.
. Buyer will create appropriate sales binder for above training or launch.
. Buyer will effect pricing and price list literature for the program for all
appropriate worldwide marketing subsidiaries and dealers.
. Buyer will announce product to dealers.
. Buyer will effect a Caterpillar Product News announcement.
. Buyer will create product brochures for product promotion.
. Buyer will create product specification sheets.
. Buyer will enter appropriate performance and specifications into its online
Technical Marketing Information (TMI) systems.
. Buyer will make adequate technical drawings available to its dealers.
. Buyer will effect a public product announcement of the phase II product that
will include reference to the new Caterpillar UPS product and its use of the
Active Power flywheel energy storage system.
. Buyer will create a product promotional video.
. Buyer will include the product where appropriate in its
marketing/specification software.
. Buyer will promote the product internally to its worldwide marketing
subsidiaries.
. Buyer will effect the above in all languages deemed appropriate by Buyer.
Implementation of the foregoing Marketing Activities is dependent upon Buyer
receiving adequate product and technical information from Seller
B-8
<PAGE>
EXHIBIT B
Forecast (to be provided as of the Effective Date)
B-9
<PAGE>
EXHIBIT "C"
[****]
B-10
**Confidential treatment has been requested for the portions of this agreement
marked by asterisks. Omitted material for which confidential treatment has been
requested has been filed separately with the Securities and Exchange
Commission.**
<PAGE>
EXHIBIT "D"
[****]
B-11
**Confidential treatment has been requested for the portions of this agreement
marked by asterisks. Omitted material for which confidential treatment has been
requested has been filed separately with the Securities and Exchange
Commission.**
<PAGE>
EXHIBIT "E"
-----------
. Prices:
------
[****]
B-12
**Confidential treatment has been requested for the portions of this agreement
marked by asterisks. Omitted material for which confidential treatment has been
requested has been filed separately with the Securities and Exchange
Commission.**
<PAGE>
EXHIBIT "C"
PAYMENT MILESTONES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
MILESTONE PAYMENT ESTIMATED
--------- ------- ---------
COMPLETION
----------
DATE
----
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Phase II agreement signed $ .5 million 4Q98
- ---------------------------------------------------------------------------------------------------------
1. CS-UPS bench demo at Active Power's
Austin facility that meets following $1.0 million 1Q99
performance objectives:
. 30 second discharge at 50 kW
. flywheel recharges in less than 20 minutes
. less than 15% THD on input & output
. output voltage regulation plus or minus 10%
- ---------------------------------------------------------------------------------------------------------
3. CS-UPS bench demo at Active Power's $1.5 million 1Q99
Austin facility that meets following
performance objectives:
. 20 second discharge at 100 kW
. flywheel recharges in less than 10 minutes
. less than 10% THD on input & output
. output voltage regulation plus or minus 5%
- ---------------------------------------------------------------------------------------------------------
4. CS-UPS bench demo at Active Power's $1 million 2Q99
Austin facility that meets following
performance objectives:
. will use production components
. single board controller for flywheel & UPS
. static switch & contactors operational
. 12.5 second discharge at 250 kW
. flywheel recharges in less than 5 minutes
. less than 5% THD on input & output
. output voltage regulation plus or minus 2%
- ---------------------------------------------------------------------------------------------------------
5. Phase II product meets Exhibit A $1 million 3Q99
specifications and first Phase II unit
shipped, along with associated production
drawings, to Caterpillar.
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT "D"
[****]
**Confidential treatment has been requested for the portions of this agreement
marked by asterisks. Omitted material for which confidential treatment has been
requested has been filed separately with the Securities and Exchange
Commission.**
<PAGE>
EXHIBIT "E"
PICTORIAL DESCRIPTION OF PROGRAM INTELLECTUAL PROPERTY
PHASE II SCHEMATIC
[Graphic of Schematic]
[Description of graphic: The schematic depicts the elements of each party's
intellectual property divided between "flywheel and flywheel electronics" and
"UPS electronics."]
For the avoidance of doubt, PROGRAM INTELLECTUAL PROPERTY does not include
INTELLECTUAL PROPERTY with respect to the fly wheel, fly wheel electronics or
flywheel packaging.
<PAGE>
Exhibit 10.7
Imperial Bank
Member FDIC
226 Airport Parkway
San Jose, CA 95110
Subject: Credit Terms and Conditions ("Agreement")
Gentlemen:
To induce you to make loans to the undersigned (herein called "Borrower"),
and in consideration of any loan or loans you, in your sole discretion, may make
to Borrower, Borrower warrants and agrees as follows:
A. Borrower represents and warrants that:
1. Existence and Rights.
Borrower is a Texas corporation. Borrower: Active Power, Inc.
Borrower is duly organized and existing and in good standing under the laws of
the State of Texas and is authorized and in good standing to do business in the
State of Texas. Borrower has powers and adequate authority, rights and
franchises to own its property and to carry on its business as now conducted,
and is duly qualified and in good standing in each State in which the character
of the properties owned by it therein or the conduct of its business makes such
qualification necessary, and Borrower has the power and adequate authority to
make and carry out this Agreement. Borrower has no investment in any other
business entity.
2. Agreement Authorized. The execution, delivery and performance of this
Agreement are duly authorized and do not require the consent or approval of any
governmental body or other regulatory authority; are not in contravention of or
in conflict with any law or regulation or any term or provision of Borrower's
articles of incorporation, by-laws, or Articles of Association, as the case may
be, and this Agreement is the valid, binding and legally enforceable obligation
of Borrower in accordance with its terms.
3. No Conflict. The execution, delivery and performance of this Agreement
are not in contravention of or in conflict with any agreement, indenture or
undertaking to which Borrower is a party or by which it or any of its property
may be bound or affected, and do not cause any lien, charge or other encumbrance
to be created or imposed upon any such property by reason thereof.
4. Litigation. There is no litigation or other proceeding pending or
threatened against or affecting Borrower, and Borrower is not in default with
respect to any order, writ, injunction, decree or demand of any court or other
governmental or regulatory authority.
5. Financial Condition. The balance sheet of Borrower as of May 31, 1999
and the related profit and loss statement for the one month ended on that date,
a copy of which has heretofore been delivered to you by Borrower, and all other
statements and data submitted in writing by Borrower to you in connection with
this request for credit are true and correct, and said balance sheet and profit
and loss statement truly present the financial condition of Borrower as of the
date thereof and the results of the operations of Borrower for the period
covered thereby, and have been prepared in accordance with generally accepted
accounting principles on a basis consistently maintained. Since such date there
have been no materially adverse changes in the financial condition or business
of Borrower. Borrower has no knowledge of any liabilities, contingent or
otherwise, at such date not reflected in said balance sheet, and Borrower has
not entered into any special commitments or substantial contracts which are not
reflected in said balance sheet, other than in the ordinary and normal course of
its business, which may have a materially adverse effect upon its financial
condition, operations or business as now conducted.
6. Title to Assets. Borrower has good title to its assets, and the same
are not subject to any liens or encumbrances other than those permitted by
Section C.3 hereof.
7. Tax Status. Borrower has no liability for any delinquent state, local
or federal taxes, and if Borrower has contracted with any government agency,
Borrower has no liability for renegotiation of profits.
8. Trademarks, Patents. Borrower, as of the date hereof, possesses all
necessary trademarks, trade names, copyrights, patents, patent rights, and
licenses to conduct its business as now operated, without any known conflict
with the valid trademarks, trade names, copyrights, patents and license rights
of others.
<PAGE>
August 3, 1999
Borrower: Active Power, Inc.
9. Regulation U. The proceeds of this loan shall not be used to purchase
or carry margin stock (as defined with Regulation U of the Board of Governors of
the Federal Reserve system).
10. Year 2000 Compliance. Borrower has reviewed the areas within their
operations and business which could be adversely affected by, and have developed
or are developing a program to address on a timely basis, the Year 2000 Problem
and have made related appropriate inquiry of material suppliers and vendors, and
based on such review and program, the Year 2000 Problem will not have a material
adverse effect upon its financial condition, operations or business as now
conducted. "Year 2000 Problem" means the risk that any computer applications
used by Borrower may be unable to recognize and properly perform date-sensitive
functions involving certain dates prior to and any dates one or after December
31, 1999.
B. Borrower agrees that so long as it is indebted to you, or so long as Bank
has any obligation to extend credit to Borrower it will, unless you shall
otherwise consent in writing:
1. Rights and Facilities. Maintain and preserve all rights, franchises
and other authority adequate for the conduct of its business; maintain its
properties, equipment and facilities in good order and repair; conduct its
business in an orderly manner without voluntary interruption and, if a
corporation or partnership, maintain and preserve its existence.
2. Insurance. Maintain public liability, property damage and workers'
compensation insurance and insurance on all its insurable property against fire
and other hazards with responsible insurance carriers to the extent usually
maintained by similar businesses.
3. Taxes and Other Liabilities. Pay and discharge, before the same become
delinquent and before penalties accrue thereon, all taxes, assessments and
governmental charges upon or against it or any of its properties, and all its
other liabilities at any time existing, except to the extent and so long as:
(a) The same are being contested in good faith and by appropriate proceedings in
such manners as not to cause any materially adverse effect upon its financial
condition or the loss of any right of redemption from any sale thereunder, and
(b) it shall have set aside on its books reserves (segregated to the extent
required by generally accepted accounting practice) deemed by it adequate with
respect thereto.
4. Records and Reports. Maintain a standard and modern system of
accounting in accordance with generally accepted accounting principles on a
basis consistently maintained; permit your representatives to have access to,
and to examine its properties, books and records at all reasonable times and,
except at any time while an event of default has occurred and is continuing,
upon reasonable prior written notice; and furnish you:
(a) As soon as available, and in any event within 30 days after the close of
each month of each fiscal year of Borrower, commencing with the month next
ending, a balance sheet, profit and loss statement and reconciliation of
Borrower's capital accounts as of the close of such period and covering
operations for the portion of Borrower's fiscal year ending on the last day of
such period, all in reasonable detail, prepared in accordance with generally
accepted accounting principles on a basis consistently maintained by Borrower
and certified by an appropriate officer of Borrower, subject, however, to
year-end audit adjustments;
(b) As soon as available, and in any event within 90 days after the close of
each fiscal year of Borrower, a report of annual statements of Company as of the
close of and for such fiscal year, all in reasonable detail and stating in
comparative form the figures as of the close of and for the previous fiscal
year, with the unqualified opinion of accountants reasonably satisfactory to
you.
(c) Within 30 days after the close of each month and of each fiscal year of
Borrower, a certificate by chief financial officer or partner of Borrower,
stating that Borrower has performed and observed each and every covenant
contained in this Agreement to be performed by it and that, to the best of
Borrower's knowledge, no event has occurred and no condition then exists which
constitutes an event of default hereunder or would constitute such an event of
default upon the lapse of time or upon the giving of notice and the lapse of
time specified herein, or, if any such event has occurred or any such condition
exists, specifying the nature thereof;
(d) Promptly after the receipt thereof by Borrower, copies of any detailed audit
reports submitted to Borrower by independent accountants in connection with each
annual or interim audit of the accounts of Borrower made by such accountants;
<PAGE>
(e) Promptly after the same are available, copies of all such proxy statements,
financial statements and reports as Borrower shall send to its stockholders, if
any, and copies of all reports which Borrower may file with the Securities and
Exchange Commission or any governmental authority at any time substituted
therefor; and
(f) Such other information relating to the affairs of Borrower as you reasonably
may request from time to time.
(g) Notice of Default. Promptly notify the Bank in writing of the occurrence of
any event of default hereunder or any event which, to the best of Borrower's
knowledge, upon notice and lapse of time would be an event of default.
5. Year 2000 Compliance. Borrower shall perform all acts reasonably
necessary to ensure that Borrower and any business in which Borrower holds a
substantial interest become Year 2000 Compliant in a timely manner. Such acts
shall include, without limitation, performing a comprehensive review and
assessment of all Borrower's systems and adopting a detailed plan, with itemized
budget, for the remediation, monitoring and testing of such systems. Borrower
shall also take reasonably necessary steps to ensure that it will not be
materially adversely affected as a result of any customer, supplier or vendor's
failure to become Year 2000 compliant. As used in this paragraph, "Year 2000
Compliant" shall mean, in regard to any entity, that all software, hardware,
firmware, equipment, goods or systems utilized by or material to the business
operations or financial condition of such entity, will properly perform date
sensitive functions before, during and after the year 2000. Borrower shall,
immediately upon request, provide to Bank such certifications or other evidence
of Borrower's compliance with the terms of this paragraph as Bank may from time
to time require.
C. Borrower agrees that so long as it is indebted to you, or so long as Bank
has any obligation to extend credit to Borrower it will not, without your
written consent:
1. Type of Business; Management. Make any substantial change in the
character of its business; or make any substantial change in its executive
management.
2. Outside Indebtedness. Except for purchase money indebtedness, create,
incur, assume or permit to exist any indebtedness for borrowed moneys other than
loans from you except obligations now existing as shown in financial statement
dated July 1999 and extensions and modifications (but not increases) thereof,
excluding those being refinanced by your bank; or sell or transfer, either with
or without recourse, any accounts or notes receivable or any moneys due to
become due.
3. Liens and Encumbrances. Except for (i) purchase money liens, inchoate
liens securing claims or demands of materialmen, mechanics, carriers,
warehousemen, landlords and other like persons imposed without actions of such
parties, provided, that payment thereof is not yet required, (iii) liens
--------
incurred or deposits made in the ordinary course of Borrower's business in
connection with worker's compensation, unemployment insurance, social security
and other like laws, and (iv) leases, subleases, licenses and sublicenses
granted to others in the ordinary course of business not interfering in any
material respect with the conduct or operation of Borrower's business, and any
interest or titles of a lessor, sublessor, licensor, or sublicensor under any
such lease, sublease, license, or sublicense, create, incur, or assume any
mortgage, pledge encumbrance, lien or charge of any kind (including the charge
upon property at any time purchased or acquired under conditional sale or other
title retention agreement) upon any asset now owned or hereafter acquired by it
including but not limited to intellectual property, other than liens for taxes
not delinquent and liens in your favor.
4. Loans, Investments, Secondary Liabilities. Make any loans or advances
to any person or other entity other than in the ordinary and normal course of
its business as now conducted or make any investment in securities other than
United States Government Treasuries or Agencies, Imperial Bank sponsored paper,
or the Monarch Money Market Funds provided, however, Borrower shall be permitted
-------- -------
to invest up to twenty-five percent (25%) of its average liquid assets for the
preceding month in mutual funds and/or certificates of deposit or deposit
accounts with any United States based bank with capital in excess of One Hundred
Million Dollars ($100,000,000); or guarantee or otherwise become liable upon the
obligation of any person or other entity, except by endorsement of negotiable
instruments for deposit or collection in the ordinary and normal course of its
business.
5. Acquisition or Sale of Business; Merger or Consolidation. Purchase or
otherwise acquire the assets or business of any person or other entity; or
liquidate, dissolve, merge (except solely to reincorporate Borrower as a
Delaware corporation in which case the new corporation shall be required to
execute such documentation related to such reincorporation as the bank may
reasonably require) or consolidate, or commence any proceedings therefor; or
sell any assets except in the ordinary and normal course of its business as now
conducted; or sell, lease, assign, or transfer any substantial part of its
business or fixed assets, or any property or other assets necessary for the
continuance of its business as now conducted including without limitation the
selling of any property or other asset, except in connection with sale-leaseback
transactions up to $25,000 in each instance and up to $100,000 in the aggregate,
accompanied by the leasing back of the same.
<PAGE>
6. Dividends, Stock Payments. If a corporation, declare or pay any
dividend (other than dividends payable in common stock of Borrower) or make any
other distribution on any of its capital stock now outstanding or hereafter
issued or purchase, redeem or retire any of such stock except for stock
repurchases pursuant to Borrower's 1993 Stock Option Plan.
D. The occurrence of any one of the following events of default shall, at your
option, terminate your commitment to lend and make all sums of principal and
interest then remaining unpaid on all Borrower's indebtedness to you immediately
due and payable, all without demand, presentment or notice, all of which are
hereby expressly waived.
1. Failure to Pay. Failure to pay any installment of principal or of
interest on any indebtedness of Borrower to you provided such failure remains
uncured for five (5) days.
2. Breach of Covenant. Failure of Borrower to perform any other terms or
conditions of this Agreement or any other agreement between Borrower and Bank
binding upon Borrower provided such failure remains uncured for ten (10) days
after notice to Borrower thereof provided such failure remains uncured for ten
(10) days after notice to Borrower thereof.
3. Breach of Warranty. Any of Borrower's representations or warranties
made herein or any statement or certificate at any time given in writing
pursuant hereto or in connection herewith shall be false or misleading in any
material respect.
4. Insolvency; Receiver or Trustee. Borrower shall become insolvent; or
admit its inability to pay its debts as they mature; or make an assignment for
the benefit of creditors; or apply for or consent to the appointment of a
receiver or trustee for it or for a substantial part of its property or
business.
5. Judgments, Attachments. Any money judgment, writ or warrant of
attachment, or similar process shall be entered or filed against Borrower or any
of its assets and shall remain unvacated unbonded or unstayed for a period of 10
days or in any event later than five days prior to the date of any proposed sale
thereunder.
6. Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against Borrower and, if
instituted against it, shall be consented to.
E. Miscellaneous Provisions.
1. Failure or Indulgence Not Waiver. No failure or delay on the part of
your Bank or any holder of Notes issued hereunder, in the exercise of any power,
right or privilege hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such power, right or privilege preclude other
or further exercise thereof or of any other right, power or privilege. All
rights and remedies existing under this agreement or any note issued in
connection with a loan that your Bank may make hereunder, are cumulative to, and
not exclusive of, any rights or remedies otherwise available.
2. Applicable Law. This Agreement and all other agreements and
instruments required by Bank in connection therewith shall be governed by and
construed according to the laws of the state of California, to the jurisdiction
of whose courts the parties hereby agree to submit.
3. Waiver of Jury Trial. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW
WHICH CANNOT BE WAIVED, THE BANK AND THE BORROWER EACH HEREBY WAIVES AND
COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE)
ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND,
ACTION OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT OR ANY
OTHER LOAN DOCUMENT OR THE SUBJECT MATTER HEREOF OR THEREOF OR ANY OBLIGATION OR
IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE BANK
OR THE BORROWER IN CONNECTION WITH ANY OF THE ABOVE, IN EACH CASE WHETHER NOW
EXISTING OR HEREAFTER ARISING AND WHETHER IN CONTRACT OR TORT OR OTHERWISE
The Commitment Letter July 21, 1999, and all amends thereto and
replacements therefore, and certain riders are attached hereto and incorporated
herein by this reference for additional terms. In the event of a conflict
between this Agreement and the Letter, the terms in the Letter shall take
precedence.
ACTIVE POWER, INC.
By: /s/
----------------------------------------
Name: ______________________________________
Title: _____________________________________
<PAGE>
IMPERIAL BANK
By: /s/
----------------------------------------
Name: ______________________________________
Title: _____________________________________
<PAGE>
Exhibit 10.8
IMPERIAL BANK
SECURITY AND LOAN AGREEMENT
(ACCOUNTS RECEIVABLE)
This Agreement is entered into between Active Power, Inc.
, a Texas Corporation
(herein called "Borrower") and IMPERIAL BANK (herein called "Bank").
1. Bank hereby commits, subject to all the terms and conditions of this
Agreement and prior to the termination of its commitment as hereinafter
provided, to make loans to Borrower from time to time in such amounts as
may be determined by Bank up to, but not exceeding in the aggregate unpaid
principal balance, the following Borrowing Base:
80 % of Eligible Accounts
and in no event more than $ 1,000,000.00
2. The amount of each loan made by Bank to Borrower hereunder shall be debited
to the loan ledger account of Borrower maintained by Bank (herein called
"Loan Account") and Bank shall credit the Loan Account with all loan
repayments made by Borrower. Borrower promises to pay Bank (a) the unpaid
balance of Borrower's Loan Account on demand and (b) on or before the tenth
day of each month, interest on the average daily unpaid balance of the Loan
Account during the immediately preceding month at the rate of Zero percent
( 0.00 %) per annum in excess of the rate of interest which Bank has
announced as its prime lending rate ("Prime Rate") which shall vary
concurrently with any change in such Prime Rate. Interest shall be computed
at the above rate on the basis of the actual number of days during which
the principal balance of the loan account is outstanding divided by 360,
which shall for interest computation purposes be considered one year. Bank
at Its option may demand payment of any or all of the amount due under the
Loan Account including accrued but unpaid Interest at any time. Such notice
may be given verbally or in writing and should be effective upon receipt by
Borrower. The amount of interest payable each month by Borrower shall not
be less than a minimum monthly charge of $ 250.00 . Bank is hereby
authorized to charge Borrower's deposit account(s) with Bank for all sums
due Bank under this Agreement.
3. Requests for loans hereunder shall be in writing duly executed by Borrower
in a form satisfactory to Bank and shall contain a certification setting
forth the matters referred to in Section 1, which shall disclose that
Borrower is entitled to the amount of loan being requested.
4. As used In this Agreement, the following terms shall have the following
meanings:
A. "Accounts" means any right to payment for goods sold or leased, or to
be sold or to be leased, or for services rendered or to be rendered no
matter how evidenced, Including accounts receivable, contract rights,
chattel paper, Instruments, purchase orders, notes, drafts,
acceptances, general intangibles and other forms of obligations and
receivables.
B. "Collateral" means any and all personal property of Borrower which is
assigned or hereafter is assigned to Bank as security or in which Bank
now has or hereafter acquires a security interest.
C. "Eligible Accounts" means all of Borrower's Accounts excluding,
however, (1) all Accounts under which payment is not received within
90 days from any invoice date, (2) all Accounts against which the
account debtor or any other person obligated to make payment thereon
asserts any defense, offset, counterclaim or other right to avoid or
reduce the liability represented by the Account and (3) any Accounts
if the account debtor or any other person liable in connection
therewith is insolvent, subject to bankruptcy or receivership
<PAGE>
proceedings or has made an assignment for the benefit of creditors or
whose credit standing is unacceptable to Bank and Bank has so notified
Borrower. Eligible Accounts shall only include such accounts as Bank
in its sole discretion shall determine are eligible from time to time.
5. Borrower hereby assigns to Bank all Borrower's present and future Accounts,
including all proceeds due thereunder, all guaranties and security
therefor, and hereby grants to Bank a continuing security interest in all
moneys in the Collateral Account referred to in Section 6 hereof, as
security for any and all obligations of Borrower to Bank, whether now owing
or hereafter incurred and whether direct, indirect, absolute or contingent.
So -long as Borrower is indebted to Bank or Bank is committed to extend
credit to Borrower, Borrower will execute and deliver to Bank such
assignments, including Bank's standard forms of Specific or General
Assignment covering individual Accounts, notices, financing statements, and
other documents and papers as Bank may require In order to affirm,
effectuate or further assure the assignment to Bank of the Collateral or to
give any third party, including the account debtors obligated on the
Accounts, notice of Bank's interest in the Collateral.
6. Until Bank exercises its rights to collect the Accounts pursuant to
paragraph 10, Borrower will collect with reasonable diligence all
Borrower's Accounts, provided that no legal action shall be maintained
thereon or in connection therewith without Bank's prior written consent.
Any collection of Accounts by Borrower, whether In the form of cash,
checks, notes, or other instruments for the payment of money (properly
endorsed or assigned where required to enable Bank to collect same), shall
be in trust for Bank, and Borrower shall keep all such collections separate
and apart from all other funds and property so as to be capable of
identification as the property of Bank and deliver said collections daily
to Bank in the identical form received. The proceeds of such collections
when received by Bank may be applied by Bank directly to the payment of
Borrower's Loan Account or any other obligation secured hereby. Any credit
given by Bank upon receipt of said proceeds shall be conditional credit
subject to collection. Returned items at Bank's option may be charged to
Borrower's general account. All collections of the Accounts shall be set
forth on an itemized schedule, showing the name of the account debtor, the
amount of each payment and such other information as Bank may reasonably
request.
7. Until Bank exercises its rights to collect the Accounts pursuant to
paragraph 10, Borrower may continue its present policies with respect to
returned merchandise and adjustments. However, Borrower shall notify Bank
within two (2) working days of all cases involving returns, repossessions,
and loss or damage of or to merchandise represented by the Accounts and of
any credits, adjustments or disputes arising in connection with the goods
or services represented by the Accounts, and in any of such events,
Borrower will immediately pay to Bank form its own funds (and not from the
proceeds of Accounts or Inventory) for application to Borrower's Loan
Account or any other obligation secured hereby the amount of any credit for
such returned or repossessed merchandise and adjustments made to any of the
Accounts.
8. Borrower represents and warrants to Bank: (i) if Borrower is a corporation,
that Borrower is duly organized and existing in the State of its
incorporation and the execution, deliver, and performance hereof are within
Borrower's corporate powers, have been duly authorized and are not in
conflict with law or the terms of any charter, by-law or other
incorporation papers, or of any indenture, agreement or undertaking to
which Borrower is a party or by which Borrower is found or affected; (ii)
Borrower is, or at the time the collateral becomes subject to Bank's
security interest will be, the true and lawful owner of and has, or at the
time the Collateral becomes subject to Bank's security interest will have,
good and clear title to the Collateral, subject only to Bank's right
therein; (iii) Each Account is, or at the time the Account comes into
existence will be, a true and correct statement of a bona fide indebtedness
incurred by the debtor named therein in the amount of the Account for
either merchandise sold or delivered (or being held subject to Borrower's
delivery instruction) to, or services rendered, performed and accepted by,
the account debtor; (iv) That, to the best of Borrower's knowledge, there
are or will be no defenses, counterclaims, or setoffs which may be asserted
against the Accounts; and (v) to the best of Borrower's knowledge, any and
all financial information, including
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<PAGE>
information relating to the Collateral, submitted by Borrower to Bank,
whether previously or in the future, is or will be true and correct.
9. Borrower will: (i) Furnish Bank from time to time such financial statements
and information as Bank may reasonably request and inform Bank within two
(2) working days the occurrence of a material adverse change therein; (ii)
Furnish Bank periodically, in such form and detail and at such times as
Bank may reasonably require, statements showing aging and reconciliation of
the Accounts and collections thereon; (iii) Permit representatives of Bank
to inspect the Borrower's books and records relating to the Collateral and
make extracts therefrom at any reasonable time and upon giving reasonable
notice to the Borrower to arrange for verification of the Accounts, under
reasonable procedures, acceptable to Bank, directly with the account
debtors or otherwise at Borrower's expense; (iv) Promptly notify Bank of
any attachment or other legal process levied against any of the Collateral
and any information received by Borrower relative to the Collateral,
including the Accounts, the account debtors or other persons obligated in
connection therewith, which may in any way affect the value of the
Collateral or the rights and remedies of Bank in respect thereto; (v)
Reimburse Bank upon demand for any and all reasonable legal costs,
including reasonable attorneys' fees, and other expense incurred in
collecting any sums payable by Borrower under Borrower's Loan Account or
any other obligation secured hereby, enforcing any term or provision of
this Security Agreement or otherwise or in the checking, handling and
collection of the Collateral and the preparation and enforcement of any
agreement relating thereto; (vi) Notify Bank of each location and of each
office of Borrower at which records of Borrower relating to the Accounts
are kept; (vii) Provide, maintain and deliver to Bank policies insuring the
Collateral against loss or damage by such risks and in such amounts, forms
and companies as Bank may reasonably require and with loss payable solely
to Bank, and, in the event Bank takes possession of the Collateral, the
insurance policy or policies and any unearned or returned premium thereon
shall at the option of Bank become the sole property of Bank, such policies
and the proceeds of any other insurance covering or in any way relating to
the Collateral, whether now in existence or hereafter obtained, being
hereby assigned to Bank; (viii) In the event the unpaid balance of
Borrower's Loan Account shall exceed the maximum amount of outstanding
loans to which Borrower is entitled under Section 1 hereof, Borrower shall,
within two (2) working days, pay to Bank, from its own funds and not from
the proceeds of Collateral, for credit to Borrower's Loan Account the
amount of such excess.
10. Bank may at any time, without prior notice to Borrower, collect the
Accounts and may give notice of assignment to any and all account debtors,
and Borrower does hereby make, constitute and appoint Bank its irrevocable,
true and lawful attorney with power to receive, open and dispose of all
mail addressed to Borrower, to endorse the name of Borrower upon any checks
or other evidences of payment that may come into the possession of Bank
upon the Accounts to endorse the name of the undersigned upon any document
or instrument relating to the Collateral; in its name or otherwise, to
demand, sue for, collect and give acquittances for any and all moneys due
or to become due upon the Accounts; to compromise, prosecute or defend any
action, claim or proceeding with respect thereto; and to do any and all
things necessary and proper to carry out the purpose herein contemplated.
11. Until Borrower's Loan Account and all other obligations secured hereby
shall have been repaid in full, Borrower shall not sell, dispose of or
grant a security interest in any of the Collateral other than to Bank, or
execute any financing statements covering the Collateral in favor of any
secured party or person other than Bank.
12. Should: (i) Default be made in the payment of any obligation, or breach be
made in any warranty, statement, promise, term or condition, contained
herein or hereby secured; (ii) Any statement or representation made for the
purpose of obtaining credit hereunder prove false; (iii) Bank reasonably
deem the Collateral inadequate or unsafe or in danger of misuse; (iv)
Borrower become insolvent or make an assignment for the benefit of
creditors; or (v) Any proceeding be commenced by or against Borrower under
any bankruptcy, reorganization, arrangement, readjustment of debt or
moratorium law or statute; then in any such event, Bank may, at its option
and without demand first made and without notice to Borrower, do any one or
more of the following: (a) Terminate its obligation to make loans to
Borrower as provided in Section 1 hereof; (b) Declare all
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<PAGE>
sums secured hereby immediately due and payable; (c) Immediately take
possession of the Collateral wherever it may be found, using all necessary
force so to do, or require Borrower to assemble the Collateral and make it
available to Bank at a place designated by Bank which is reasonably
convenient to Borrower and Bank, and Borrower waives all claims for damages
due to or arising from or connected with any such taking; (d) Proceed in
the foreclosure of Bank's security interest and sale of the Collateral in
any manner permitted by law, or provided for herein; (e) Sell, lease or
otherwise dispose of the Collateral at public or private sale, with or
without having the Collateral at the place of sale, and upon terms and in
such manner as Bank may determine, and Bank may purchase same at any such
sale; (f) Retain the Collateral in full satisfaction of the obligations
secured thereby; (g) Exercise any remedies of a secured party under the
Uniform Commercial Code. Prior to any such disposition, Bank may, at as
option, cause any of the Collateral to be repaired or reconditioned in such
manner and to such extent as Bank may deem advisable, and any sums expended
therefor by Bank shall be repaid by Borrower and secured hereby. Bank shall
have the right to enforce one or more remedies hereunder successively or
concurrently, and any such action shall not estop or prevent Bank from
pursuing any further remedy which it may have hereunder or by law. If a
sufficient sum is not realized from any such disposition of Collateral to
pay all obligations secured by this Security Agreement, Borrower hereby
promises and agrees to pay Bank any deficiency.
13. If any writ of attachment, garnishment, execution or other legal process be
issued against any property of Borrower, or if any assessment for taxes
against Borrower, other than real property, is made by the Federal or State
government or any department thereof, the obligation of Bank to make loans
to Borrower as provided in Section 1 hereof shall immediately terminate and
the unpaid balance of the Loan Account, all other obligations secured
hereby and all other sums due hereunder shall immediately become due and
payable without demand, presentment or notice.
14. Borrower authorizes Bank to destroy all invoices, delivery receipts,
reports and other types of documents and records submitted to Bank in
connection with the transactions contemplated herein at any time subsequent
to four months from the time such items are delivered to Bank.
15. Nothing herein shall in any way limit the effect of the conditions set
forth in any other security or other agreement executed by Borrower, but
each and every condition hereof shall be in addition thereto.
16. Should default be made in the payment of principal or interest when due, or
in the performance or observance, when due, of any item, covenant or
condition of this Agreement, any deed of trust, security agreement or other
agreement (including amendments or extensions thereof) securing or
pertaining to this Agreement, at the option of the holder hereof and
without notice or demand, the entire balance of principal and accrued
interest then remaining unpaid shall (a) become immediately due and
payable, and (b) thereafter bear interest, until paid in full, at the
increased rate of 5% per year in excess of the rate provided for above, as
it may vary from time to time.
17. If any installment payment, interest payment, principal payment or
principal balance payment due hereunder is delinquent twenty (20) or more
days, Borrower agrees to pay Bank a late charge in the amount of 5% of the
payment so due and unpaid, in addition to the payment; but nothing in this
paragraph is to be construed as any obligation on the part of the Bank to
accept payment of any payment past due or less than the total unpaid
principal balance after maturity.
All payments shall be applied first to any late charges owing, then to
interest and the remainder, if any, to principal.
18. Reference Provision.
A. Other than (i) non-judicial foreclosure and all matters in connection
therewith regarding security interests in real or personal property;
or (ii) the appointment of a receiver, or the exercise of other
provisional remedies (any and all of which may be initiated pursuant
to applicable law), each controversy, dispute or claim
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<PAGE>
between the parties arising out of or relating to this document
("Agreement"), which controversy, dispute or claim is not settled in
writing within thirty (30) days after the "Claim Date" (defined as the
date on which a party subject to the Agreement gives written notice to
all other parties that a controversy, dispute or claim exists), will
be settled by a reference proceeding in California in accordance with
the provisions of Section 638 et seq. of the California Code of Civil
Procedure, or their successor section ("CCP"), which shall constitute
the exclusive remedy for the settlement of any controversy, dispute or
claim concerning this Agreement, including whether such controversy,
dispute or claim is subject to the reference proceeding and except as
set forth above, the parties waive their rights to initiate any legal
proceedings against each other in any court or jurisdiction other than
the Superior Court in the County where the Real Property, if any, is
located or Los Angeles County if none (the "Court"). The referee shall
be a retired Judge of the Court selected by mutual agreement of the
parties, and if they cannot so agree within forty-five (45) days after
the Claim Date, the referee shall be promptly selected by the
Presiding Judge of the Court (or his representative). The referee
shall be appointed to sit as a temporary judge, with all of the powers
of a temporary judge, as authorized by law, and upon selection should
take and subscribe to the oath of office as provided for in Rule 244
of the California Rules of Court (or any subsequently enacted Rule).
Each party shall have one peremptory challenge pursuant to CCP
(S)170.6. The referee shall (a) be requested to set the matter for
hearing within sixty (60) days after the Claim Date and (b) try any
and all issues of law or fact and report a statement of decision upon
them, if possible, within ninety (90) days of the Claim Date. Any
decision rendered by the referees will be final, binding and
conclusive and judgment shall be entered pursuant to CCP (S)644 in any
court in the State of California having jurisdiction. Any party may
apply for a reference proceeding at any time after thirty (30) days
following notice to any other party of the nature of the controversy,
dispute or claim, by filing a petition for a hearing and/or trial. All
discovery permitted by this Agreement shall be completed no later than
fifteen (15) days before the first hearing date established by the
referee. The referee may extend such period in the event of a party's
refusal to provide requested discovery for any reason whatsoever,
including, without limitation, legal objections raised to such
discovery or unavailability of a witness due to absence or illness. No
party shall be entitled to "priority" in conducting discovery.
Depositions may be taken by either party upon seven (7) days written
notice, and request for production or inspection of documents shall be
responded to within ten (10) days after service. All disputes relating
to discovery which cannot be resolved by the parties shall be
submitted to the referee whose decision shall be final and binding
upon the parties. Pending appointment of the referee as provided
herein, the Superior Court is empowered to issue temporary and or
provisional remedies, as appropriate.
B. Except as expressly set forth in this Agreement and the riders
attached hereto, the referee shall determine the manner in which the
reference proceeding is conducted including the time and place of all
hearings, the order of presentation of evidence, and all other
questions that arise with respect to the course of the reference
proceeding. All proceedings and hearings conducted before the referee,
except for trial, shall be conducted without a court reporter, except
that when any party so requests, a court reporter will be used at any
hearing conducted before the referee. The party making such a request
shall have the obligation to arrange for and pay for the court
reporter. The costs of the court reporter at the trial shall be borne
equally by the parties.
C. The referee shall be required to determine all issues in accordance
with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in
the State of California will be applicable to the reference
proceeding. The referee shall be empowered to enter equitable as well
as legal relief, to provide all temporary and/or provisional remedies
and to enter equitable orders that will be binding upon the parties.
The referee shall Issue a single judgment at the close of the
reference proceeding which shall dispose of all of the claims of the
parties that are the subject of the reference. The
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<PAGE>
parties hereto expressly reserve the right to contest or appeal from
the final judgment or any appealable order or appealable judgment
entered by the referee. The parties hereto expressly reserve the right
to findings of fact, conclusions of law, a written statement of
decision, and the right to move for a new trial or a different
judgment, which new trial, if granted, is also to be a reference
proceeding under this provision.
D. In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is
enacted), any dispute between the parties that would otherwise be
determined by the reference procedure herein described will be
resolved and determined by arbitration. The arbitration will be
conducted by a retired judge of the Court, in accordance with the
California Arbitration Act, (S)1280 through (S)1294.2 of the CCP as
amended from time to time. The limitations with respect to discovery
as set forth hereinabove shall apply to any such arbitration
proceeding.
19. Additional Provisions: Subject to the provisions of the Credit Terms and
Conditions Agreement dated August 3, 1999, and all amendments and riders
thereto and replacements therefor.
If checked, the Addendum or Exhibit 'A" attached (and all amendments
thereto and replacements therefor) is incorporated herein by this
reference.
By signing in the space below, each of the undersigned agrees that the foregoing
Riders are incorporated in and made a part of the Security and Loan Agreement
between Active Power, Inc. and Imperial Bank dated August ___, 1999.
Executed this 3rd day of August, 1999
Active Power, Inc., a Texas corporation
---------------------------------------
(Name of Borrower)
IMPERIAL BANK By: /s/
------------------------------------
(Authorized Signature and Title)
BY: /s/ BY: /s/
--------------------------------- ------------------------------------
Title (Authorized Signature and Title)
6
<PAGE>
Exhibit 10.9
LEASE AGREEMENT
Between
Braker Phase III, Ltd.,
-----------------------
as Landlord,
and
Magnetic Bearing Technologies, Inc.,
------------------------------------
as Tenant,
Covering approximately 4,050 gross square feet
-----
of the Building known (or to be known) as
Braker Center III, Building 1
-----------------------------
located at
11525 Stonehollow Drive, Suite 135
----------------------------------
Austin, Texas, 78758.
------ -----
<PAGE>
STANDARD INDUSTRIAL LEASE AGREEMENT
(AUS/91)
Approximately 4,050 gross square feet
11525 Stonehollow Drive, Suite 135
Austin, Texas 78758
(Braker Center III, Building 1)
LEASE AGREEMENT
THIS LEASE AGREEMENT is made and entered into by and between Braker Phase III,
-----------------
Ltd., hereinafter referred to as "Landlord," and Magnetic Bearing Technologies,
- ---- ------------------------------
Inc., hereinafter referred to as "Tenant."
- ----
1. PREMISES AND TERM. In consideration of the mutual obligations of Landlord and
Tenant set forth herein, Landlord leases to Tenant, and Tenant hereby takes from
Landlord, certain leased premises situated within the County of Travis, State of
Texas, as ------
more particularly described on EXHIBIT "A" attached hereto and incorporated
herein by reference (the "Premises"), to have and to hold, subject to the terms,
covenants and conditions in this Lease. The term of this Lease shall commence
on the Commencement Date hereinafter set forth and shall end on the last day of
the month that is Sixty (60) months after the Commencement Date.
A. Building or Improvements to be Constructed. If the Premises or part
------------------------------------------
thereof are to be constructed, the "Commencement Date" shall be deemed to be the
earliest of: (i) the date upon which the Premises and other improvements to be
erected in accordance with the plans and specifications described on EXHIBIT "B"
attached hereto and incorporated herein by reference (the "Plans") have been
substantially completed; (ii) the date on which the Premises or such
improvements would have been substantially completed but for delays caused
directly by Tenant, including Plan delays or change orders; (iii) the date on
which Tenant occupies any part of the Premises. As used herein, the term
"substantially completed" shall mean that, in the opinion of the architect or
space planner that prepared the Plans, such improvements have been completed in
accordance with the Plans, and the Premises are in good and satisfactory
condition, with the exception of completion of minor punch list items. As soon
as such improvements have been substantially completed, Landlord shall notify
Tenant in writing that the Commencement Date has occurred. Should the Landlord
fail to deliver the space for occupancy by June 1, 1996, the Tenant will have
the right to cancel this Lease Agreement.
2. BASE RENT, SECURITY DEPOSIT AND ESCROW DEPOSITS.
A. Base Rent. Tenant agrees to pay Landlord rent for the Premises, in
---------
advance, without demand, deduction or set off, at the rate of See Rental Rate
Paragraph in Exhibit "C" ($_____________) per month during the term hereof.
One such monthly installment, plus the other monthly charges set forth in
Paragraph 2C below, shall be due and payable on the date hereof, and a like
monthly installment shall be due and payable on or before the first day of each
calendar month succeeding the Commencement Date, except that all payments due
hereunder for any fractional calendar month shall be prorated.
B. Security Deposit. In addition, Tenant agrees to deposit with Landlord
----------------
on the date hereof the sum of Two Thousand Five Hundred and No/100 Dollars
($2,500.00), which shall be held by Landlord, without obligation for interest,
as security for the performance of Tenant's obligations under this Lease (the
"Security Deposit"), it being expressly understood and agreed that the Security
Deposit is not an advance rental deposit or a measure of Landlord's damages in
case of Tenant's default. Upon occurrence of an Event of Default, Landlord may
use all or part of the Security Deposit to pay past due rent or other payments
due Landlord under this Lease or the cost of any other damage, injury, expense
or liability caused by such Event of Default, without prejudice to any other
remedy provided herein or provided by law. On demand, Tenant shall pay Landlord
the amount that will restore the Security Deposit to its original amount. The
Security Deposit shall be deemed the property of Landlord, but any remaining
balance of the Security Deposit shall be returned by Landlord to Tenant when all
of Tenant's present and future obligations under this Lease have been fulfilled.
C. Escrow Deposits. Without limiting in any way Tenant's other obligations
---------------
under this Lease, Tenant agrees to pay to Landlord its Proportionate Share (as
defined in this Paragraph 2C below) of (i) Taxes (hereinafter defined) payable
by Landlord pursuant to Paragraph 3A below, (ii) the cost of utilities payable
by Landlord pursuant to
Initials _______ _______
Date _______ _______
<PAGE>
Paragraph 8 below, (iii) Landlord's cost of maintaininginsurance pursuant to
Paragraph 9A below, and (iv) Landlord's cost of maintaining the Premises
pursuant to paragraph 5E below and any common area charges payable by Tenant in
accordance with Paragraph 4B below (collectively, the "Tenant Costs"). During
each month of the term of this Lease, on the same day that rent is due
hereunder, Tenant shall deposit in escrow with Landlord an amount equal to one-
twelfth (1/12) of the estimated amount of Tenant's Proportionate Share of the
Tenant Costs. Tenant authorizes Landlord to use the funds deposited with
Landlord under this Paragraph 2C to pay such Tenant Costs. The initial monthly
escrow payments are based upon the estimated amounts for the year in question
and shall be increased or decreased annually to reflect the projected actual
amount of all Tenant Costs. If the Tenant's total escrow deposits for any
calendar year are less than Tenant's actual Proportionate Share of the Tenant
Costs for such calendar year, Tenant shall pay the difference to Landlord within
thirty (30) days after demand. If the total escrow deposits of Tenant for any
calendar year are more than Tenant's actual Proportionate Share of the Tenant
Costs for such calendar year, Landlord shall return the excess to the Tenant
within sixty (60) days. In the event the Premises constitute a portion of a
multiple occupancy building (the "Building"), Tenant's "Proportionate Share"
with respect to the Building, as used in this Lease, shall mean a fraction, the
numerator of which is the gross rentable area contained in the Premises and the
denominator of which is the gross rentable area contained in the entire
Building. In the event the Premises or the Building is part of a project or
business park owned, managed or leased by Landlord or an affiliate of Landlord
(the "Project"), Tenant's "Proportionate Share" of the Project, as used in this
Lease, shall mean a fraction, the numerator of which is the gross rentable area
contained in the Premises and the denominator of which is the gross rentable
area contained in all of the buildings (including the Building) within the
Project.
3. TAXES
A. Real Property Taxes. Subject to reimbursement under Paragraph 2C
-------------------
herein, Landlord agrees to pay all taxes, assessments and governmental charges
of any kind and nature (collectively referred to herein as "Taxes") that accrue
against the Premises, the Building and/or the land of which the Premises or the
Building are a part. If at any time during the term of this Lease there shall
be levied, assessed or imposed on Landlord a capital levy or other tax directly
on the rents received therefrom and/or a franchise tax, assessment, levy or
charge measured by or based, in whole or in part, upon such rents from the
Premises and/or the land and improvements of which the Premises are a part, then
all such taxes, assessments, levies or charges, or the part thereof so measured
or based shall be deemed to be included within the term "Taxes" for the purposes
hereof. The Landlord shall have the right to employ a tax consulting firm to
attempt to assure a fair tax burden on the real property within the applicable
taxing jurisdiction. Tenant agrees to pay its Proportionate Share of the cost
of such consultant.
B. Personal Property Taxes. Tenant shall be liable for all taxes levied or
-----------------------
assessed against any personal property or fixtures placed in or on the Premises.
If any such taxes are levied or assessed against Landlord or Landlord's property
and (i) Landlord pays the same or (ii) the assessed value of Landlord's property
is increased by inclusion of such personal property and fixtures and Landlord
pays the increased taxes, then Tenant shall pay to Landlord, upon demand, the
amount of such taxes.
4. LANDLORD'S REPAIRS AND MAINTENANCE.
A. Structural Repairs. Landlord, at its own cost and expense, shall
------------------
maintain the roof, foundation and the structural soundness of the exterior walls
of the Building in good repair, reasonable wear and tear excluded. The term
"walls" as used herein shall not include windows, glass or plate glass, any
doors, special store fronts or office entries, and the term "foundation" as used
herein shall not include loading docks. Tenant shall immediately give Landlord
written notice of defect or need for repairs, after which Landlord shall have
reasonable opportunity to effect such repairs or cure such defect.
B. Tenant's Share of Common Area Charges. Tenant agrees to pay its
-------------------------------------
Proportionate Share of the cost of (i) maintenance and/or landscaping (including
both maintenance and replacement of landscaping) of any property that is a part
of the Building and/or the Project; (ii) operating, maintaining and repairing
any property, facilities or services (including without limitation utilities and
insurance therefor) provided for the use or benefit of Tenant or the common use
or benefit of Tenant and other lessees of the Project or the Building; and (iii)
an administrative and or management fee of up to ten percent (10%).
Initials _______ _______
Date _______ _______
2
<PAGE>
5. TENANT'S REPAIRS.
A. Maintenance of Premises and Appurtenances. Tenant, at its own cost and
-----------------------------------------
expense, shall (i) maintain all parts of the Premises and promptly make all
necessary repairs and replacements to the Premises (except those for which
Landlord is expressly responsible hereunder), and (ii) keep the parking areas,
driveways and alleys surrounding the Premises in a clean and sanitary condition.
Tenant's obligation to maintain, repair and make replacements to the Premises
shall cover, but not be limited to, pest control (including termites), trash
removal and the maintenance, repair and replacement of all HVAC, electrical,
plumbing, sprinkler and other mechanical systems which service the Tenant's
lease space.
B. Parking. Tenant and its employees, customers and licensees shall have
-------
the right to use only its Proportionate Share of any parking areas that have
been designated for such use by Landlord in writing, subject to (i) all rules
and regulations promulgated by Landlord, and (ii) rights of ingress and egress
of other lessees. Landlord shall not be responsible for enforcing Tenant's
parking rights against any third parties, and Tenant expressly does not have the
right to tow or obstruct improperly parked vehicles. Tenant agrees not to park
on any public streets or private roadways adjacent to or in the vicinity of the
Premises.
C. System Maintenance. Tenant, at its own cost and expense, shall enter
------------------
into a regularly scheduled preventive maintenance/service contract with a
maintenance contractor approved by Landlord for servicing all hot water, heating
and air conditioning systems and equipment within the Premises. The service
contract must include all services suggested by the equipment manufacturer in
its operations/maintenance manual and must become effective within thirty (30)
days of the date Tenant takes possession of the Premises.
D. Option to Maintain Premises. Landlord reserves the right to perform, in
---------------------------
whole or in part and without notice to Tenant, maintenance, repairs and
replacements to the Premises, paving, common area, landscape, exterior painting,
common sewage line plumbing and any other items that are otherwise Tenant's
obligations under this Paragraph 5, in which event, Tenant shall be liable for
its Proportionate Share of the cost and expense of such repair, replacement,
maintenance and other such items.
6. ALTERATIONS. Tenant shall not make any alterations, additions or improvements
to the Premises without the prior written consent of Landlord such consent will
not be unreasonably withheld. Tenant, at its own cost and expense, may erect
such shelves, bins, machinery and trade fixtures as it desires, provided that
(i) such items do not alter the basic character of the Premises or the Building,
(ii) such items do not overload or damage same, (iii) such items may be removed
without injury to the Premises, and (iv) the construction, erection or
installation thereof complies with all applicable governmental laws, ordinances,
regulations and with Landlord's specifications and requirements. Tenant shall be
responsible for compliance with The Americans With Disabilities Act of 1990.
Without implying any consent of Landlord thereto, all alterations, additions,
improvements and partitions erected by Tenant shall be and remain the property
of Tenant during the term of this Lease. All shelves, bins, machinery and trade
fixtures installed by Tenant shall be removed on or before the earlier to occur
of the day of termination or expiration of this Lease or vacating the Premises,
at which time Tenant shall restore the Premises to their original condition. All
alterations, installations, removals and restorations shall be performed in a
good and workmanlike manner so as not to damage or alter the primary structure
or structural qualities of the Building or other improvements situated on the
Premises or of which the Premises are a part.
7. SIGNS. Any signage Tenant desires for the Premises shall be subject to
Landlord's written approval and shall be submitted to Landlord prior to the
Commencement Date of this Lease. Tenant shall repair, paint and/or replace the
Building fascia surface to which its signs are attached upon Tenant's vacating
the Premises or the removal or alteration of its signage. Tenant shall not,
without Landlord's prior written consent, (i) make any changes to the exterior
of the Premises, such as painting; (ii) install any exterior lights,
decorations, balloons, flags, pennants or banners; or (iii) erect or install any
signs, windows or door lettering, placards, decorations or advertising media of
any type which can be viewed from the exterior of the Premises. All signs,
decorations, advertising media, blinds, draperies and other window treatment or
bars or other security installations visible from outside the Premises shall
conform in all respects to the criteria established by Landlord or shall be
otherwise subject to Landlord's prior written consent.
Initials _______ _______
Date _______ _______
3
<PAGE>
8. UTILITIES. Landlord agrees to provide normal water and electricity service to
the Premises. Tenant shall pay for all water, gas, heat, light, power,
telephone, sewer, sprinkler charges and other utilities and services used on or
at the Premises, together with any taxes, penalties, surcharges or the like
pertaining to the Tenant's use of the Premises and any maintenance charges for
utilities. Landlord shall have the right to cause any of said services to be
separately metered to Tenant, at Tenant's expense. Tenant shall pay its pro rata
share, as reasonably determined by Landlord, of all charges for jointly metered
utilities. Landlord shall not be liable for any interruption or failure of
utility service on the Premises, and Tenant shall have no rights or claims as a
result of any such failure the Landlord will use its best reasonable efforts to
restore service. In the event water is not separately metered to Tenant, Tenant
agrees that it will not use water and sewer capacity for uses other than normal
domestic restroom and kitchen usage, and Tenant further agrees to reimburse
Landlord for the entire amount of common water and sewer costs as additional
rental if, in fact, Tenant uses water or sewer capacity for uses other than
normal domestic restroom and kitchen uses without first obtaining Landlord's
written permission, including but not limited to the cost for acquiring
additional sewer capacity to service Tenant's excess sewer use. Furthermore,
Tenant agrees in such event to install at its own expense a submeter to
determine Tenant's usage.
9. INSURANCE.
A. Landlord's Insurance. Subject to reimbursement under Paragraph 2C
--------------------
herein, Landlord shall maintain insurance covering the Building in an amount not
less than eighty percent (80%) of the "replacement cost" thereof, insuring
against the perils of fire, lightning, extended coverage, vandalism and
malicious mischief.
B. Tenant's Insurance. Tenant, at its own expense, shall maintain during
------------------
the term of this Lease a policy including personal injury and property damage,
with contractual liability endorsement, in the amount of Five Hundred Thousand
Dollars ($500,000.00) for property damage and One Million Dollars
($1,000,000.00) per occurrence and Two Million Dollars ($2,000,000.00) in the
aggregate for personal injuries or deaths of persons occurring in or about the
Premises. Tenant, at its own expense, shall also maintain during the term of
this Lease fire and extended coverage insurance covering the replacement cost of
(i) all alterations, additions, partitions and improvements installed or placed
on the Premises by Tenant or by Landlord on behalf of Tenant; and (ii) all of
Tenant's personal property contained within the Premises. Said policies shall
(i) name the Landlord as an additional insured and insure Landlord's contingent
liability under or in connection with this Lease (except for the workers'
compensation policy, which instead shall include a waiver of subrogation
endorsement in favor of Landlord); (ii) be issued by an insurance company which
is acceptable to Landlord; and (iii) provide that said insurance shall not be
cancelled unless thirty (30) days prior written notice has been given to
Landlord. Said policy or policies or certificates thereof shall be delivered to
Landlord by Tenant on or before the Commencement Date and upon each renewal of
said insurance.
C. Prohibited Uses. Tenant will not permit the Premises to be used for any
---------------
purpose or in any manner that would (i) void the insurance thereon, (ii)
increase the insurance risk or cost thereof, or (iii) cause the disallowance of
any sprinkler credits; including without limitation, use of the Premises for the
receipt, storage or handling of any product, material or merchandise that is
explosive or highly inflammable. If any increase in the cost of any insurance
on the Premises or the Building is caused by Tenant's use of the Premises or
because Tenant vacates the Premises, then Tenant shall pay the amount of such
increase to Landlord upon demand therefor.
10. FIRE AND CASUALTY DAMAGE.
A. Total or Substantial Damage and Destruction. If the Premises or the
-------------------------------------------
Building should be damaged or destroyed by fire or other peril, Tenant shall
immediately give written notice to Landlord of such damage or destruction. If
the Premises or the Building should be totally destroyed by any peril covered by
the insurance to be provided by Landlord under Paragraph 9A above, or if they
should be so damaged thereby that, in Landlord's estimation, rebuilding or
repairs cannot be completed within one hundred eighty (180) days after the date
of such damage or after such completion there would not be enough time remaining
under the terms of this Lease to fully amortize such rebuilding or repairs,
then this Lease shall terminate and the rent shall be abated during the
unexpired portion of this Lease, effective upon the date of the occurrence of
such damage.
B. Partial Damage or Destruction. If the Premises or the Building should
-----------------------------
be damaged by any peril covered by the insurance to be provided by Landlord
under Paragraph 9A above and, in Landlord's estimation, rebuilding or repairs
can be substantially completed within one hundred twenty (120) days after the
date of such damage, then this
Initials _______ _______
Date _______ _______
4
<PAGE>
Lease shall not terminate and Landlord shall substantially restore the Premises
to its previous condition, except that Landlord shall not be required to
rebuild, repair or replace any part of the partitions, fixtures, additions and
other improvements that may have been constructed, erected or installed in or
about the Premises for the benefit of, by or for Tenant.
C. Lienholders' Rights in Proceeds. Notwithstanding anything herein to the
-------------------------------
contrary, in the event the holder of any indebtedness secured by a mortgage or
deed of trust covering the Premises requires that the insurance proceeds be
applied to such indebtedness, then Landlord shall have the right to terminate
this Lease by delivering written notice of termination to Tenant within fifteen
(15) days after such requirement is made known to Landlord by any such holder,
whereupon all rights and obligations hereunder shall cease and terminate.
D. Waiver of Subrogation. Notwithstanding anything in this Lease to the
---------------------
contrary, Landlord and Tenant hereby waive and release each other of and from
any and all rights of recovery, claims, actions or causes of action against each
other, or their respective agents, officers and employees, for any loss or
damage that may occur to the Premises, improvements to the Building or personal
property (Building contents) within the Building and/or Premises, for any reason
regardless of cause or origin. Each party to this Lease agrees immediately
after execution of this Lease to give written notice of the terms of the mutual
waivers contained in this subparagraph to each insurance company that has issued
to such party policies of fire and extended coverage insurance and to have the
insurance policies properly endorsed to provide that the carriers of such
policies waive all rights of recovery under subrogation or otherwise against the
other party.
11. LIABILITY AND INDEMNIFICATION. Except for any claims, right of recovery and
causes of action that Landlord has released, Tenant shall hold Landlord harmless
from and defend Landlord against any and all claims or liability for any injury
or damage (i) to any person or property whatsoever occurring in, on or about the
Premises or any part thereof, the Building and/or other common areas, the use of
which Tenant may have in accordance with this Lease, if (and only if) such
injury or damage shall be caused in whole or in part by the act, neglect, fault
or omission of any duty by Tenant, its agents, servants, employees or invitees;
(ii) arising from the conduct or management of any work done by the Tenant in or
about the Premises; (iii) arising from transactions of the Tenant; and (iv) all
costs, counsel fees, expenses and liabilities incurred in connection with any
such claim or action or proceeding brought thereon. The provisions of this
Paragraph 11 shall survive the expiration or termination of this Lease. Landlord
shall not be liable in any event for personal injury or loss of Tenant's
property caused by fire, flood, water leaks, rain, hail, ice, snow, smoke,
lightning, wind, explosion, interruption of utilities or other occurrences.
Landlord strongly recommends that Tenant secure Tenant's own insurance in excess
of the amounts required elsewhere in this Lease to protect against the above
occurrences if Tenant desires additional coverage for such risks. Tenant shall
give prompt notice to Landlord of any significant accidents involving injury to
persons or property. Furthermore, Landlord shall not be responsible for lost or
stolen personal property, equipment, money or jewelry from the Premises or from
the public areas of the Building or the Project, regardless of whether such loss
occurs when the area is locked against entry. Landlord shall not be liable to
Tenant or Tenant's employees, customers or invitees for any damages or losses to
persons or property caused by any lessees in the Building or the Project, or for
any damages or losses caused by theft, burglary, assault, vandalism or other
crimes. Landlord strongly recommends that Tenant provide its own security
systems and services and secure Tenant's own insurance in excess of the amounts
required elsewhere in this Lease to protect against the above occurrences if
Tenant desires additional protection or coverage for such risks. Tenant shall
give Landlord prompt notice of any criminal or suspicious conduct within or
about the Premises, the Building or the Project and/or any personal injury or
property damage caused thereby. Landlord may, but is not obligated to, enter
into agreements with third parties for the provision, monitoring, maintenance
and repair of any courtesy patrols or similar services or fire protective
systems and equipment and, to the extent same is provided at Landlord's sole
discretion, Landlord shall not be liable to Tenant for any damages, costs or
expenses which occur for any reason in the event any such system or equipment is
not properly installed, monitored or maintained or any such services are not
properly provided. Landlord shall use reasonable diligence in the maintenance of
existing lighting, if any, in the parking garage or parking areas servicing the
Premises, and Landlord shall not be responsible for additional lighting or any
security measures in the Project, the Premises, the parking garage or other
parking areas.
12. USE. The Premises shall be used only for the purpose of receiving, storing,
shipping and selling developing, manufacturing, assembling and testing (other
than retail) products, materials and merchandise made and/or distributed by
Tenant and for such other lawful purposes as may be directly incidental thereto.
Outside storage,
Initials _______ _______
Date _______ _______
5
<PAGE>
including without limitation storage of trucks and other vehicles, is prohibited
without Landlord's prior written consent. Tenant shall comply with all
governmental laws, ordinances and regulations applicable to the use of the
Premises and shall promptly comply with all governmental orders and directives
for the correction, prevention and abatement of nuisances in, upon or connected
with the Premises, all at Tenant's sole expense. Tenant shall not permit any
objectionable or unpleasant odors, smoke, dust, gas, noise or vibrations to
emanate from the Premises, nor take any other action that would constitute a
nuisance or would disturb, unreasonably interfere with or endanger Landlord or
any other lessees of the Building or the Project.
13. HAZARDOUS WASTE. The term "Hazardous Substances," as used in this Lease,
shall mean pollutants, contaminants, toxic or hazardous wastes, radioactive
materials or any other substances, the use and/or the removal of which is
required or the use of which is restricted, prohibited or penalized by any
"Environmental Law," which term shall mean any federal, state or local statute,
ordinance, regulation or other law of a governmental or quasi-governmental
authority relating to pollution or protection of the environment or the
regulation of the storage or handling of Hazardous Substances. Tenant hereby
agrees that: (i) no activity will be conducted on the Premises that will produce
any Hazardous Substances, except for such activities that are part of the
ordinary course of Tenant's business activities (the "Permitted Activities"),
provided said Permitted Activities are conducted in accordance with all
Environmental Laws and have been approved in advance in writing by Landlord and,
in connection therewith, Tenant shall be responsible for obtaining any required
permits or authorizations and paying any fees and providing any testing required
by any governmental agency; (ii) the Premises will not be used in any manner for
the storage of any Hazardous Substances, except for the temporary storage of
such materials that are used in the ordinary course of Tenant's business (the
"Permitted Materials"), provided such Permitted Materials are properly stored in
a manner and location meeting all Environmental Laws and have been approved in
advance in writing by Landlord, and, in connection therewith, Tenant shall be
responsible for obtaining any required permits or authorizations and paying any
fees and providing any testing required by any governmental agency; (iii) no
portion of the Premises will be used as a landfill or a dump; (iv) Tenant will
not install any underground tanks of any type; (v) Tenant will not allow any
surface or subsurface conditions to exist or come into existence that
constitute, or with the passage of time may constitute, a public or private
nuisance; and (vi) Tenant will not permit any Hazardous Substances to be brought
onto the Premises, except for the Permitted Materials, and if so brought or
found located thereon, the same shall be immediately removed, with proper
disposal, and all required clean-up procedures shall be diligently undertaken by
Tenant at its sole cost pursuant to all Environmental Laws. Landlord and
Landlord's representatives shall have the right but not the obligation to enter
the Premises for the purpose of inspecting the storage, use and disposal of any
Permitted Materials to ensure compliance with all Environmental Laws. Should it
be determined, in Landlord's sole opinion, that any Permitted Materials are
being improperly stored, used or disposed of, then Tenant shall immediately take
such corrective action as requested by Landlord. Should Tenant fail to take such
corrective action within twenty-four (24) hours, Landlord shall have the right
to perform such work and Tenant shall reimburse Landlord, on demand, for any and
all costs associated with said work. If at any time during or after the term of
this Lease, the Premises is found to be contaminated with Hazardous Substances,
Tenant shall diligently institute proper and thorough clean-up procedures, at
Tenant's sole cost. Tenant agrees to indemnify and hold Landlord harmless from
all claims, demands, actions, liabilities, costs, expenses, damages, penalties
and obligations of any nature arising from or as a result of any contamination
of the Premises with Hazardous Substances, or otherwise arising from the use of
the Premises by Tenant. The foregoing indemnification and the responsibilities
of Tenant shall survive the termination or expiration of this Lease.
14. INSPECTION. Landlord's agents and representatives shall have the right to
enter the Premises at any reasonable time during business hours (or at any time
in case of emergency) (i) to inspect the Premises, (ii) to make such repairs as
may be required or permitted pursuant to this Lease, and/or (iii) during the
last six (6) months of the Lease term, for the purpose of showing the Premises.
In addition, Landlord shall have the right to erect a suitable sign on the
Premises stating the Premises are available for lease. Tenant shall notify
Landlord in writing at least thirty (30) days prior to vacating the Premises and
shall arrange to meet with Landlord for a joint inspection of the Premises prior
to vacating. If Tenant fails to give such notice or to arrange for such
inspection, then Landlord's inspection of the Premises shall be deemed correct
for the purpose of determining Tenant's responsibility for repairs and
restoration of the Premises.
15. ASSIGNMENT AND SUBLETTING. Tenant shall not have the right to sublet, assign
or otherwise transfer or encumber this Lease, or any interest therein, without
the prior written consent of Landlord which shall not be unreasonably withheld.
Any attempted assignment, subletting, transfer or encumbrance by Tenant in
violation of
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the terms and covenants of this paragraph shall be void. Any assignee, sublessee
or transferee of Tenant's interest in this Lease (all such assignees, sublessees
and transferees being hereinafter referred to as "Transferees"), by assuming
Tenant's obligations hereunder, shall assume liability to Landlord for all
amounts paid to persons other than Landlord by such Transferees to which
Landlord is entitled or is otherwise in contravention of this Paragraph 15. No
assignment, subletting or other transfer, whether or not consented to by
Landlord or permitted hereunder, shall relieve Tenant of its liability under
this Lease. If an Event of Default occurs while the Premises or any part thereof
are assigned or sublet, then Landlord, in addition to any other remedies herein
provided or provided by law, may collect directly from such Transferee all rents
payable to the Tenant and apply such rent against any sums due Landlord
hereunder. No such collection shall be construed to constitute a novation or a
release of Tenant from the further performance of Tenant's obligations
hereunder. If Landlord consents to any subletting or assignment by Tenant as
hereinabove provided and any category of rent subsequently received by Tenant
under any such sublease is in excess of the same category of rent payable under
this Lease, or any additional consideration is paid to Tenant by the assignee
under any such assignment, then Landlord may, at its option, declare such excess
rents under any sublease or such additional consideration for any assignment to
be due and payable by Tenant to Landlord as additional rent hereunder.
16. CONDEMNATION. If more than eighty percent (80%) of the Premises are taken
for any public or quasi-public use under governmental law, ordinance or
regulation, or by right of eminent domain or private purchase in lieu thereof,
and the taking prevents or materially interferes with the use of the remainder
of the Premises for the purpose for which they were leased to Tenant, then this
Lease shall terminate and the rent shall be abated during the unexpired portion
of this Lease, effective on the date of such taking. If less than eighty percent
(80%) of the Premises are taken for any public or quasi-public use under any
governmental law, ordinance or regulation, or by right of eminent domain or
private purchase in lieu thereof, or if the taking does not prevent or
materially interfere with the use of the remainder of the Premises for the
purpose for which they were leased to Tenant, then this Lease shall not
terminate, but the rent payable hereunder during the unexpired portion of this
Lease shall be reduced to such extent as may be fair and reasonable under all of
the circumstances. All compensation awarded in connection with or as a result of
any of the foregoing proceedings shall be the property of Landlord, and Tenant
hereby assigns any interest in any such award to Landlord; provided, however,
Landlord shall have no interest in any award made to Tenant for loss of business
or goodwill or for the taking of Tenant's trade fixtures and personal property,
if a separate award for such items is made to Tenant.
17. HOLDING OVER. At the termination of this Lease by its expiration or
otherwise, Tenant shall immediately deliver possession of the Premises to
Landlord with all repairs and maintenance required herein to be performed by
Tenant completed. If, for any reason, Tenant retains possession of the Premises
after the expiration or termination of this Lease, unless the parties hereto
otherwise agree in writing, such possession shall be deemed to be a tenancy at
will only, and all of the other terms and provisions of this Lease shall be
applicable during such period, except that Tenant shall pay Landlord from time
to time, upon demand, as rental for the period of such possession, an amount
equal to one and one-quarter (1 1/4) times the rent in effect on the date of
such termination of this Lease, computed on a daily basis for each day of such
period. No holding over by Tenant, whether with or without consent of Landlord,
shall operate to extend this Lease except as otherwise expressly provided. The
preceding provisions of this Paragraph 17 shall not be construed as consent for
Tenant to retain possession of the Premises in the absence of written consent
thereto by Landlord.
18. QUIET ENJOYMENT. Landlord represents that it has the authority to enter into
this Lease and that, so long as Tenant pays all amounts due hereunder and
performs all other covenants and agreements herein set forth, Tenant shall
peaceably and quietly have, hold and enjoy the Premises for the term hereof
without hindrance or molestation from Landlord, subject to the terms and
provisions of this Lease.
19. EVENTS OF DEFAULT. The following events (herein individually referred to as
an "Event of Default") each shall be deemed to be a default in or breach of
Tenant's obligations under this Lease:
A. Tenant shall fail to pay any installment of the rent herein reserved
when due, or any other payment or reimbursement to Landlord required herein when
due, and such failure shall continue for a period of five (5) days from the date
such payment was due.
B. Tenant shall fail to discharge any lien placed upon the Premises in
violation of Paragraph 22 hereof within twenty (20) days after any such lien or
encumbrance is filed against the Premises.
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C. Tenant shall default in the performance of any of its obligations under
any other lease to Tenant from Landlord, or from any person or entity affiliated
with or related to Landlord, and same shall remain uncured after the lapsing of
any applicable cure periods provided for under such other lease.
D. Tenant shall fail to comply with any term, provision or covenant of this
Lease (other than those listed above in this paragraph) and shall not begin to
cure such failure within twenty (20) days after written notice thereof from
Landlord.
20. REMEDIES. Upon each occurrence of an Event of Default, Landlord shall have
the option to pursue any one or more of the following remedies without any
notice or demand:
(a) Terminate this Lease;
(b) Enter upon and take possession of the Premises without terminating
this Lease;
(c) Make such payments and/or take such action and pay and/or perform
whatever Tenant is obligated to pay or perform under the terms of this Lease,
and Tenant agrees that Landlord shall not be liable for any damages resulting to
Tenant from such action; and/or
A. Damages Upon Termination. If Landlord terminates this Lease at
------------------------
Landlord's option, Tenant shall be liable for and shall pay to Landlord the sum
of all rental and other payments owed to Landlord hereunder accrued to the date
of such termination, plus, as liquidated damages, an amount equal to (i) the
present value of the total rental and other payments owed hereunder for the
remaining portion of the Lease term, calculated as if such term expired on the
date set forth in Paragraph 1, less (ii) the present value of the then fair
market rental for the Premises for such period, provided that, because of the
difficulty of ascertaining such value and in order to achieve a reasonable
estimate of liquidated damages hereunder, Landlord and Tenant stipulate and
agree, for the purposes hereof, that such fair market rental shall in no event
exceed seventy-five percent (75%) of the rental amount for such period set forth
in Paragraph 2 above.
B. Damages Upon Repossession. If Landlord repossesses the Premises without
-------------------------
terminating this Lease, Tenant, at Landlord's option, shall be liable for and
shall pay Landlord on demand all rental and other payments owed to Landlord
hereunder, accrued to the date of such repossession, plus all amounts required
to be paid by Tenant to Landlord until the date of expiration of the term as
stated in Paragraph 1, diminished by all amounts actually received by Landlord
through reletting the Premises during such remaining term (but only to the
extent of the rent herein reserved). Actions to collect amounts due by Tenant
to Landlord under this paragraph may be brought from time to time, on one or
more occasions, without the necessity of Landlord's waiting until expiration of
the Lease term.
C. Costs of Reletting, Removing, Repairs and Enforcement. Upon an Event of
-----------------------------------------------------
Default, in addition to any sum provided to be paid under this Paragraph 20,
Tenant also shall be liable for and shall pay to Landlord (i) brokers' fees and
all other costs and expenses incurred by Landlord in connection with reletting
the whole or any part of the Premises; (ii) the costs of removing, storing or
disposing of Tenant's or any other occupant's property; (iii) the costs of
repairing, altering, remodeling or otherwise putting the Premises into condition
acceptable to a new tenant or tenants; (iv) any and all costs and expenses
incurred by Landlord in effecting compliance with Tenant's obligations under
this Lease; and (v) all reasonable expenses incurred by Landlord in enforcing or
defending Landlord's rights and/or remedies hereunder, including without
limitation all reasonable attorneys' fees and all court costs incurred in
connection with such enforcement or defense.
D. Late Charge. In the event Tenant fails to make any payment due
-----------
hereunder within five (5) days after such payment is due, including without
limitation any rental or escrow payment, in order to help defray the additional
cost to Landlord for processing such late payments and not as interest, Tenant
shall pay to Landlord on demand a late charge in an amount equal to five percent
(5%) of such payment. The provision for such late charge shall be in addition
to all of Landlord's other rights and remedies hereunder or at law, and shall
not be construed as liquidated damages or as limiting Landlord's remedies in any
manner.
E. Interest on Past Due Amounts. If Tenant fails to pay any sum which at
----------------------------
any time becomes due to Landlord under any provision of this Lease as and when
the same becomes due hereunder, and such failure continues for ten
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(10) days after the due date for such payment, then Tenant shall pay to Landlord
interest on such overdue amounts from the date due until paid at an annual rate
which equals the lesser of (i) twelve percent (12%) or (ii) the highest rate
then permitted by law.
F. No Implied Acceptances or Waivers. Exercise by Landlord of any one or
---------------------------------
more remedies hereunder granted or otherwise available shall not be deemed to be
an acceptance by Landlord of Tenant's surrender of the Premises, it being
understood that such surrender can be effected only by the written agreement of
Landlord. Tenant and Landlord further agree that forbearance by Landlord to
enforce any of its rights under this Lease or at law or in equity shall not be a
waiver of Landlord's right to enforce any one or more of its rights, including
any right previously forborne, in connection with any existing or subsequent
default. No re-entry or taking possession of the Premises by Landlord shall be
construed as an election on its part to terminate this Lease, unless a written
notice of such intention is given to Tenant, and, notwithstanding any such
reletting or re-entry or taking possession of the Premises, Landlord may at any
time thereafter elect to terminate this Lease for a previous default. Pursuit
of any remedies hereunder shall not preclude the pursuit of any other remedy
herein provided or any other remedies provided by law, nor shall pursuit of any
remedy herein provided constitute a forfeiture or waiver of any rent due to
Landlord hereunder or of any damages occurring to Landlord by reason of the
violation of any of the terms, provisions and covenants contained in this Lease.
Landlord's acceptance of any rent following an Event of Default hereunder shall
not be construed as Landlord's waiver of such Event of Default. No waiver by
Landlord of any violation or breach of any of the terms, provisions and
covenants of this Lease shall be deemed or construed to constitute a waiver of
any other violation or default.
G. Reletting of Premises. In the event of any termination of this Lease
---------------------
and/or repossession of the Premises for an Event of Default, Landlord shall use
reasonable efforts to relet the Premises and to collect rental after reletting,
with no obligation to accept any lessee that Landlord deems undesirable or to
expend any funds in connection with such reletting or collection of rents
therefrom. Tenant shall not be entitled to credit for or reimbursement of any
proceeds of such reletting in excess of the rental owed hereunder for the period
of such reletting. Landlord may relet the whole or any portion of the Premises,
for any period, to any tenant and for any use or purpose.
H. Landlord's Default. If Landlord fails to perform any of its
------------------
obligations hereunder within thirty (30) days after written notice from Tenant
specifying such failure, Tenant's exclusive remedy shall be an action for
damages. Unless and until Landlord fails to so cure any default after such
notice, Tenant shall not have any remedy or cause of action by reason thereof.
All obligations of Landlord hereunder will be construed as covenants, not
conditions; and all such obligations will be binding upon Landlord only during
the period of its possession of the premises and not thereafter. The term
"Landlord" shall mean only the owner, for the time being, of the Premises and,
in the event of the transfer by such owner of its interest in the Premises, such
owner shall thereupon be released and discharged from all covenants and
obligations of the Landlord thereafter accruing, provided that such covenants
and obligations shall be binding during the Lease term upon each new owner for
the duration of such owner's ownership. Notwithstanding any other provision of
this Lease, Landlord shall not have any personal liability hereunder. In the
event of any breach or default by Landlord in any term or provision of this
Lease, Tenant agrees to look solely to the equity or interest then owned by
Landlord in the Premises or the Building; however, in no event shall any
deficiency judgement or any money judgement of any kind be sought or obtained
against any Landlord.
I. Tenant's Personal Property. If Landlord repossesses the Premises
--------------------------
pursuant to the authority herein granted, or if Tenant vacates or abandons all
or any part of the Premises, then, in addition to Landlord's rights under
Paragraph 27 hereof, Landlord shall have the right to (i) keep in place and use,
or (ii) remove and store, all of the furniture, fixtures and equipment at the
Premises, including that which is owned by or leased to Tenant, at all times
prior to any foreclosure thereon by Landlord or repossession thereof by any
lessor thereof or third party having a lien thereon. In addition to the
Landlord's other rights hereunder, Landlord may dispose of the stored property
if Tenant does not claim the property within ten (10) days after the date the
property is stored. Landlord shall give Tenant at least ten (10) days prior
written notice of such intended disposition. Landlord shall also have the right
to relinquish possession of all or any portion of such furniture, fixtures,
equipment and other property to any person ("Claimant") who presents to Landlord
a copy of any instrument represented by Claimant to have been executed by Tenant
(or any predecessor of Tenant) granting Claimant the right under various
circumstances to take possession of such furniture, fixtures, equipment or other
property, without the necessity on the part of Landlord to inquire into the
authenticity or legality of said instrument. The rights of Landlord herein
stated shall be in addition to any and
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all other rights that Landlord has or may hereafter have at law or in equity,
and Tenant stipulates and agrees that the rights granted Landlord under this
paragraph are commercially reasonable.
21. MORTGAGES. Tenant accepts this Lease subject and subordinate to any
mortgages and/or deeds of trust now or at any time hereafter constituting a lien
or charge upon the Premises or the improvements situated thereon or the
Building, provided, however, that if the mortgagee, trustee or holder of any
such mortgage or deed of trust elects to have Tenant's interest in this Lease
superior to any such instrument, then by notice to Tenant from such mortgagee,
trustee or holder, this Lease shall be deemed superior to such lien, whether
this Lease was executed before or after said mortgage or deed of trust. Tenant,
at any time hereafter on demand, shall execute any instruments, releases or
other documents that may be required by any mortgagee, trustee or holder for the
purpose of subjecting and subordinating this Lease to the lien of any such
mortgage. Tenant shall not terminate this Lease or pursue any other remedy
available to Tenant hereunder for any default on the part of Landlord without
first giving written notice by certified or registered mail, return receipt
requested, to any mortgagee, trustee or holder of any such mortgage or deed of
trust, the name and post office address of which Tenant has received written
notice, specifying the default in reasonable detail and affording such
mortgagee, trustee or holder a reasonable opportunity (but in no event less than
thirty (30) days) to make performance, at its election, for and on behalf of
Landlord.
22. MECHANIC'S LIENS. Tenant has no authority, express or implied, to create or
place any lien or encumbrance of any kind or nature whatsoever upon, or in any
manner to bind, the interest of Landlord or Tenant in the Premises. Tenant will
save and hold Landlord harmless from any and all loss, cost or expense,
including without limitation attorneys' fees, based on or arising out of
asserted claims or liens against the leasehold estate or against the right,
title and interest of the Landlord in the Premises or under the terms of this
Lease.
23. MISCELLANEOUS.
A. Interpretation. The captions inserted in this Lease are for
--------------
convenience only and in no way define, limit or otherwise describe the scope or
intent of this Lease, or any provision hereof, or in any way affect the
interpretation of this Lease. Any reference in this Lease to rentable area shall
mean the gross rentable area as determined by the roofline of the building in
question.
B. Binding Effect. Except as otherwise herein expressly provided, the
--------------
terms, provisions and covenants and conditions in this Lease shall apply to,
inure to the benefit of and be binding upon the parties hereto and upon their
respective heirs, executors, personal representatives, legal representatives,
successors and assigns. Landlord shall have the right to transfer and assign,
in whole or in part, its rights and obligations in the Premises and in the
Building and other property that are the subject of this Lease.
C. Evidence of Authority. Tenant agrees to furnish to Landlord, promptly
---------------------
upon demand, a corporate resolution, proof of due authorization by partners or
other appropriate documentation evidencing the due authorization of such party
to enter into this Lease.
D. Force Majeure. Landlord shall not be held responsible for delays in
-------------
the performance of its obligations hereunder when caused by material shortages,
acts of God, labor disputes or other events beyond the control of Landlord.
E. Payments Constitute Rent. Notwithstanding anything in this Lease to
------------------------
the contrary, all amounts payable by Tenant to or on behalf of Landlord under
this Lease, whether or not expressly denominated as rent, shall constitute rent.
F. Estoppel Certificates. Tenant agrees, from time to time, within ten
---------------------
(10) days after request of Landlord, to deliver to Landlord, or Landlord's
designee, an estoppel certificate stating that this Lease is in full force and
effect, the date to which rent has been paid, the unexpired term of this Lease,
any defaults existing under this Lease (or the absence thereof) and such other
factual or legal matters pertaining to this Lease as may be requested by
Landlord. It is understood and agreed that Tenant's obligation to furnish such
estoppel certificates in a timely fashion is a material inducement for
Landlord's execution of this Lease.
G. Entire Agreement. This Lease constitutes the entire understanding and
----------------
agreement of Landlord and Tenant with respect to the subject matter of this
Lease, and contains all of the covenants and agreements of Landlord and Tenant
with respect thereto. Landlord and Tenant each acknowledge that no
representations, inducements, promises or agreements, oral or written, have been
made by Landlord
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or Tenant, or anyone acting on behalf of Landlord or Tenant, which are not
contained herein, and any prior agreements, promises, negotiations or
representations not expressly set forth in this Lease are of no force or effect.
EXCEPT AS SPECIFICALLY PROVIDED IN THIS LEASE, TENANT HEREBY WAIVES THE BENEFIT
OF ALL WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE PREMISES, INCLUDING
WITHOUT LIMITATION ANY IMPLIED WARRANTY THAT THE PREMISES ARE SUITABLE FOR ANY
PARTICULAR PURPOSE. Landlord's agents and employees do not and will not have
authority to make exceptions, changes or amendments to this Lease, or factual
representations not expressly contained in this Lease. Under no circumstances
shall Landlord or Tenant be considered an agent of the other. This Lease may not
be altered, changed or amended except by an instrument in writing signed by both
parties hereto.
H. Survival of Obligations. All obligations of Tenant hereunder not fully
-----------------------
performed as of the expiration or earlier termination of the term of this Lease
shall survive the expiration or earlier termination of the term hereof,
including without limitation all payment obligations with respect to taxes and
insurance and all obligations concerning the condition and repair of the
Premises. Upon the expiration or earlier termination of the term hereof, and
prior to Tenant vacating the Premises, Tenant shall pay to Landlord any amount
reasonably estimated by Landlord as necessary to put the Premises in good
condition and repair, reasonable wear and tear excluded, including without
limitation the cost of repairs to and replacements of all heating and air
conditioning systems and equipment therein. Tenant shall also, prior to vacating
the Premises, pay to Landlord the amount, as estimated by Landlord, of Tenant's
obligation hereunder for real estate taxes and insurance premiums for the year
in which the Lease expires or terminates. All such amounts shall be used and
held by Landlord for payment of such obligations of Tenant hereunder, with
Tenant being liable for any additional costs therefore upon demand by Landlord,
or with any excess to be returned to Tenant after all such obligations have been
determined and satisfied, as the case may be. Any Security Deposit held by
Landlord may, at Landlord's option, be credited against any amounts due from
Tenant under this Paragraph 23H.
I. Severability of Terms. If any clause or provision of this Lease is
---------------------
illegal, invalid or unenforceable under present or future laws effective during
the term of this Lease, then, in such event, it is the intention of the parties
hereto that the remainder of this Lease shall not be affected thereby, and it is
also the intention of the parties to this Lease that in lieu of each clause or
provision of this Lease that is illegal, invalid or unenforceable, there be
added, as a part of this Lease, a clause or provision as similar in terms to
such illegal, invalid or unenforceable clause or provision as may be possible
and be legal, valid and enforceable.
J Effective Date. All references in this Lease to "the date hereof" or
--------------
similar references shall be deemed to refer to the last date, in point of time,
on which all parties hereto have executed this Lease.
K. Brokers' Commission. Tenant represents and warrants that it has dealt
-------------------
with and will deal with no broker, agent or other person other than Hill
Partners, Inc. in connection with this transaction or future related
transactions and that no broker, agent or other person other than Hill Partners,
Inc. brought about this transaction, and Tenant agrees to indemnify and hold
Landlord harmless from and against any claims by any broker, agent or other
person other than Hill Partners, Inc. claiming a commission or other form of
compensation by virtue of having dealt with Tenant with regard to this leasing
transaction.
L. Ambiguity. Landlord and Tenant hereby agree and acknowledge that this
---------
Lease has been fully reviewed and negotiated by both Landlord and Tenant, and
that Landlord and Tenant have each had the opportunity to have this Lease
reviewed by their respective legal counsel, and, accordingly, in the event of
any ambiguity herein, Tenant does hereby waive the rule of construction that
such ambiguity shall be resolved against the party who prepared this Lease.
M. Joint Several Liability. If there be more than one Tenant, the
-----------------------
obligations hereunder imposed upon Tenant shall be joint and several. If there
be a guarantor of Tenant's obligations hereunder, the obligations hereunder
imposed upon Tenant shall be joint and several obligations of Tenant and such
guarantor, and Landlord need not first proceed against Tenant before proceeding
against such guarantor, nor shall any such guarantor be released from its
guaranty for any reason whatsoever, including, without limitation, in case of
any amendments hereto, waivers hereof or failure to give such guarantor any
notices hereunder.
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<PAGE>
N. Third Party Rights. Nothing herein expressed or implied is intended,
------------------
or shall be construed, to confer upon or give to any person or entity, other
than the parties hereto, any right or remedy under or by reason of this Lease.
O. Exhibits and Attachments. All exhibits, attachments, riders and
------------------------
addenda referred to in this Lease, and the exhibits listed herein below and
attached hereto, are incorporated into this Lease and made a part hereof for all
intents and purposes as if fully set out herein. All capitalized terms used in
such documents shall, unless otherwise defined therein, have the same meanings
as are set forth herein.
P. Applicable Law. This Lease has been executed in the State of Texas and
--------------
shall be governed in all respects by the laws of the State of Texas. It is the
intent of Landlord and Tenant to conform strictly to all applicable state and
federal usury laws. All agreements between Landlord and Tenant, whether now
existing or hereafter arising and whether written or oral, are hereby expressly
limited so that in no contingency or event whatsoever shall the amount
contracted for, charged or received by Landlord for the use, forbearance or
retention of money hereunder or otherwise exceed the maximum amount which
Landlord is legally entitled to contract for, charge or collect under the
applicable state or federal law. If, from any circumstance whatsoever,
fulfillment of any provision hereof at the time performance of such provision
shall be due shall involve transcending the limit of validity prescribed by law,
then the obligation to be fulfilled shall be automatically reduced to the limit
of such validity, and if from any such circumstance Landlord shall ever receive
as interest or otherwise an amount in excess of the maximum that can be legally
collected, then such amount which would be excessive interest shall be applied
to the reduction of rent hereunder, and if such amount which would be excessive
interest exceeds such rent, then such additional amount shall be refunded to
Tenant.
24. NOTICES. Each provision of this instrument or of any applicable
governmental laws, ordinances, regulations and other requirements with reference
to the sending, mailing or delivering of notice or the making of any payment by
Landlord to Tenant or with reference to the sending, mailing or delivering of
any notice or the making of any payment by Tenant to Landlord shall be deemed to
be complied with when and if the following steps are taken:
(i) All rent and other payments required to be made by Tenant
to Landlord hereunder shall be payable to Landlord at the address for Landlord
set forth below or at such other address as Landlord may specify from time to
time by written notice delivered in accordance herewith. Tenant's obligation to
pay rent and any other amounts to Landlord under the terms of this Lease shall
not be deemed satisfied until such rent and other amounts have been actually
received by Landlord.
(ii) All payments required to be made by Landlord to Tenant
hereunder shall be payable to Tenant at the address set forth below, or at such
other address within the continental United States as Tenant may specify from
time to time by written notice delivered in accordance herewith.
(iii) Except as expressly provided herein, any written notice,
document or payment required or permitted to be delivered hereunder shall be
deemed to be delivered when received or, whether actually received or not, when
deposited in the United States Mail, postage prepaid, Certified or Registered
Mail, addressed to the parties hereto at the respective addresses set out below,
or at such other address as they have theretofore specified by written notice
delivered in accordance herewith.
25. ADDITIONAL PROVISIONS. See EXHIBIT "C" attached hereto and incorporated
herein by reference.
26. LANDLORD'S LIEN. In addition to any statutory lien for rent in Landlord's
favor, Landlord shall have and Tenant hereby grants to Landlord a continuing
security interest in all rentals and other sums of money which may become due
under this Lease from Tenant, all goods, equipment, fixtures, furniture,
inventory, and other personal property of Tenant now or hereafter situated at,
on or within the real property described in EXHIBIT "A" attached hereto and
incorporated herein by reference, and such property shall not be removed
therefrom without the consent of Landlord, except in the ordinary course of
Tenant's business. In the event any of the foregoing described property is
removed from the Premises in violation of the covenant in the preceding
sentence, the security interest shall continue in such property and all proceeds
and products, regardless of location. Upon an Event of Default hereunder by
Tenant, in addition to all of Landlord's other rights and remedies, Landlord
shall have all rights and remedies under the Uniform Commercial Code, including
without limitation the right to sell the property described in this paragraph at
public or private sale at any time after ten (10) days prior notice by Landlord.
Tenant hereby agrees to
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execute such other instruments deemed by Landlord as necessary or desirable
under applicable law to perfect more fully the security interest hereby created.
Landlord and Tenant agree that this Lease and security agreement and EXHIBIT "A"
attached hereto serves as a financing statement and that a copy, photograph or
other reproduction of this portion of this Lease may be filed of record by
Landlord and have the same force and effect as the original. This security
agreement and financing statement also covers fixtures located at the Premises
subject to this Lease and legally described in EXHIBIT "A" attached hereto, and
all rents or other consideration received by or on behalf of Tenant in
connection with any assignment of Tenant's interest in this Lease or any
sublease of the Premises or any part thereof, and, therefore, may also be filed
for record in the appropriate real estate records. Landlord will agree to
subordinate this lien to the Tenant's priority lenders so long as the Tenant is
not in default of this Lease Agreement.
EXECUTED BY LANDLORD, this _____ day of _______________, 19___.
BRAKER PHASE III, LTD.
By: 2800 Industrial, Inc., General Partner
/s/ Richard E. Anderson
----------------------------------------------
Attest/Witness By: Richard E. Anderson
______________________________ Title: Vice President
______________________________ Address: c/o Hill Partners, Inc.
Title: _______________________ 2800 Industrial Terrace, Austin,
TX 78758
EXECUTED BY TENANT, this _____ day _________________, 19___.
MAGNETIC BEARING TECHNOLOGIES, INC.
/s/
---------------------------------------------
Attest/Witness By:
_____________________________ Title:
By: _________________________ Address:
Title: ______________________
EXHIBIT "A" - Description of Premises
EXHIBIT "B" - Plans
EXHIBIT "C" - Additional Provisions
Initials ________ _________
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EXHIBIT "B"
PLANS
TO BE ATTACHED AT A LATER DATE
<PAGE>
EXHIBIT "C"
ADDITIONAL PROVISIONS
RENTAL RATE
- -----------
The monthly base rental rate shall be structured as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
Year Base Rental Rate Rental Rate
Per Square Foot Per Month Per Month
---------------------------------------------------------------------------------
<S> <C> <C>
Year 1 $.55 $2,227.50
---------------------------------------------------------------------------------
Year 2 $.60 $2,430.00
---------------------------------------------------------------------------------
Year 3 $.65 $2,632.50
---------------------------------------------------------------------------------
Year 4 $.70 $2,835.00
---------------------------------------------------------------------------------
Year 5 $.75 $3,037.50
---------------------------------------------------------------------------------
</TABLE>
TENANT FINISH ALLOWANCE
- -----------------------
Landlord shall provide a maximum tenant finish allowance of Twelve and No/00
Dollars ($12.00) per square foot or Forty-eight Thousand Six Hundred and No/00
Dollars ($48,600.00) to be applied toward interior improvements, excluding
extraordinary items installed on behalf of the Tenant. Included in this Twelve
and No/00 Dollars ($12.00) per square foot or Forty-eight Thousand Six Hundred
and No/00 Dollars ($48,600.00) are all costs associated with the interior
construction of the premises including architectural and engineering fees, a
construction management fee of four (4) percent of hard costs and all other
costs associated with the interior improvement construction. Any finish out
dollars required over and above the finish-out allowance of Twelve and No/00
Dollars ($12.00) per square foot or Forty-eight Thousand Six Hundred and No/00
Dollars ($48,600.00) will be amortized over the lease term at ten (10) percent
per annum interest.
INTERIOR IMPROVEMENTS
- ---------------------
All improvements must comply with Landlord's standard specifications and all
applicable governmental regulations. Prior to beginning construction of any
such improvements, Tenant shall submit architectural drawings of the proposed
improvements to Landlord and shall obtain Landlord's written consent to begin
construction.
<PAGE>
Exhibit 10.10
FIRST AMENDMENT TO LEASE AGREEMENT BETWEEN
BRAKER PHASE III, LTD. AS LANDLORD,
AND MAGNETIC BEARING TECHNOLOGIES, INC., AS TENANT
To be attached to and form a part of Lease made the 12th day
of March, 1996 (which together with any amendments,
modifications and extensions thereof, is hereinafter called
the Lease), between Landlord and Tenant, covering a total of
4,050 square feet and located at 11525 Stonehollow Drive,
Suite 135, Austin, Texas, 78758 known as Braker Center III,
Building 1.
WITNESSETH that:
1. Effective August 1, 1996 and expiring May 31, 2001, the demised premises
shall contain, in addition to the approximately 4,050 square feet
originally demised, an additional area, hereinafter called the "new
space", containing approximately 4,050 square feet adjacent thereto (see
Exhibit "A" attached hereto), thus making the aggregate area of the
demised premises approximately 8,100 square feet. *
2. Landlord shall provide a maximum tenant finish allowance of Twelve and
No/00 Dollars ($12.00) per square foot or Forty-eight Thousand Six
Hundred and NO/100 Dollars ($48,600.00) for the additional area of 4,050
square feet. This allowance is inclusive of all costs associated with the
finish-out and is an absolute maximum. Any finish-out dollars required
over and above the finish-out allowance of Twelve and No/00 Dollars
($12.00) per square foot or Forty-eight Thousand Six Hundred and NO/100
Dollars ($48,600.00) will be the sole responsibility of the Tenant.
3. The monthly base rental shall be structured as follows:
<TABLE>
<CAPTION>
=====================================================================================
Base Total
Existing Space New Space Rental
Lease Period 4,050 4,050 Rate
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
-------------------------------------------------------------------------------------
5/6/96 thru 7/31/96 $3,313.60 0 $3,313.60
-------------------------------------------------------------------------------------
8/1/96 thru 5/31/97 $3,313.60 $2,551.50 $5,865.10
-------------------------------------------------------------------------------------
6/1/97 thru 5/31/98 $3,516.10 $2,551.50 $6,067.60
-------------------------------------------------------------------------------------
6/1/98 thru 5/31/99 $3,718.60 $2,551.50 $6,270.10
-------------------------------------------------------------------------------------
6/1/99 thru 5/31/00 $3,921.10 $2,551.50 $6,472.60
-------------------------------------------------------------------------------------
6/1/00 thru 5/31/01 $4,123.60 $2,551.50 $6,675.10
=====================================================================================
</TABLE>
4. Except as herein and hereby modified and amended the Agreement of Lease
shall remain in full force and effect and all the terms, provisions,
covenants and conditions thereof are hereby ratified and confirmed.
DATED AS OF THE ______ DAY OF ________________, 19__.
WITNESS: BRAKER PHASE III, LTD.:
By: 2800 Industrial, Inc., General Partner
/s/ /s/ Richard E. Anderson
- ----------------------------- ---------------------------------------------
By: Richard E. Anderson
Title: Vice President
WITNESS: MAGNETIC BEARING TECHNOLOGIES, INC.
/s/ /s/ Joseph F. Pinkerton
- ----------------------------- -------------------------------------------
By: Joseph F. Pinkerton
Title: President
<PAGE>
* Effective date of Amendment shall begin no sooner than the date upon which the
improvements to the Premises of the "new space" have been substantially
completed in accordance with the plans and specifications described in Exhibit B
or the date on which the new space would have been substantially completed if
not for delay caused directly by Tenant, including Plan delays or change orders.
2
<PAGE>
Exhibit 10.11
SECOND AMENDMENT TO LEASE AGREEMENT BETWEEN
BRAKER PHASE III, LTD. AS LANDLORD,
AND MAGNETIC BEARING TECHNOLOGIES, INC., AS TENANT
To be attached to and form a part of Lease made the
12th day of March, 1996 (which together with any
amendments, modifications and extensions thereof, is
hereinafter called the Lease), between Landlord and
Tenant, covering a total of 8,100 square feet and
located at 11525 Stonehollow Drive, Suite 135, Austin,
Texas, 78758 known as Braker Center III, Building 1.
WITNESSETH that:
1. The Commencement Date shall be May 6, 1996, and shall expire Sixty (60)
months thereafter on Maya 31, 2001.
2. Effective September 1, 1996 and expiring May 31, 2001, the monthly base
rental rate shall be structured as follows:
=======================================================
Lease Period Base Total Rental
Rate Per Month
-------------------------------------------------------
-------------------------------------------------------
9/1/96 thru 5/31/97 $6,025.10
-------------------------------------------------------
6/1/97 thru 5/31/98 $6,227.60
-------------------------------------------------------
6/1/98 thru 5/31/99 $6,430.10
-------------------------------------------------------
6/1/99 thru 5/31/00 $6,632.60
-------------------------------------------------------
6/1/00 thru 5/31/01 $6,835.10
=======================================================
3. The Lease expressly refers to Tenant as "Magnetic Bearing Technologies,
Inc. The Tenant's name has been changed to "Active Power, Inc.. The
Lease and all related documents are hereby amended such that all
references to "Tenant" or "Magnetic Bearing Technologies, Inc." will
translate to mean "Active Power, Inc.".
4. Except as herein and hereby modified and amended the Agreement of Lease
shall remain in full force and effect and all the terms, provisions,
covenants and conditions thereof are hereby ratified and confirmed.
DATED AS OF THE 1st DAY OF September, 1996.
--- --------- --
WITNESS: BRAKER PHASE III, LTD.:
By: 2800 Industrial, Inc., General Partner
/s/ /s/ Richard E. Anderson
- --------------------------------- ---------------------------------
By: Richard E. Anderson
Title: Vice President
<PAGE>
WITNESS: ACTIVE POWER, INC.
/s/ /s/ Joseph F. Pinkerton
- --------------------------------- ---------------------------------
By: Joseph F. Pinkerton
Title: President
2
<PAGE>
Exhibit 10.12
THIRD AMENDMENT TO LEASE AGREEMENT BETWEEN
BRAKER PHASE III, LTD. AS LANDLORD,
AND ACTIVE POWER INC., AS TENANT
To be attached to and form a part of Lease made the 12th day
of March, 1996 (which together with any amendments,
modifications and extensions thereof, is hereinafter called
the Lease), between Landlord and Tenant, covering a total of
8,100 square feet and located at 11525 Stonehollow Drive,
Suite 135, Austin, Texas, 78758 known as Braker Center III,
Building 1.
WITNESSETH that:
1. Effective November 1, 1997 and expiring October 31, 1999, the demised
premises shall contain, in addition to the approximately 8,100 square feet
originally demised, an additional area, hereinafter called the "new space",
containing approximately 15,080 square feet adjacent thereto (see Exhibit
"A" attached hereto), thus making the aggregate area of the demised
premises approximately 23,180 square feet.
2. Effective November 1, 1997 the monthly base rental rate shall be structured
as follows:
<TABLE>
<CAPTION>
=======================================================================================================
Lease Period Existing Space New Space Base Total Rental Rate
8,100 15,080 Per Month
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
11/1/97 - 5/31/98 $6,227.60 $9,048.00 $15,275.60
-------------------------------------------------------------------------------------------------------
6/1/98 - 10/31/98 $6,430.10 $9,048.00 $15,478.10
-------------------------------------------------------------------------------------------------------
11/1/98 - 5/31/99 $6,430.10 $9,500.40 $15,930.50
-------------------------------------------------------------------------------------------------------
6/1/99 - 10/31/99 $6,632.60 $9,500.40 $16,133.00
-------------------------------------------------------------------------------------------------------
11/1/99 - 5/31/00 $6,632.60 -0- $ 6,632.60
-------------------------------------------------------------------------------------------------------
6/1/00 - 5/31/01 $6,835.10 -0- $ 6,835.10
=======================================================================================================
</TABLE>
3. Landlord shall provide a maximum tenant finish allowance of Ten Thousand
and No/00 Dollars ($10,000.00) to be applied toward interior improvements.
Included in this Ten Thousand and No/00 Dollars ($10,000.00) are all costs
associated with the interior construction of the premises including
architectural and engineering fees and all other costs associated with the
interior improvement construction.
4. The Lease expressly refers to Landlord as Braker Phase III, Ltd. The
Landlord's name has been changed to Metropolitan Life Insurance Company.
The Lease and all related documents are hereby amended such that all
referenced to "Landlord" or "Braker Phase III, Ltd." will translate to mean
"Metropolitan Life Insurance Company".
5. Except as herein and hereby modified and amended the Agreement of Lease
shall remain in full force and effect and all the terms, provisions,
covenants and conditions thereof are hereby ratified and confirmed.
DATED AS OF THE 10th DAY OF October, 1997.
---- ------- --
<PAGE>
WITNESS: METROPOLITAN LIFE INSURANCE COMPANY
a New York corporation, on behalf of a commingled
separate account
By: SSR Realty Advisors, Inc., a Delaware
corporation, as Investment Advisor to Metropolitan
Life Insurance Company
/s/ Alan Bates
- -----------------------------------------------------------------
By: Alan Bates
Title:______________________________
WITNESS: ACTIVE POWER, INC.
/s/ Joseph F. Pinkerton
- -----------------------------------------------------------------
By: Joseph F. Pinkerton
Title: President
2
<PAGE>
Exhibit 10.13
FOURTH AMENDMENT TO LEASE AGREEMENT BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY, AS LANDLORD
AND
ACTIVE POWER, INC., AS TENANT
To be attached to and form a part of Lease made the 12th day of March
1996 (which together with any amendments, modifications and extensions
thereof, is hereinafter called the Lease), between Landlord and Tenant.
THIS FOURTH AMENDMENT TO LEASE AGREEMENT (this "Fourth Amendment) made and
entered into as of the 20th day of August, 1999 by and between METROPOLITAN LIFE
INSURANCE COMPANY ("Landlord") and ACTIVE POWER, INC., ("Tenant").
W I T N E S S E T H:
Landlord and Tenant entered into that certain Lease Agreement dated March
12, 1996 (the "Lease" for space in Stonehollow 1), the Third Amendment dated
October 10, 1997 addresses an expansion of space into STONEHOLLOW 2 of
approximately 15,080 square feet of space located at 11525 Stonehollow Drive,
Suite 225, Austin, Texas.
Landlord and Tenant now desire to further amend the Lease Agreement and
Amendments in certain respects as more fully hereinafter set forth. Landlord and
Tenant agree as follows:
1. Landlord and Tenant agree to extend the term of the 15,080 square foot
space (Suite 225 in Stonehollow 2) for an additional twelve (12) months.
Effective date to be November 1, 1999 and the Expiration Date to be October
31, 2000.
2. Tenant agrees to accept space in its current "as is" condition.
3. The base rental for this 15,080 square foot space shall be $0.71 per square
foot per month (NNN).
4. Except as specifically amended hereby, the Lease shall remain unaffected
hereby and in full force and effect as originally written.
DATED AS OF THE 20 DAY OF AUGUST, 1999.
1
<PAGE>
WITNESS: LANDLORD:
Metropolitan Life Insurance Company, a New York
corporation, on behalf of a commingled separate account
/s/ Susan R. Barra
By: SSR Realty Advisors, Inc., a Delaware corporation,
as Investment Advisor to Metropolitan Life Insurance
Company
By:
Name: /s/ A. Alan Bates
Title: A. Alan Bates
Address: _____________________________________________
_____________________________________________
_____________________________________________
Telephone: _____________________________________________
Fax: _____________________________________________
WITNESS: TENANT:
ACTIVE POWER, INC.
/s/ Diane G. Lung
By: /s/ Joseph F. Pinkerton, III
Name: Joseph F. Pinkerton
Title: President
Address: 11525 Stonehollow, #635
Austin, TX 78758
_____________________________________________
Telephone: 512-836-6464
Fax: 512-836-4511
2
<PAGE>
Exhibit 10.14
FIFTH AMENDMENT TO LEASE AGREEMENT BETWEEN
METROPOLITAN LIFE INSURANCE COMPANY, AS LANDLORD
AND
ACTIVE POWER, INC., AS TENANT
To be attached to and form a part of Lease made the 12th day
of March 1996 (which together with any amendments,
modifications and extensions thereof, is hereinafter called
the Lease), between Landlord and Tenant.
THIS FIFTH AMENDMENT TO LEASE AGREEMENT (this "Fifth Amendment) made and
---------------
entered into as of the 9th day of February, 2000 by and between METROPOLITAN
--- --------
LIFE INSURANCE COMPANY ("Landlord") and ACTIVE POWER, INC., ("Tenant").
--------
W I T N E S S E T H:
Landlord and Tenant entered into that certain Lease Agreement dated March
12, 1996 (the "Lease" for space in Stonehollow 1), amended by the First
-----
Amendment dated June 24, 1996 increasing the square footage to 8,100 square feet
in Stonehollow 1, Suite 135, amended by the Second Amendment dated September 4,
1996 notifying Landlord of a name change from "Magnetic Bearing Technologies" to
"Active Power, Inc." amended by the Third Amendment dated October 10, 1997
expanding into STONEHOLLOW 2 for approximately an additional 15,080 square feet
of space located at 11525 Stonehollow Drive, Suite 255, Austin, Texas for a
total of 23,180 square feet of space and finally amended by the Fourth Amendment
dated August 20, 1999 extending the term in Stonehollow 2, Suite 255 for an
additional twelve months.
Landlord and Tenant now desire to further amend the Lease Agreement and
Amendments in certain respects as more fully hereinafter set forth. Landlord and
Tenant agree as follows:
1. Landlord and Tenant agree to extend the term of the 8,100 square foot space
(Stonehollow 1, Suite 135) for an additional twenty-two (22) months. Current
expiration date for Suite 135 is May 31, 2001; therefore the new expiration
date shall be March 31, 2003.
2. Landlord and Tenant agree to extend the term of the 15,080 square foot space
(Stonehollow 2, Suite 255) for an additional twenty-nine (29) months.
Current expiration date for Suite 255 is October 31, 2000; therefore the new
expiration shall be March 31, 2003.
3. Landlord and Tenant agree that Tenant shall expand into an additional 7,466
square feet of space located at 11525 Stonehollow Drive (Stonehollow 1)
Suite 120 and an additional 4,200 square feet of space located at 11525
Stonehollow Drive (Stonehollow 1) Suite 110 as outlined on the attached
Exhibit "A" as "expansion space #1".
4. Landlord is leasing the "expansion space #1" (Suites 120 & 110) to Tenant
"as is" "where is" without representation or warranty, without any
obligation to alter, remodel, improve, repair or decorate any part of the
"expansion space #1" (Suites 120 & 110). Any provisions in the Lease
conflicting herewith shall be amended accordingly. Landlord
<PAGE>
agrees to deliver the "expansion space #1" (Suites 120 & 110) to Tenant in
broom-clean condition. With respect to the "expansion space #1" (Suites 120
& 110), Landlord agrees that all plumbing, electrical and HVAC systems shall
be in good working order as of the Commencement Date and agrees to provide a
limited warranty of thirty (30) days from rent commencement with respect
thereto. Tenant must notify Landlord in writing of any warranty item within
such thirty (30) day period or such warranty shall be deemed null and void.
Landlord shall provide an allowance of $50,864.00 for tenant improvements.
5. Landlord agrees to allow Tenant access to the "expansion space #1" (Suites
120 & 110) for forty-two (42) days for construction of tenant improvements
and cabling free of charge.
6. Commencement Date for the "expansion space #1" (Suites 120 & 110) shall be
seven (7) days after Landlord's written notice. Commencement is currently
estimated to be January 30, 2000. Rent shall commence for the "expansion
space #1" (Suites 120 & 110) after the construction period outlined in
Paragraph 5.
7. Landlord and Tenant agree that Tenant may expand into an additional 4,050
square feet of space located at 11525 Stonehollow Drive (Stonehollow 1)
Suite 130 as outlined on the attached Exhibit "A" as "expansion space #2"
provided that Tenant gives Landlord written notice of its intention to
----------------------------------------------------------------------
expand into expansion space #2 by April 1, 2001.
------------------------------------------------
8. Commencement Date for "expansion space #2" (Suite 130) shall depend upon
vacation of the existing tenant, Video Associates Laboratories, Inc.
Estimated vacation date of Video Associates Laboratories, Inc. is July 31,
2001. "Expansion Space #2" shall be coterminous with the other suites
expiring March 31, 2003. In the event the existing tenant has not been
---------------------------------------------
removed from expansion space #2 by October 31, 2001; then Tenant may
--------------------------------------------------------------------
terminate its intent to expand into expansion space #2 by giving Landlord
-------------------------------------------------------------------------
thirty (30) days written notice. This termination shall only apply to
---------------------------------------------------------------------
expansion space #2.
-------------------
9. Landlord is leasing the "expansion space #2" (Suite 130) to Tenant "as is"
"where is" without representation or warranty, without any obligation to
alter, remodel, improve, repair or decorate any part of the "expansion space
#2" (Suite 130). Any provisions in the Lease conflicting herewith shall be
amended accordingly. Landlord agrees to deliver the "expansion space #2"
(Suite 130) to Tenant in broom-clean condition. With respect to the
"expansion space #2" (Suite 130), Landlord agrees that all plumbing,
electrical and HVAC systems shall be in good working order as of the
Commencement Date and agrees to provide a limited warranty of thirty (30)
days from commencement with respect thereto. Tenant must notify Landlord in
writing of any warranty item within such thirty (30) day period or such
warranty shall be deemed null and void
<PAGE>
10. Monthly Base Rental Rate shall be as defined below:
Stonehollow 1
"Expansion Space #1" (Suite 120) 7,466 square feet
--------------------------------------------------
Commencement - 2/28/01 = $0.90/sf ($6,719.40 per month)
03/01/01 - 03/31/01 = $0.95/sf ($7,092.70 per month)
Stonehollow 1
"Expansion Space #1" (Suite 110) 4,200square feet
-------------------------------------------------
Commencement - 03/31/03 = $0.95/sf ($3,990.00 per month)
Stonehollow 1
Existing Space (Suite 135) 8,100 square feet
--------------------------------------------
06/01/01 - 03/31/03 = $0.87/sf ($7,047.00 per month)
Stonehollow 1
"Expansion Space #2" (Suite 130) 4,050 square feet
--------------------------------------------------
Commencement
(est. 8/1/01) - 3/31/03 = $0.85/sf ($3,442.50 per month)
Stonehollow 2
Existing Space (Suite 255) 15,080 square feet
---------------------------------------------
11/01/00 - 03/31/03 = $0.74/sf ($11,159.20 per month)
11. Tenant agrees to pay to Landlord an Additional Security Deposit in the
amount of $10,500.00.
12. Tenant shall have the right and option to renew this Lease for one (1)
-------
additional twelve (12) month term by delivering written notice thereof to
-----------
Landlord at least One Hundred Twenty (120) days prior to the expiration
date of the lease term, provided that at the time of such notice and at the
end of the lease term, Tenant is not in default hereunder. Upon the
delivery of said notice and subject to the conditions set forth in the
preceding sentence, this Lease shall be extended upon the same terms,
covenants and conditions as provided in this Lease, except that the rental
payable during said extended term shall be the prevailing market rental
rate for space of comparable size, quality and location at the commencement
of such extended term. If a conflict arises in the determination of such a
FMV rental rate, a three-member committee, selected from the Austin Board
of Realtors, shall determine the FMV rental rate. The first two members of
such committee shall be selected by Landlord and Tenant respectively, which
two members shall select the third. In no event shall the rate decrease
below the rate Tenant is currently paying.
13. Except as specifically amended hereby, the Lease shall remain unaffected
hereby and in full force and effect as originally written.
Signatures on Next Page
<PAGE>
DATED AS OF THE 9 DAY OF FEBRUARY, 2000.
WITNESS: LANDLORD:
Metropolitan Life Insurance Company, a New
York corporation, on behalf of a commingled
separate account
________________________________
By: SSR Realty Advisors, Inc., a Delaware
corporation, as Investment Advisor to
Metropolitan Life Insurance Company
By:
Name: /s/ A. Alan Bates
Title: Senior Asset Manager
Address: ___________________________________
___________________________________
___________________________________
Telephone:914-422-6828
Fax: 914-422-6884
DATED AS OF THE ___DAY OF _______________, 2000.
WITNESS: TENANT:
ACTIVE POWER, INC.
___________________________________
By: /s/ David Gino
Name: David Gino
Title: CFO
Address: ___________________________________
___________________________________
___________________________________
Telephone:512-491-3134
Fax: 512-836-4511
<PAGE>
Exhibit "A"
-----------
Stonehollow 1
=============
Address: 11525 Stonehollow Drive, Suite 135 (existing space)
11525 Stonehollow Drive, Suite 120 (expansion space #1)
11525 Stonehollow Drive, Suite 110 (expansion space #1)
11525 Stonehollow Drive, Suite 130 (expansion space #2)
Legal Description: Lot 1-A, Block A, Stonehollow Section 4-A Resubdivision
of Lots 2 and 3 Stonehollow Section Four, a subdivision
in Travis County, Texas according to the map or plat of
record in Volume 98, Pages 36-37 in the Plat Records of
Travis County, Texas
Stonehollow 2
=============
Address: 11525 Stonehollow Drive, Suite 135 (existing space)
Legal Description: Lot 2-A, Block A, Stonehollow Section 4-A Resubdivision
of Lots 2 and 3 Stonehollow Section Four, a subdivision
in Travis County, Texas according to the map or plat of
record in Volume 98, Pages 36-37 in the Plat Records of
Travis County, Texas
<PAGE>
EXHIBIT 10.15
SUBLEASE AGREEMENT
------------------
This Sublease is made this 5th day of April , 1999 at
------- ---------
Travis County, Texas by and between Video Associates Laboratories, Inc.,
(herein, "Sublessor"), and Active Power, Inc., (herein, "Sublessee").
Sublessor is the Lessee under that certain Lease, (the "Main Lease"), by
and between Metropolitan Life Insurance Company, a New York corporation; on
behalf of a commingled separate account by: SSR Realty Advisors, Inc., a
Delaware corporation, as Investment Advisor to Metropolitan Life Insurance
Company, as Landlord, (herein, "Lessor"), and Video Associates Laboratories,
Inc., as Tenant, (herein "Sublessor"), executed on or about May 24, 1996,
------------
Amended August 13, 1996 and Estoppel Certificate dated December 11, 1996
(Ownership from Braker Phase III, Ltd., as Landlord to above referenced
Metropolitan Life, as Landlord), for a portion of the premises described in the
Main Lease and Exhibit "B", (herein, "Leased Premises"), a true and correct copy
of which Main Lease is attached hereto as Exhibit "A" and incorporated herein by
this reference.
In consideration of the mutual promises contained herein, Sublessor hereby
subleases Leased Premises to Sublessee, subject to the terms of the Main Lease,
and subject further to the provisions of this Sublease Agreement, as follows:
1. Sublessee hereby agrees to abide by and observe all the terms, covenants
and conditions of the Main Lease.
2. The premises for the sublease shall be approximately 2,079 square feet.
3. The term of this Sublease shall commence April 12, 1999, provided, however,
that this Sublease shall sooner terminate upon the termination for any
cause whatsoever of the Main Lease. The term of the sublease will be
approximately twelve and one-half (12 1/2) months, expiring April 30, 2000.
4. Insofar as the provisions of the Main Lease do not conflict with the
specific provisions of this Sublease Agreement, they and each of them are
incorporated into this Sublease as if fully completely rewritten herein,
and Sublessee agrees to be bound to the Sublessor by all the terms of the
Main Lease and to assume towards Sublessor and perform all the obligations
and responsibilities that Sublessor, by the Main Lease, assumes towards the
Lessor, except for the payment of rent by Sublessee to Sublessor, which is
governed by Paragraph 5 herein. Sublessee further agrees to indemnify and
hold harmless Sublessor from any claim or liability under the Main Lease
that is a direct result of actions by Sublessee. The relationship between
Sublessee and Sublessor shall be the same as that between Sublessor and
Lessor under the Main Lease.
5. Sublessee agrees to pay Sublessor, as rent for the Leased Premises its
proportionate share of Base Rent and Escrow Deposits in the Main Lease. The
estimated monthly payments for 1999 are as follows:
Through 7/31/99 $ 1,927.61
08/01/99 through 12/31/99 $ 1,992.00
<PAGE>
6. The following events shall be deemed to be events of default by Sublessee
under this Sublease: any events of default by Sublessee, listed as events
of default by Tenant set forth in the Main Lease, or any default in the
provisions of this Sublease Agreement. Upon the occurrence of any such
events of default, and in addition to any other available remedies provided
by law or in equity, Sublessor shall have all remedies granted to Lessor in
the Main Lease.
7. Upon Execution of this Sublease, Sublessee shall deposit with Sublessor the
sum of two thousand five hundred and 00/100 dollars ($2,500.00), as a
security deposit to be held by Sublessor pursuant to the provisions of the
Main Lease. Security deposit shall be returned to Sublessee within thirty
(30) calendar days of termination of the sublease provided Sublessee's
obligations under this Sublease Agreement have been fulfilled.
8. Time is of the essence of this Sublease, and each and all the terms hereof.
9. Any notice or other communication required or permitted to be given under
this Sublease or under the Main Lease shall be in writing and shall be
deemed to be delivered on the date it is hand delivered to the party to
whom such notice is given, at the address set forth below, or if such
notice is mailed, on the date on which it is deposited in the United States
Mail, postage prepaid, certified or registered mail, return receipt
requested, addressed to the party to whom such notice is directed, at the
address set forth below:
If to Sublessor: If to Sublessee:
Video Associates Laboratories, Inc. Active Power, Inc.
----------------------------------- -----------------------------------
11525 Stonehollow Drive, Suite 130 11525 Stonehollow Drive, Suite 135
----------------------------------- -----------------------------------
Austin, Texas 78758 Austin, Texas 78758
----------------------------------- -----------------------------------
10. Sublessee shall have no right to assign or sublet any interest in this
Sublease without first obtaining the written consent of the Lessor and
Sublessor, which consent may or may not be granted by the Lessor or
Sublessor in their sole opinion, judgment or discretion.
11. In the event any one or more of the provisions contained in this Sublease
Agreement shall for any reason be held invalid, illegal, or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not
affect any other provision hereof and this agreement shall be construed as
if such invalid, illegal or unenforceable provisions had never been
contained herein.
12. This agreement constitutes the sole and only agreement of the parties
hereto and supersedes any prior understandings and written or oral
agreements between the parties respecting the subject matter of this
Sublease Agreement.
13. Sublessee agrees to pay Sublessor its proportionate share (53%) of the
monthly electric bill. If the electric bill reasonably exceeds the
Sublessor's bill from the previous year, then Sublessee shall be
responsible for this overage.
14. Any alterations made to demise the sublease premises shall be paid by
Sublessee. Furthermore, upon expiration of sublease term, Sublessee shall
return the sublease
2
<PAGE>
premises to its original condition disregarding reasonable wear and tear
and improvements.
15. Sublessee shall not create any objectional or unpleasant noise or
vibrations.
16. Sublessee shall not use Sublessor's trash dumpster.
17. Sublessee shall maintain and repair HVAC equipment per Section 5 of the
Main Lease.
3
<PAGE>
EXECUTED on the day and year first above written.
SUBLESSOR: SUBLESSEE:
Video Associates Laboratories, Inc. Active Power, Inc.
By:/s/ By: /s/
________________________________ ______________________________
Title:_____________________________ Title:____________________________
CONSENT BY LESSOR
Metropolitan Life Insurance Company, Lessor under the Main Lease referred to in
this Sublease Agreement, hereby consents to the foregoing Sublease Agreement.
LESSOR:
Metropolitan Life Insurance Company, a New York corporation;
On behalf of a commingled separate account
BY: SSR Realty Advisors, Inc., a Delaware corporation, as
Investment Advisor to Metropolitan Life Insurance Company
By:/s/
________________________________
Title:_____________________________
4
<PAGE>
FIRST AMENDMENT TO SUBLEASE AGREEMENT
-------------------------------------
To be attached to and form a part of Sublease made the 5th day of
April 1999 (which together with any amendments, modifications and
extensions thereof, is hereinafter called the Sublease), between
Sublessor and Sublessee for space in Stonehollow, Building 1, a
portion of Suite 130.
THIS FIRST AMENDMENT TO SUBLEASE AGREEMENT (this "First Amendment") made
---------------
and entered into as of the 31 day of January , 2000 by and between Video
-- --------------
Associates Laboratories, Inc. (Sublessor) and Active Power, Inc. (Sublessee).
Sublessor and Sublessee now desire to further amend the Sublease Agreement
as more fully hereinafter set forth. Sublessor and Sublessee agree as follows:
1. Sublessor and Sublessee agree to extend the term of the 2,079 square foot
sublease space for an additional fifteen (15) months. Effective date shall
be May 1, 2000 and the Expiration Date shall be July 31, 2001.
2. Sublessee agrees to pay Sublessor, as rent for the Leased Premises it
proportionate share of Base Rent and Escrow Deposit in the Main Lease, for
the extended term.
3. Sublessor consents to the attached proposed improvements subject to Section
6 of the Main Lease. Sublessor reserves the right to require Sublessee to
return the sublease premises to its original condition disregarding
reasonable wear and tear.
4. Except as specifically amended hereby, the Sublease shall remain unaffected
hereby and in full force and effect as originally written.
SUBLESSOR: SUBLESSEE:
Video Associates Laboratories, Inc. Active Power, Inc.
By: /s/ By: /s/
-------------------------------- -------------------------------
Name:______________________________ Name:_____________________________
Title:_____________________________ Title:____________________________
<PAGE>
CONSENT BY LESSOR
-----------------
Metropolitan Life Insurance Company, Lessor under the Main Lease referred to in
this Sublease Agreement, hereby consents to the foregoing Sublease Agreement.
LESSOR:
Metropolitan Life Insurance Company, a New York corporation;
On behalf of a commingled separate account
BY: SSR Realty Advisors, Inc., a Delaware corporation, as
Investment Advisor to Metropolitan Life Insurance Company
By: /s/
--------------------------------
Title:_____________________________
Date:______________________________
<PAGE>
Proposed Improvements
---------------------
<PAGE>
EXHIBIT 10.16
Active Power
11525 Stonehollow Drive, Suite 135 Austin, Texas 78758
Phone: 512.836.6464 Fax: 512.836.4511
November 2, 1999
David Gino
8110 Talbot Lane
Austin, TX 78746
Dear David:
Below is the modified letter we discussed late last week. When you get a chance,
please sign both copies and mail one back to me. Thanks.
Your employment with Active Power, Inc. ("Active Power") as its Chief Financial
Officer will commence on December 1, 1999. In consideration of the services to
be provided by you during the term of your employment your initial compensation
shall be as follows:
(a) biweekly (every 14 days) pay of $7,692.31. Should a change in corporate
control take place during your employment with Active Power and a
significant reduction in responsibility relative to your initial
position take place in your view within 12 months of the change in
control event, Active Power will pay your base salary until you find a
new position for a period of up to 6 months.
(b) Cash bonus up to 30% of base pay, contingent upon meeting three to six
pre-defined MBOs. Objectives will be mutually agreed upon by you and
Joe Pinkerton. Once notified that a particular MBO has been achieved,
payment will follow within four weeks.
(c) 15 days vacation with pay during each 12 months of employment. Accrued
vacation, up to a maximum of 15 days, will be paid upon termination.
(d) 10 days paid sick leave during each 12 months of employment. Unused
sick leave may not be carried over from year to year and is not paid
out upon termination.
(e) 100,000 option shares to vest over 4 years of employment (quarterly)
subject to Board approval, to be granted upon commencement of
employment. A Notice of Grant of Stock Option will be provided
following Board approval. Should a change in corporate control take
place during your employment with Active Power and a significant
reduction in assignment and/or responsibility relative to your current
position take place, then 75% of your then unvested options will
accelerate and vest immediately.
(f) Miscellaneous: entitled to participate in any pension or profit-sharing
plan, group life insurance plan, hospitalization insurance plan,
medical services plan, or any other plan or arrangement of Active
Power now or hereafter existing for the benefit of employees
generally.
Please note that your employment at Active Power is "at will", meaning either
you or Active Power can terminate the employment relationship at any time, with
or without notice and with or without cause. Nothing contained in this offer of
employment, or in any other communication, oral or written, between you and
<PAGE>
Active Power, may modify the at-will relationship, which may only be modified by
a written agreement signed by the President of Active Power designating a
specific term of employment.
Health Plan:
Active Power currently uses BlueCross BlueShield as its health plan for
employees. You can choose between the HMO plan or the PPO plan. Active Power
pays for the employee's insurance cost and family members may be added to the
plan by deducting the cost of dependents from biweekly pay. Currently, spouses
are about $150-170 per month (depending upon which plan is chosen) and an entire
family costs about $250-300 per month.
Regarding pre-existing conditions, as long as you have had health insurance for
at least 18 months with your present employer and join Active Power's plan
within 30 days of your hire date, then, under federal law (HIPAA), our insurance
company cannot deny coverage due to pre-existing conditions.
Both plans have a large list of doctors from which to choose and access to most
of the major medical facilities in the Austin area.
Long-Term Disability:
Active Power has in place a long-term disability policy, through Fortis
Benefits, that covers all full-time employees. This plan is fully funded by
Active Power. This policy will pay 60% of your base pay if you are disabled for
greater than 90 days, and will continue to pay benefits through age 65 if
necessary.
Retirement Plans:
Active Power has an employee funded 401k plan in which all employees over 21
years old are eligible to participate at the start of each calendar quarter. The
401k is managed by CIGNA and a list of investment options is provided for your
information (there are no commissions charged from trading between the listed
funds).
Looking forward to working with you to make Active Power a great company.
Sincerely, Accepted:/s/ David Gino
/s/ Joe Pinkerton Date: 11/4/99
Joe Pinkerton David Gino
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 26, 2000 (except for Note 12, as to which
the date is March 31, 2000) in the Registration Statement (Form S-1) and
related Prospectus of Active Power, Inc. to be filed on or about May 11, 2000
for the registration of shares of its common stock.
/s/ Ernst & Young LLP
Austin, Texas
May 10, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the audited
financial statements for the year ended December 31, 1999 and the unaudited
financial statements for the three months ended March 31, 2000 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-2000
<PERIOD-START> JAN-01-1999 JAN-01-2000
<PERIOD-END> DEC-31-1999 MAR-31-2000
<CASH> 24,856,497 18,605,977
<SECURITIES> 1,408,822 4,754,002
<RECEIVABLES> 63,734 225,642
<ALLOWANCES> 25,976 29,613
<INVENTORY> 933,692 1,231,321
<CURRENT-ASSETS> 27,242,100 24,818,224
<PP&E> 2,302,657 2,892,012
<DEPRECIATION> 1,178,934 1,332,875
<TOTAL-ASSETS> 28,365,823 26,377,361
<CURRENT-LIABILITIES> 848,006 1,157,133
<BONDS> 0 0
51,841,224 54,961,737
420 420
<COMMON> 2,590 2,845
<OTHER-SE> (27,427,260) (34,400,774)
<TOTAL-LIABILITY-AND-EQUITY> 28,365,823 26,377,361
<SALES> 1,046,811 181,836
<TOTAL-REVENUES> 5,046,811 181,836
<CGS> 3,006,174 521,055
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 10,441,443 4,764,065
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 17,947 4,372
<INCOME-PRETAX> (7,418,753) (5,107,656)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (7,418,753) (7,418,753)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,418,753) (5,107,656)
<EPS-BASIC> (2.75) (1.68)
<EPS-DILUTED> (2.75) (1.68)
</TABLE>
